Financial deregulation has been demanded by business interests, particularly large financial firms and transnational corporations who want to be free to move their money around. The economic argument for financial deregulation has been supplied by free market think tanks and economic advisors, who have argued that the free and unregulated movement of capital is more efficient, because capital can move to where it gets the best returns.
Large investors have their own lobbying associations and pressure groups that pressure governments to deregulate their financial sectors and make ‘the world safe for capitalism’. These include the Emerging Markets Trading Association, the Council of Institutional Investors, and the Institute of International Finance. The membership of the latter, for example, is made up of 185 of the world’s largest banks, funds and portfolio managers. It seeks to enable its members to engage ‘with Finance Ministers, Central Bank Governors, the IMF, the World Bank, and other multilateral agencies designed to enhance private sector–public sector cooperation’.
The US Treasury also worked hard to achieve financial deregulation. Lawrence Summers, Deputy Secretary of the Treasury, and former chief-economist at the World Bank, in a paper on ‘America’s Role in Global Economic Integration’ stated in 1997 that: ‘At Treasury, our most crucial international priority remains the creation of a well funded, truly global capital market.’
Free market advocates have been aware that deregulation would enable ‘private international financial markets to discipline government policy effectively’. Unfortunately governments and citizens were not aware of this implication and because few laypeople can understand the complexities of international financial transactions, there was little opposition to the deregulation of financial markets. This was facilitated by the fact that the relevant government departments around the world – finance and commerce – as well as the central banks, tended to be staffed by free-market oriented economists who heartily embraced deregulation. Also there are close links between ‘the private sector side of international finance and the public sector domain of national economic policies’, often because of common educational backgrounds.
Financial deregulation was also self-perpetuating because countries which were competing for international capital with countries that had already deregulated felt they had to deregulate also. In this way financial deregulation created a snowball effect.
The US was the first to begin deregulating its financial sector. It did so to attract investors at a time when US government deficits were high due to spending on the Vietnam War, and a weakening trade position developed as industries in Europe and Japan thrived. Also ‘American banks and financiers who were chaffing at the bit under restrictive financial controls’ lobbied hard for this deregulation, which promised more opportunities and bigger profits.
In 1971 President Nixon disconnected the value of the US dollar from the gold standard. Other countries, since the Bretton Woods Conference at the end of the second world war, had fixed the value of their currencies to the US dollar, on the understanding that the value of US dollar would be fixed at $35 per ounce of gold. However now that the value of US currency fluctuated, free of the value of gold, many countries found it very difficult to keep a fixed exchange rate between their own currency and the US dollar. This led to most adopting a floating exchange rate; that is, an exchange rate set by the market rather than the government. In 1974 Nixon deregulated the movement of capital in and out of the US. Britain followed suit in 1979 and other countries did so during the 1980s so that by the 1990s most of the world’s flow of capital was deregulated.