Great Britain developed such a system at the end of the 17th century and in the first decades. At the end of the 18th century, the newly independent USA also developed such a system. In 1914, at the end of the first era of globalization, four European countries and the United States accounted for about 90 percent of world capital exports.
These systems had a version of each of the five key components of a good financial system. This is because in the early 1790s the United States undertook a financial revolution similar to earlier ones in the Netherlands and Great Britain (Sylla 1999b). He used them in office with the support of the president, Congress, and the private sector.
In the Dutch case, the modern financial system was established before the Golden Age and the rise of the Dutch economy to dominance in the 17th century. In the British case, the modern financial system was established before the first industrial revolution and the rise of the English economy to dominance in the 18th century. And why then did the two countries play an important role in financial globalization in the late 19th century.
During the middle decades of the 19th century, France and Germany thus added the missing elements of a sound financial system.
Data and Methodology 1. Overview
His government succeeded in the threefold task of promoting internal industrial development, expanding and strengthening Japanese economic interests in Korea and China, and adapting its plans to the political rivalry of the European continent. 4 Earlier, more descriptive studies of the relationship between financial factors and economic growth of five Atlantic economies and Japan at different times over the past three centuries. The study is, to our knowledge, the first to apply recent cross-country regression techniques in a systematic study of the finance-growth connection that includes the period before 1960.3 The results, which we describe below, support the view that finance most strongly influences growth in the earlier stages of economic development.
This channel may be important in later stages of development when financial systems have matured, and perhaps in providing one of the impulses needed to develop a financial system in the first place.5. 1975.assets.8 They then present evidence that the downward portion of the curve can be explained by financial development in the form of monetization, as measured by changes in. Thus, the ratio of money stock to output may be a particularly useful indicator of financial development in the earlier decades of our study, as it reflects industrialization as well as an increase in the use of financial assets.
Interestingly, all three countries that experienced economic deepening had increases of more than 50 percent in the postwar period, too. The data thus indicate large differences in the growth experiences of the economies in our sample, but also suggest a correlation between financial depth and real income. The ratio of liquid liabilities to output is a common measure of the size and possibly the sophistication of the financial sector in a single country, but it is imprecise because of non-bank intermediaries such as insurance and investment companies whose liabilities do not end up in broad money supply .
Furthermore, a financial system should be characterized by all the institutions that promote the accumulation of capital, including securities markets. Unfortunately, we do not yet know the extent of stock market developments in the pre-war period for most of the countries in our sample, and so we need to conduct an analysis that allows for consistency. Existing empirical studies of the relationship between trade and growth have reached mixed conclusions, presumably because most measures of openness are themselves endogenous and.
When we split the sample and work with five-year sub-periods, observations were the predetermined component of the trade-output relationship with instruments and then examine its explanatory power when added to our cross-country specifications. The tendency for real interest rates to converge in the Atlantic economies before 1914 and again more recently has been documented by Obstfeld and Taylor (1997) and has been interpreted by them as an indicator of the extent of economic integration. Since Homer and Sylla (1996) and Obstfeld and Taylor (2000) jointly provide annual long-term debt interest rate series for twelve of the countries in our study well into the 19th century, we conclude by examining the roles of finance and trade. in the convergence process in the period before 1914.
Results and Discussion
All inclusions of conditional variables in equations (2)-(4) tend to reduce the measured effect of finance on growth, but the importance of the broad financial aggregate remains. The R2 from the regressions shows that much of the cross-sectional variation in output growth can be explained by our simple models. By including the initial values of the full set of regressors and initial inflation as instruments, these two stages of least squares regression extract the predetermined (ie, explainable by the information in the initial information set for each period) right-hand side components of the variable and use them instead of the actual regressors in the estimation.
Instruments include initial values of the full set of regressors, as well as the inflation rate, with initial values taken as the first observation of each decade. To make more observations available for each estimate, we work with five-year rather than ten-year averages of the data. In the period before 1929, we again note the importance of the convergence and financial effects on growth and the robustness of results.
The left panel of the table reports coefficients and standard errors from OLS regressions using initial values as regressors. Instruments include initial values for the full set of regressors as well as the inflation rate. A less prominent role for finance in the post-war period is the striking feature of Table 5.
We attribute this change to the industrialized nature of almost all countries in our sample by 1960. Instruments include initial values of the ratio of government spending to output, the inflation rate, and the full set of regressors. The financial variables are significant during the full sample and the period 1850-1929, but are not significant in the post-war period.
Such a regression allows us to test for the role of finance and openness in one of the characteristics that is evident from figure 1, namely the decline in interest rates. Since economic theory also suggests a long-run relationship between the economy's growth rate and the real interest rate, we include, as in the cross-country growth regressions, the initial log level of real GDP per capita on the right-hand side. . To do this, we subtract the average of the average interest rates of countries with observations in a given 5-year period from the individual country average, and.
191 (84) The dependent variable is the absolute value of the difference between the average nominal long-term interest rate for a country over a period of 5 years and the national average for that period. These results show that, controlling for time, initial income and inflation, countries with greater financial depth at the start of a 5-year period had long-term interest rates over that period that were closer to the periodic average of the sample than those which according to our measure were financially less well developed.
Conclusion
Data Appendix
Gross domestic product, GDP deflator, population, money supply: 1960-97 from World Development Indicators worksheets based on Obstfeld and Taylor (2000). Gross domestic product, GDP deflator, population: 1960–1997 from World Development Indicators worksheets based on Obstfeld and Taylor (2000). 1880-99 is Mitchell banknote circulation, Mitchell savings bank deposits, and M1 less circulation in the hands of the public from the worksheets underlying Bordo and Jonung is the sum of Mitchell banknote circulation and savings deposits.
Gross domestic product, GDP deflator: 1960-97 from World Development Indicators worksheets based on Obstfeld and Taylor (2000). 1900-1917 is circulation and savings deposits by Mitchell determined as in 1918-59, with commercial bank deposits interpolated under an assumption of constant growth between the 5-year standards for 1850-74. Gross domestic product, GDP deflator, population: 1960-97 from World Development Indicators from worksheets supporting Rousseau and Wachtel (1998).
Commercial and savings bank deposits were interpolated under a constant growth assumption between 5-year benchmarks for 1865-74. In The Legacy of Western European Fiscal and Monetary Institutions for the New World, ed. In The Decisive Moment: The Great Depression and the American Economy in the Twentieth Century, ed.
Financial intermediation and economic growth: A historical comparison of the US, UK and Canada.
