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Financial University lecture, Moscow 27.10.10 “Financial

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Financial University lecture, Moscow
27.10.10
“Financial development and economic
growth: Lessons of History”
Richard Sylla, New York University
Why are there such extremes of wealth and
poverty in today’s world?
• Thesis: Financial development—in particular, “financial
revolutions” that in brief periods gave some nations modern
financial systems early in their modern histories—led them to
grow economically much faster than others, producing
increased inequality.
• Today’s lecture illustrates the thesis by reviewing financial
development in modern history.
TABLE 1
REAL GDP PER CAPITA RELATIVE TO WORLD AVERAGE, SELECTED COUNTRIES, 1500-2006
(WORLD AVERAGE = 100 AT EACH DATE)
Country
Date
Italy
Netherlands
U.K
U.S.A
Japan
France
Germany
1500
195
133
126
71
88
129
120
1600
185
231
164
67
88
142
131
1700
179
343
203
86
93
160
145
1820
167
273
256
188
100
184
159
1870
173
318
368
282
85
216
210
1913
170
268
326
351
92
231
242
1950
166
284
327
452
91
249
184
1973
259
319
293
407
279
320
292
1998
311
354
328
479
358
343
312
2006
274
324
319
430
311
302
277
Source: Derived from Angus Maddison, The World Economy: A Millennial Perspective. Paris: OECD, 2001. Table B-21, p. 264. and
Maddison website..
2006
319
430
302
311
84
36
23
97
Year
UK
US
Fran
Japa
Chin
India
Afric
Latin
Americ
1700
203
86
160
93
98
89
65
86
1820
256
188
184
100
90
80
63
100
1870
368
282
216
85
61
61
51
81
1913
326
351
231
92
37
45
39
100
1950
327
452
249
91
21
29
40
121
1973
293
407
320
279
20
21
33
110
1998
328
479
343
358
55
31
24
102
Table 2
Real GDP Per Capita Relative to World Average, Selected Countries/Regions,
1700-2006
(World average GDP = 100 at each date)
Source: Derived from Maddison (2001), Table B-21, p. 264, and Maddison website.
Financial Revolution
What is it? Emergence, in a brief period of history, of a modern
financial system with:
•
•
•
•
•
•
Stable public finances and public debt management
Stable Currency/Money
A good banking system
An effective central bank
Efficient securities markets
Business corporations—financial & non-financial—
authorized by governments and with
shareholders and managers
Historical Financial Revolutions
Which countries in modern history had financial revolutions?
• Successful cases:
– Dutch Republic, 1550-1620
– England, 1688-1740s
– USA, 1789-1795
– Japan, 1870s-1880s
• Aborted case:
– France, 1715-1720 (John Law)
Dutch Republic: first modern system
• Public borrowing (not forced loans) from late
16th century
• Currency stabilization in early 17th century
• Central bank: Bank of Amsterdam, 1609
• Banks: kassiers by early 17th century
• Securities markets: Amsterdam, 1600-10
• Corporations: Dutch East India Co. (VOC) and
West India Co., 1600-1620
The Dutch Golden Age, 17th century
• Based in part on financial modernization, the
Dutch Republic wins its independence from
Spain, a much larger country, in 80-years war,
1568-1648.
• The mid 17th century is the Dutch “golden
age”, an “embarrassment of riches.”
• Dutch build an overseas empire.
• Dutch found New Amsterdam, today’s New
York City.
England (UK): second to modernize by emulating
the Dutch Republic, mostly after 1688
• Public finance: long-term debts, 1688-1720
• Currency stabilized: de facto gold standard in
early 18th century (Sir Isaac Newton)
• Central bank: Bank of England, 1694
• Banking system: London, late 17th century;
nationwide after 1750
• Securities markets, 1690s
• Corporations: Bank of England, East India
Company, South Sea Co., and others, 1690s ff.
Great Britain’s leadership
• Financial modernization 1688-1740s enables
England to win all its wars except one from
1688 to 1815.
• The first Industrial Revolution comes after the
English financial revolution, and is aided by it.
• Britain builds a great overseas empire.
• Britain becomes “the workshop of the world”
in the 19th century.
The USA’s financial revolution,
1789-1795
• Public finances built and national debt
restructured, 1790
• Convertible dollar currency introduced, 1791
• Central Bank: Bank of the United States, 1791
• Banking system emerges—state-chartered banks
• Securities markets and stock exchanges emerge
(eg, NYSE, 1792)
• Numerous corporations are chartered during
1790s
US expansion and economic growth
• US economy expands at modern rates starting
in the 1790s and continuing to the present
• Geographical territory of USA more triples by
1867, when Alaska is purchased from Russia
• By the 1870s or 1880s, the USA is the largest
economy in the world and the leading
manufacturing nation.
• In 1790, the US population is less than 4
million; now it is more than 300 million.
Year
2006
1998
1990
1982
1974
1966
1958
1950
1942
1934
1926
1918
1910
1902
1894
1886
1878
1870
1862
1854
1846
1838
1830
1822
1814
1806
1798
1790
2000 USD
Real GDP Per Capita in the United States, 1790-2006
$100,000
$10,000
$1,000
$100
Japan’s financial revolution,
1870s-1880s
• Public finance: rice taxes to money taxes; bond
issues to pay samurai, 1870s
• Money: Yen currency, silver- and later gold-based,
1870s-1890s
• Central Bank: Bank of Japan, 1882
• Banking system: national banks, ordinary banks
• Securities markets: Tokyo and Osaka stock
exchanges, both founded 1878
• Corporations: many founded during Meiji era
Japan’s expansion
• Japan’s economic growth takes off during the
1870s, and continues to the present era, with
a great setback in World War II.
• Before that, Japan wins Sino-Japanese war in
1890s, and Russo-Japanese war in early 1900s
• Japan is the one large non-Western country to
equal the West in economic development and
growth.
Financial Modernization leads to Crises
• Dutch Republic: Tulip Mania in the 1630s
• France: Mississippi Bubble of 1719-20 under John Law’s
modernization plan (next slides)
• UK: South Sea Bubble of 1720 (next slides)
• USA: First of many crises in 1792, on heels of Hamilton’s
financial modernization plan
• Japan: Inflationary crisis of late 1870s, just as finances are
being modernized by reformers
• Conclusion is that financial modernization is exhilarating,
leading to excesses that end in financial crises. Pattern recurs:
financial innovation, excesses, and then crises.
• But crises end, and modern economic growth continues.
Lessons of History
• The Dutch, British, American, and Japanese cases
suggest that financial revolutions precede and promote
modern economic growth.
• Other countries imported the innovations of these
leaders, and their growth followed.
• Researchers on today’s emerging markets find similar
patterns: countries with stable public finances and
sound currencies, with effective central banks and
banking systems, and with liquid securities markets
and ease of forming corporations, grow faster than
countries that lack one of more of these key
components of modern financial systems.
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