Comment

Abstract

We live in an era of financial globalization. Yet we are not the first to do so. In an oft‐quoted passage from The Economic Consequences of the Peace— indeed, a passage thatDennisQuinn andHans‐JoachimVothquote in their paper “Free Flow, Limited Diversification: Openness and the Fall and Risk of StockMarketCorrelations, 1890–2001”—J.M.Keynes (1920, 11) famously describes how, prior to the FirstWorldWar, an investor could already “adventure his wealth in the natural resources and new enterprises of any quarter of the world” through a deep and integrated international capital market. By contrast, scholars of the global economy at midcentury have characterized national markets as “insular” (McKinnon 1981), with countries shielded from the impact of global financial developments by an extensive system of administrative controls on the cross‐border flow of capital, even as international trade was progressively liberalized. What can we learn from such historical variation in capital account openness about the role of financial forces in shaping the behavior of the global economy? How did the integrated international capital market at the turnof the nineteenth and twentieth centuries shapedomestic financial institutions and markets? At midcentury, were controls on cross‐border capital movements an impediment to economic and financial development? Or did they help stabilize economies subject to financial shocks? These are the important questions that Quinn and Voth address. At a time when the efficiency of financial markets and the desirability of capital account openness are again being called into question, it is all themore important that we learn the correct lessons of history.