The regulation of international financial markets from the 1950s to the 1990s

After 1945, the regulation of international financial markets became more intense and widespread as part of the system designed to avoid the chaos that had characterised international economic relations in the 1930s. This paper examines how the post-war consensus about the usefulness of regulating capital flows evolved after the advent of current account convertibility in 1959. First, an examination of the debate over regulating the Eurodollar market will be used to highlight the contrast between European attitudes to capital markets compared to the views of the USA and the UK, where the differences are not as firm or as reliable as has been portrayed. The archival evidence shows that there were lively concerns about the dangers of the market and vigorous internal discussion about intervention as well as regulation in both London and Washington, and also among banks themselves. Nevertheless, both American and British regulators resisted introducing controls because the benefits of the market for their balance of payments policies outweighed the threats. This is not to say that the British and Americans were opposed to capital controls per se. Indeed, this was a time of deliberate intensification of capital controls in the USA on US$ outflows, and in the UK on sterling transactions. This analysis shows that the traditional story that market innovation undermined the effectiveness of capital controls and therefore led to the collapse of the Bretton Woods system needs to be adjusted to take account of regulators’ roles in allowing that innovation to spread, and how the US and UK deliberately used the market as part of their response to the imbalances in the international economy in the 1960s.

The next part of the paper develops the history of prudential regulation and supervision of international banking that began after the end of the Bretton Woods system. This area has remained a challenge for regulators for much the same reasons that were present in the 1970s: problems of enforcement, the privacy of banking business, and the primacy of national over international interests. A second theme of the paper, therefore, is the enduring conflict between the desire to have national sovereignty over financial markets on the one hand, and the need for supranational oversight to ensure consistency and enforcement of prudential supervision and regulation in an increasingly global market.