The Age Of Finance

Twenty-five years ago, representatives of the 10 largest industrial nations met at the Smithsonian Institution in Washington to plan the rescue of their wobbly currencies and restore order to the international financial system. Their agreement was hailed as a great achievement, but within a few months, the Bretton Woods fixed-exchange-rate system, in effect since 1944, collapsed for good. Far from being the disaster many feared, though, the breakdown of Bretton Woods ushered in a whole new era of finance. Floating exchange rates eased cross-border investments, encouraged a proliferation of new products, and toppled capital controls and other financial regulations. Today, financial markets act as powerful agents of capital, seeking value where they can and wringing concessions from policymakers. The markets are hardly always rational--prices habitually ricochet, and the illogic of the markets' day-to-day behavior can be mystifying, if not terrifying. Currently, the dollar is strengthening, the Nikkei is again taking a drubbing, and Federal Reserve Board Chairman Alan Greenspan worries about possible "irrational exuberance" in the stock market. Just what has the Age of Finance wrought?

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