Handbook of the International Political Economy of Monetary Relations
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Handbook of the International Political Economy of Monetary Relations

  • Handbooks of Research on International Political Economy series

Edited by Thomas Oatley and W. Kindred Winecoff

This extensive Handbook provides an in-depth exploration of the political economy dynamics associated with the international monetary and financial systems. Leading experts offer a fresh take on research into the interaction between system structure, the self-interest of private firms, the political institutions within which governments make policy, and the ideas that influence beliefs about appropriate policy responses. Crucially they also assess how these factors have shaped the political economy of various facets of monetary and financial systems.
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Chapter 19: The Gnomes of Zurich meet the Dogs of War: financial leadership and regulation, 1850-2013

Michael J. Lee

Extract

Governments face a trade-off between financial stability and the ability of capital to flow to profitable destinations at home and abroad. Lax financial regulation allows capital to flow to innovative and profitable enterprises. While promoting growth, deregulation exposes institutions to riskier enterprises, amplifies linkages between firms, and enables overextension by financial firms. Thus, finance-driven growth and innovation comes at a cost to financial stability. There has been considerable variance across time and space over where governments position their economies along this trade-off. This chapter contends that global competition for financial leadership is an important driver of this variation: when the leading financial power (that is, the country with the largest global stock exchange, the most foreign assets, and the global reserve currency) is ailing, it takes risks to stave off a serious challenge. Financial deregulation offers a declining lead economy the ability to maintain the rents of leadership, but at the cost of greater risks. To assess the importance of positional motives behind financial deregulation, I conduct a macro-historical account of financial power and regulation since the late nineteenth century. Numerous works consider the role that ideas, domestic politics, interstate competition, and crises play in driving regulatory outcomes.

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