The rise of cross-border investing in recent decades is not the first time the world has seen a significant burst of financial globalization. Indeed, the Second Industrial Revolution coincided with a new era of capital mobility that extended roughly from 1860 to 1915. Foreign investment assets rose to 55 percent of GDP in the major European economies.
This wave of financial globalization reflected European investment in colonies and former colonies. As the British Empire reached its peak, Great Britain alone accounted for half of the foreign assets of the period. These investments helped fund the industrialization and urbanization that transformed recipient nations such as Canada, Australia, and Argentina.
But the ending of the first age of financial globalization provides a cautionary tale. Two world wars and a global depression not only brought this period of integration to a halt but also ushered in six decades of tightly restricted capital flows and pegged foreign exchange rates. Foreign investment assets as a share of GDP in the major economies did not regain their earlier peak until 1990. Today it is unclear whether financial globalization will rebound or whether we will enter a similar period of more insular national financial markets.