In this chapter we complement the quantitative analysis of the previous chapters with an historical narrative that follows the evolution of the global capital market from its formative stages in the late nineteenth century. How did the market evolve to such levels of sophistication and geographical extent by the period 1870–1913? Why did it then decline so dramatically in the first half of the twentieth century, from 1914 to the 1940s? And why was the pace of rebuilding so slow in the postwar era? Where do we stand now, at the start of the twenty-first century? And how do the economic, historical, and political events of the twentieth century inform these questions?

Capital without constraints: The gold standard, 1870–1931

The classical gold standard era

The story begins with the emergence of a global gold-standard monetary regime in the 1870s and 1880s and the rise of a world capital market centered on the key financial center of that era, London. The story of the convergence by many different nations on a single monetary standard is now well know, and it exhibits all of the “network externality” properties. Of course, those same increasing-returns aspects driving the adoption of this institutional device, the gold standard, made it also equally susceptible to extinction in the event of crisis and suspension, as we shall see. Nonetheless, with British leadership, the gold standard eventually became an almost universal regime by the 1890s and 1900s, especially in the principal trading nations of the world, replacing silver and bimetallic standards along the way.