jmherbenerHere is a limited historical analysis of capital flows from the World Bank:
http://siteresources.worldbank.org/INTGDF2000/Resources/CH6–118-139.pdf
Since the mid-1800s governments have set up and attempted to manage an international monetary system. The classic gold standard of the second half of the nineteenth century was designed by governments to manage monetary inflation by punishing countries that inflated their currencies excessively. The fatal flaw of the system is that it required redemption of each currency into gold and yet governments continuously inflated their currencies faster than the gold stock increased through production. When their monetary inflation produced booms and busts, they blamed markets and the free-flow of capital. Governments destroyed the classic gold standard to inflate their currencies to pay for spending during the First World War. They cobbled together the gold exchange standard in the 1920s. but their inflation destroyed it in the early 1930s. After the Second World War, governments erected the Bretton-Woods System, in which all other currencies were redeemable into the dollar and the dollar was redeemable into gold. Their inflation destroyed this system in 1971 and ushered in the miserable decade of the 1970s. The U.S. government cobbled together another dollar reserve standard, without gold, in the 1980s. We will see if this system will survive the inflation, and consequent boom and bust, governments generated in the last decade.
Of course, markets always constrain government activity whether they are international or not. In these international monetary systems, capital flows are a means of punishing wayward governments. A more recent example of this was the fall of the Asian tigers in the 1990s. Thailand over-inflated its currency, the baht, in response to the Fed’s inflation of the dollar after the recession of 1990-91.
Rothbard has written about some of this:
Also, consult James Grant’s book, Money of the Mind.
Finally, government borrowing has dominated bond markets throughout this entire period. Today, for example, bond markets in the U.S. are $70 trillion and $40 trillion of that is government debt at all levels. Governments want to support bond markets because they are the biggest borrowers of all. The Federal government wants to borrow from foreigners, so its demand helped create and support international bond markets. Complaining about how such markets constrain its financing is not objective science but merely special interest pleading.