mr ferguson reviews the historical perspective and policy implications of global financial integration remarks by mr roger w ferguson jr, a member of the board of governors of the us federal reserve system, at the annual policy seminar of the national association for business economics, washington dc, on 4 / 3 / 99. global financial integration : historical perspective and policy implications thank you very much for inviting me to speak to this distinguished group of business economists and analysts. as we have discovered over the last eighteen months or so, we live in a rapidly changing global economic and financial environment. today, given the theme of your conference, i would like to put the events of the last few years into a broader historical context, and ask what are the most appropriate policy solutions. yesterday and today let me turn to a previous period of close global linkage in economic and financial markets : the forty years or so prior to world war i. here i will draw on a recent nber working paper by michael bordo, barry eichengreen and jongwoo kim. 1 during this time, capital flowed essentially without restriction, chiefly from developed western europe to regions in the then rapidly developing countries of the americas and to australia. just to put this in perspective, these three economists report that at its peak, the outflow from the united kingdom reached 9 percent of gnp and was almost as high in france, germany and the netherlands. much of this capital was invested in bonds that financed railroads and other infrastructure investments and in long - term government debt instruments, but there was also significant direct foreign investment. bordo, eichengreen and kim find that one element of the pre - 1914 episode of global financial integration is the size and persistence of the current account deficits of capital importing countries, mainly australia, canada, argentina and the scandinavian countries. similarly, the current account surpluses of some capital exporters, particularly the united kingdom, showed considerable persistence. these economic historians indicate that it was not unusual for these countries to experience current account imbalances, deficits for the capital importers or surpluses for the capital exporters, of between 5 percent and 10 percent of gdp lasting for several years. the size and persistence of these capital account imbalances in the pre - 1914 period appear to compare roughly with the size of current account imbalances that have existed in the most recent period of global financial integration. economic historians indicate that during the period from 1971 to 1997, emerging market countries were running, on average, current

important that all resources be employed to their comparative advantage, thereby increasing the stock of goods and services available to us all. conclusion let me conclude by saying that while the current era of globalization is quite distinct from the period prior to world war i, there are important lessons that can be learned from that earlier era. some historians have argued that the pre - 1914 era was notable for the size and relative stability of capital flows. thus far our era has been notable for the size of international capital flows, but recently not for the stability. i do not doubt that there is room for improvement in the regimes that determine capital flows. however, i think that most of the solutions to the challenges that the world has faced require building institutional mechanisms and policy expertise that allow reliance on the strengths of the free market system. improvements in policy discipline, information sharing, and institutional structure should all be evaluated by the litmus test of whether they enhance the flow of information to, and reduce bureaucratic interference with, markets and thus provide a safer and more stable global financial and economic environment.