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1 This Is an Early Draft of the First Chapter of My Dissertation. Thank This is an early draft of the first chapter of my dissertation. Thank you for reading. Look forward to questions and comments! -Youn The rise of global finance and the large US industrial corporations Youn Ki ([email protected]) INTRODUCTION The resurgence of global finance in the late twentieth century is one of the most fascinating events in financial history. After the Great Depression, international capital flows dried up. Moreover, postwar Bretton Woods system legitimized the use of capital controls so that countries could rebuild domestic economy without being interrupted by cross-border capital flows. Virtually all countries resorted to controls including the United States (US). As a result, international capital flows remained negligent in the early postwar years.1 However, international financial market appeared in the form of Euromarket by the late 1950s, and rapidly expanded throughout the 1960s and the 1970s. International bank lending increased to $ 9 billion in 1964, $71 billion in 1971, and $475 billion in 1979. Indeed, its expansion was so rapid that it generated enough short-term international flows to precipitate the breakdown of Bretton Woods in the early 1970s. To better deal with ever growing international capital flows, Europeans and Japanese proposed to strengthen capital controls during the reform talks of international financial system of the early 1970s. However, the US changed its attitude toward control, and frustrated the attempts of the other major economies. Moreover, it succeeded in weakening international 1 Bryant 1987: 62; Mendelsohn: 207. After the war, international capital movement was limited to intergovernmental capital flows such as Marshall Plan. 1 provisions on capital control during the reform negotiations, and abolished its control programs in 1974. Without US’ effort, the development of international financial market would have been aborted. This paper aims to answer two puzzles: first, how could the Euromarket grow so fast in the 1960s and early 1970s under such restrictive financial regime? Second, why did the US change its position on international capital movement in the early 1970s? My research demonstrates that large US industrial corporations catalyzed the rise of global finance in the late twentieth century, as they increasingly invested abroad. First, large US industrial firms facilitated the growth of Euromarket by financing foreign direct investment through the market. Euromarket was exempted from US capital controls, which allowed US industrial firms and banks to flock into the market in the late 1960s and early 1970s. The US government left Euromarket unregulated because of multinational corporations’ political pressures. Second, large US industrial firms pressed the US government to remove its controls programs and to promote international capital movement. While the firms supported capital controls in the early postwar period, they withdrew support in the late 1960s as the controls increasingly impeded foreign direct investment. They convinced the US government to thwart European and Japanese efforts to strengthen the provisions on capital controls during the reform talks of the international financial system in the early 1970s. The US not only succeeded in frustrating the attempt but it also weakened international rules on controls. This study on the role of large industrial firms makes important theoretical contributions to financialization literature. First, my argument emphasizes financial activities of industrial corporations. Contemporary theories of financialization have overlooked industrial corporations because industrial firms are considered to engage in “productive” work, unlike financial institutions. However, industrial firms also engage in a variety of financial activities from raising funds and making payments to managing profits. Particularly, large industrial firms serve as major suppliers and demanders of fund, critically 2 influencing the rise and fall of financial markets. Second, this paper focuses on the political power of large US industrial corporations. Existing theory on the role of interest group in financialization process pays much attention to financial sector because US financiers constantly showed strong interest in liberal financial regime. However, the demand of US financial community was not well received by the US government over the postwar years. US government finally changed its attitude toward international capital movement by the early 1970s, only after US industrialists started to strongly oppose the controls. Finally, the focus on the political capacity of large US industrial corporations challenges the assumption of state autonomy, which state-centered perspectives posit. A closer look at the policy making processes in the US would reveal that large industrial firms’ demand for unimpeded foreign direct investment greatly influenced government decisions regarding international capital movement. The rest of this paper consists of three sections. The first section explores current literature on financialization, and provides a new perspective focusing on the role of large US industrial corporations. The second section closely examines the history of global finance. This part heavily relies on statistical data related to the growth of Euromarket and archival work on the political activities of large industrial firms and leading business organizations. The last section analyzes the strengths and weaknesses of existing theories and a new approach. Also, the theoretical contributions of the new argument would be discussed. THEORIES OF FINANCIALIZATION Contemporary theories on the rise of finance have emphasized the role of market, state, and financial sector. An alternative explanation this paper suggests is the role of large US industrial corporations. 3 Market A market-centered approach focuses on the innovative ability of market forces to promote the growth of a liberal financial order by taking advantage of arbitrage opportunities and circumventing regulatory obstacles. (Bryant 1987, O’Brien 1992, Rajan and Zingales 2003). Particularly, technological development in recent era revolutionized the financial services so that financial transactions could be done in much larger scale within very short time. Much lowered transaction costs, in turn, made financial actors become more sensitive to incentives for arbitrage. According to Bryant, financial institutions enters into international financial markets “on their own initiative,” in order to actively engage in arbitrage activities between unregulated markets and regulated markets.2 This type of cross-border transactions may not directly related to real-sector economic activities. At the same time, their creative capacity to evade government regulations renders financial regulations ineffective. Frustrated by the failed efforts to control financial activities, the theory expects, countries start to abolish controls and promote a liberal financial system.3 State State-centered approaches emphasize how government policies influence financial development. One such perspective contends that a state supports the expansion of global finance to serve national interest. Especially, the US has special interest in liberal financial order because of dollar’s role as world reserve currency and highly developed US financial markets. Since the dollar and US financial markets would remain prominent in integrated financial markets, foreign investors would be willing to underwrite US debts. For instance, Helleiner argues that US government supported the growth of 2 Bryant 1987: 66. 3 See Gowa 1983: 31, 62, 86. Goodman and Pauly (1993) makes a similar argument, but emphasizes that the development of international production and financial intermediation enabled multinational firms to evade capital controls. 4 Euromarket in the 1960s as it accumulated balance of payments deficits because the Euromarket was expected to encourage foreigners to hold onto dollars and finance US debt.4 Again in the early 1970s, the US officials consciously reconstructed a liberal financial system that would finance US internal and external debts with world’s savings—“super-exorbitant privileges.” (Strange 1986, Helleiner 1994, Gowan 1999) This special status of the dollar may generate a rift between the US and the rest of the world on the issue of liberal financial regime because the other countries may not want to subsidize US debts. Another state-based perspective stresses that government policies sometimes unintentionally lead to the rise of finance. For example, the US government adopted capital control programs to reduce outward dollar flows in the 1960s. The imposition of controls induced US-based multinational firms and banks to finance overseas operations from offshore financial market, “ironically” spurring the growth of Euromarket.5 (Helleiner 1994, Hawley 1987, Rollings 2011) Krippner also argues that the US government’s decision to depoliticize the economy in order to overcome the dilemma of incompatible social demands in the 1970s and 1980s inadvertently resulted in domestic and international financial deregulation. (Krippner 2011) This perspective assumes that the government was not aware of the “unintentional” impact that certain policy would bring about; or, even if the government had known the impact beforehand, it did not pay attention to the impact. Another important assumption that all state-centered approaches make is the high degree of state autonomy. The “national interest” argument posits
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