It is not widely recognized that the worldwide explosion of capital flows came only after the IMF–Bretton Woods system of fixed exchange rates and dollar-gold convertibility collapsed in the early 1970s. By the late 1970s, many developed countries began to abandon the array of capital controls that had been necessary to maintain strict par values. Exchange-rate flexibility combined with deregulation of the financial markets, improved technology, and the development of innovative financial hedge instruments to protect against exchange-rate risks to encourage a massive increase in cross-border capital movements. Even more significantly, the direction of these flows changed, as more capital began to move to the developing economies around the world, particularly in East Asia and Latin America.
Has this revolution in capital mobility been a good thing for the world? Previously poor East Asian economies have become economic dynamos in record time, most of the former Soviet empire has joined the world trading system, and Europe has begun a once-unthinkable experiment of a single currency. Never in history has there been such breathtaking change in international monetary relations in so short a period of time.
There is no doubting the benefits that the international financial revolution has brought to the world. But there have also been troubling crises that deserve attention: the volatility of the dollar's exchange rate in the 1980s, the developing-country debt crisis that burdened Latin America and threatened the solvency of major Western banks, and the bumpy road to the European Monetary Union. But most monetary and financial crises are not simply the product of unfair speculation or herd behavior. There is almost always a real-world culprit, whether it is loose monetary policies, fiscal largesse, or insufficient supervision of domestic financial institutions. Fortunately, as the link between these macroeconomic and regulatory problems and monetary chaos are better understood, there should be far fewer destabilizing crises in the future.