The Great Depression as a Watershed: International Capital Mobility over the Long Run

This paper surveys the evolution of international capital mobility since the late-nineteenth century. It begins with an overview of empirical evidence on the fall and rise of integration in the global capital market. A discussion of institutional developments focuses on the use of capital controls and the pursuit of domestic macroeconomic policy objectives in the context of changing monetary regimes. A fundamental macroeconomic policy trilemma has forced policy-makers to trade off conflicting goals. The natural implication of the trilemma is that capital mobility has prevailed and expanded under circumstances of widespread political support either for an exchange rate subordinated monetary policy regime (e.g. the gold standard), or for a monetary regime geared mainly towards domestic objectives at the expense of exchange rate stability (e.g. the recent float). Through its effect on popular attitudes towards both the gold standard and the legitimate scope for government macroeconomic intervention, the Great Depression emerges as the key turning point in the recent history of international capital markets.