DWA 103 · Week 7 · Tue Oct 6, 2026

Global Finance

Should money move across borders as freely as goods? What does a country give up? Who gains, who loses, and where do crises spread?

Framework

Four questions, three readings

Part	Question	Reading
I	Is trade in money like trade in goods?	Bhagwati, “The Capital Myth” (1998)
II	What must a country give up?	The “unholy trinity”; Kirshner 2003: 647–651
III	Who gains and who loses?	Kirshner, “Money Is Politics” (2003)
IV	Where do crises spread?	Oatley et al., “The Political Economy of Global Finance: A Network Model” (2013)
Review	Midterm, Thursday Oct 8	Study guide, terms 1–20

Part I · Bhagwati 1998

Widgets and capital

“But only an untutored economist will argue that, therefore, free trade in widgets and life insurance policies is the same as free capital mobility. Capital flows are characterized, as the economic historian Charles Kindleberger … has famously noted, by panics and manias.”

Capital account convertibility: “you and I, nationals or foreigners, could take capital in and out freely, in any volume and at any time”

Jagdish Bhagwati, 2008. Photo: Johannes Jansson / norden.org, CC BY 2.5 DK

Part I · Bhagwati 1998

Private capital flows to five Asian economies, 1994–1997

Indonesia, Malaysia, South Korea, Thailand, the Philippines
1996: inflow of $93 billion, “up from $41 billion in 1994”
1997: “that suddenly changed to an outflow of $12 billion”

Part I · Bhagwati 1998

Growth without capital account convertibility

China and Japan: “remarkable growth rates without capital account convertibility”
Western Europe: “return to prosperity was also achieved without capital account convertibility”
Gains from free capital mobility: “asserted, not demonstrated”^1–3
“most of the payoff can be obtained by direct equity investment”

Research since 1998 · financial openness and growth

1 Kose, Prasad, Rogoff & Wei 2006: “it remains difficult to find robust evidence that financial integration systematically increases growth, once other determinants of growth are controlled for” (NBER Working Paper 12484: 15; published in IMF Staff Papers, 2009)

2 Rodrik & Subramanian 2009: “The stylized fact that there is no correlation between long-run economic growth and financial globalization …” (IMF Staff Papers 56(1): 112)

3 Ostry, Loungani & Furceri 2016, IMF Research Department: “Although growth benefits are uncertain, costs in terms of increased economic volatility and crisis frequency seem more evident.” (Finance & Development 53(2): 39)

Part I · Lucas 1990

The Lucas paradox

Lucas 1990, “Why Doesn’t Capital Flow from Rich to Poor Countries?” · the standard model, 1988: “the marginal product of capital in India should be about 58 times that of the U.S. … all capital should flow from the U.S. to India.”

United StatesEmerging market and developing economies (IMF group)

Part I · Bhagwati 1998

The “Wall Street–Treasury complex”

Name	From	To
Robert Rubin	Wall Street	Treasury Secretary
Roger Altman	Wall Street	Treasury “and back”
Nicholas Brady	Treasury Secretary	“back in finance”
Ernest Stern	acting president, World Bank	managing director, J.P. Morgan
James Wolfensohn	investment banker	president, World Bank

“…unable to look much beyond the interest of Wall Street, which it equates with the good of the world.”

Part I · after 1998

Treasury Secretaries who came from finance, 2006–2025

Name	From	Took office
Henry Paulson	chief executive, Goldman Sachs	2006
Steven Mnuchin	Goldman Sachs; hedge funds	2017
Scott Bessent	hedge-fund manager	2025

Part II · The unholy trinity

Three policy goals

Part II · The unholy trinity

Which two?

The gold standard, from the 1870s
Bretton Woods, 1947–71
The United States, Japan, and Canada today
The euro area

For each system, name the two goals it keeps and the one it gives up.

Part II · The unholy trinity

Four systems, four choices

System	Keeps	Gives up
Gold standard, from the 1870s	fixed rate · free capital	control of interest rates; deflation, 1873–96
Bretton Woods, 1947–71	fixed rate · own monetary policy	free capital (capital controls)
Floating: U.S., Japan, Canada	free capital · own monetary policy	fixed rate
Euro area	fixed rate · free capital	national monetary policy

Part II · Kirshner 2003

Bretton Woods and after

“nothing is more certain than that the movement of capital funds must be regulated”Keynes, 1942, quoted in Kirshner: 650

“Domestic politics sealed the deal: faced with the choice of deflationary adjustment or wrecking the Bretton Woods system, the US chose the latter”p. 651

IMF rules “were written to explicitly accommodate capital controls” (p. 650)
“a commitment to external price stability requires a loss of control over domestic policy autonomy” (p. 649)

Part II · Timeline

Rules and crises in global finance, 1944–2025

Part III · Kirshner 2003

“The management of money is always and everywhere political: for every policy choice, there is an alternative that some actors would prefer.”Kirshner 2003: 645

Part III · Kirshner 2003

Opposing preferences

Choice	One side	Other side	Page
Exchange rate	exporters	importers	647
Inflation	debtors	creditors	647
Tight or loose money	sectors that grow faster under “tight money and low inflation”	sectors that do not	656

Costs of defending a fixed rate: “austerity budgets, deflationary monetary policy, costly and compulsory intervention in exchange markets” (p. 649)

Part IV · Oatley et al. 2013

Flat and hierarchical networks

“In a flat network, a crisis anywhere in the system can spread everywhere.” (p. 133)
Hierarchical: “‘robust-but-fragile’: the system is robust to peripheral disturbances but fragile in the face of disturbances in the center.” (p. 136)

Part IV · Oatley et al. 2013: 137–40

Where countries hold their overseas portfolio assets

72%

of countries in the sample hold overseas portfolio assets in the United States

35%

hold them in the United Kingdom

>80% · <1%

Argentina’s overseas portfolio: “more than 80 percent” in the U.S., “less than 1 percent” in Australia

“We find that the system is a strongly hierarchical network centered firmly on US capital markets.”p. 133

Part IV · Oatley et al. 2013

Three crises, three positions in the network

Crisis	Position	As reported by the authors	Page
Latin American debt, 1982	periphery	Sixteen governments owed “almost $40 billion to the eight largest American banks,” 147 percent of those banks’ capital; “the US banking system sagged, but it did not shatter”	141
Asia, 1997	semi-periphery	Restructuring “cost between 15 and 50 percent of GDP” in the region. Four U.S. banks closed, Nov 1997–Dec 1998.	140–42
Subprime, 2008	center	“approximately 450 commercial banks with $2 trillion of deposits” failed or were rescued; “twenty-three European countries experienced a significant banking crisis”	131, 143

116 other banking crises, 1975–2007: “None of these crises escalated into a global banking crisis.” (p. 143)

Part IV · Oatley et al. 2013 · Depth: Pforr, Pape & Petry 2025

The center, 2013 and 2025

Oatley et al. 2013: 145

“Thus, in the current system no country or region offers an alternative to the US that is fit to serve as the global center.”

Pforr, Pape & Petry 2025: S126

“US financial hegemony is ending—not through a collapse but with the start of a financial interregnum: a transitional phase where dollar dominance slowly fades without a clear successor.”

56%

of global trade invoiced in dollars; U.S. share of world trade about 10%

85%

“around 85 percent of all foreign exchange transactions occur against the dollar”

−11%

the dollar “lost approximately 11 percent in value by June 2025, the biggest decline in more than fifty years”

Synthesis

Readings and key terms

Question	Reading	Key term
Is trade in money like trade in goods?	Bhagwati 1998	“panics and manias”; “Wall Street–Treasury complex”
What must a country give up?	The unholy trinity; Kirshner 2003: 647–651	fixed rate · free capital · own monetary policy: two of three
Who gains and who loses?	Kirshner 2003	“there are no ‘neutral’ choices about money” (p. 657)
Where do crises spread?	Oatley et al. 2013	“robust-but-fragile” (p. 136)

Midterm review

Blue-book midterm · Thursday, October 8

25

points

10 × 2

multiple-choice questions, from the twenty terms

2 × 2.5

short answers, two of the four in the study guide

1 page

of handwritten notes allowed

Coverage: Weeks 1–7 readings and lectures

Midterm review · study guide, Part A

Twenty terms

Week	Terms
1 · Contesting globalization	1 IPE and its three traditions · 2 Globalization · 3 The first globalization and its backlash
2 · Liberalisms	4 Adam Smith’s case for free trade · 5 Anarchy and liberal internationalism
3 · Realism and mercantilism	6 Realist political economy · 7 Hamilton and List · 8 Economic statecraft today
4 · Constructivisms	9 Constructivism · 10 Shared beliefs at the IMF
5 · Marxism	11 Marx’s core ideas · 12 Imperialism · 13 World-systems analysis · 14 Capitalism and democracy
6 · Trade	15 Comparative advantage · 16 Winners and losers from trade · 17 The politics of trade policy
7 · Global finance	18 Capital is not widgets · 19 The unholy trinity · 20 Money is politics

Midterm review · study guide, terms 4–14

Four lenses

Lens	Starts from	Core claim	Terms
Liberal	the individual	anarchy is a problem that can be managed; absolute gains	4, 5
Realist	the state	security comes first; relative gains	6–8
Constructivist	social facts	ideas tell actors what their interests are	9, 10
Marxist	class	the economic base shapes politics, law, and ideas; surplus value	11–14

Midterm review · study guide, Part B

Four short-answer questions

Liberals and realists both begin with anarchy. Why does liberal internationalism conclude that states can cooperate, while realists are more skeptical?terms 5, 6, 8
Pick one recent trade or financial measure (a tariff, a sanction, an export ban, a subsidy). How would a liberal, a realist, and a Marxist each explain it?terms 4–8, 11–13
If free trade makes countries richer, why is it so often unpopular? By Rodrik’s two tests, when is opposition to free trade legitimate?terms 3, 15–17
Should money move across borders as freely as goods?terms 3, 18–20

Two of these four will be on the exam. Use at least two course authors of your choice in each answer.

Midterm review

Outline one answer

Pairs · 5 minutes: choose one of the four questions. Write a four-line outline. Name two authors and one example.

Thu Oct 8Blue-book midterm, in class
Tue Oct 13No class
Oct 15–16Fall Break
By Sun Oct 18Discussion questions on this week’s readings (Week 7), in the shared doc
Oct 20 & 22Week 9 · Global Capitalism, Democracy, and Dictatorship

Global Finance

Four questions, three readings

Widgets and capital

Private capital flows to five Asian economies, 1994–1997

Growth without capital account convertibility

The Lucas paradox

The “Wall Street–Treasury complex”

Treasury Secretaries who came from finance, 2006–2025

Three policy goals

Which two?

Four systems, four choices

Bretton Woods and after

Rules and crises in global finance, 1944–2025

Opposing preferences

Flat and hierarchical networks

Where countries hold their overseas portfolio assets

Three crises, three positions in the network

The center, 2013 and 2025

Readings and key terms

Blue-book midterm · Thursday, October 8

Twenty terms

Four lenses

Four short-answer questions

Outline one answer

Thursday and after