Abstract
Electronic funds transfer systems (EFTS) are the primary means by which capital moves through the world economy, including real time gross settlement systems for handling international payments as well as foreign exchange transactions. This paper starts by noting how the world of the Bretton-Woods system differed from the hypermobile, digitized world that followed. Next, it summarizes some major public and private EFTS networks and the repercussions for capital markets, stock exchanges, and foreign exchange markets. Third it summarizes how EFTS challenge national monetary controls and the implications. Finally, it points to the centrality of EFTS in the emergence and growth of offshore banking centers.
TopFinance Before Efts
Prior to the rise of EFTS, global finance was a relatively placid world. Under the Bretton-Woods system from 1947 to 1973, there were few exchange rate fluctuations; most currencies were pegged to the U.S. dollar, which was, in turn, was pegged to gold, at $35/ounce. Currency appreciations or depreciations reflected government fiscal and monetary policies within relatively nationally contained financial markets in which central bank intervention was effective. Trade balances and foreign exchange markets were strongly connected: rising imports caused a currency to decline in value as domestic buyers needed more foreign currency to finance purchases. Rising exports had the opposite effect, raising the price of domestic currencies on the international market. Currency fluctuations figured prominently in rectifying trade imbalances. The largely unregulated Euromarket was also important to this system.
The system ended abruptly with the U.S. abandonment of the gold standard in 1971 and the collapse of the Bretton-Woods system in 1973 (Leyshon, 1992; Leyshon and Thrift, 1997; Strange, 1994). Hereafter, supply and demand would dictate the value of a state's currency. Soon currency exchange became the world’s largest industry by volume: roughly $4 trillion in electronic funds crossed national borders each day in 2007, orders of magnitude more than the total value of international trade in goods.
Key Terms in this Chapter
Capital Markets: Supply and demand of debt and equity securities, commodities, and other financial instruments.
Real Time Gross Settlement System: electronic systems for streamlining transactions among large financial institutions, typically governments and networks of banks
Bretton-Woods System: International system of regulation erected by the U.S. that lasted from 1945 to 1973, designed to provide order to post-WWII financial markets.
Foreign Exchange: Instruments of payment among different national currencies.
Electronic Funds Transfer Systems: Means of moving money digitally either among financial institutions and governments or to individuals and households
Offshore Banking: Financial institution located outside of the country of depositors, typically in tax havens on the periphery of the global banking system.