Reputation, Regulation and the Collapse of International Capital Markets, 1920-1935

This paper is about the economics of financial power and regime change. It revisits important aspects of the “end of globalization†– as the shutting down of global capital markets after 1931 is generally referred to. It articulates a novel perspective on the fundamental regime change that occurred at that point by putting the collapse of foreign government bonds that occurred in New York in the early 1930s in the perspective of London’s earlier experience as a centre of global capital exports. It argues that the London industrial set-up for managing foreign government debts had been essentially transplanted from London to New York in the 1920s. This set-up rested on the role of prestigious intermediaries who were involved in originating, distributing and monitoring high quality securities, as well as dealing with crises. It then argues that several critical aspects of the New Deal financial reforms adopted during the 1930s interfered directly with this set-up and prevented the industry from dealing with the crisis in the usual way. It concludes that the global bond market was a casualty of domestic policies associated with the New Deal, and that the New Deal opened a new era in international finance.