1. Financial University lecture, Moscow 27.10.10 “ Financial development and economic growth: Lessons of History” Richard Sylla, New York University

2. 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.

3. T ABLE 1 REAL GDP PER CAPITA RELATIVE TO WORLD AVERAGE, SELECTED COUNTRIES, 1500-2006 (WORLD AVERAGE = 100 AT EACH DATE) Country DateItalyNetherlandsU.KU.S.AJapanFranceGermany 15001951331267188129120 16001852311646788142131 17001793432038693160145 1820167273256188100184159 187017331836828285216210 191317026832635192231242 195016628432745291249184 1973259319293407279320292 1998311354328479358343312 2006274324319430311302277 Source: Derived from Angus Maddison, The World Economy: A Millennial Perspective. Paris: OECD, 2001. Table B-21, p. 264. and Maddison website..

4. 200631943030231184362397 YearUKUSFranJapaChinIndiaAfricLatin Americ 1700203 86160 93 98 89 65 86 1820256188184100 90 80 63100 1870368282216 85 61 51 81 1913326351231 92 37 45 39100 1950327452249 91 21 29 40121 1973293407320279 20 21 33110 1998328479343358 55 31 24102 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.

7. 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

8. 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)

9. Dutch Republic: first modern system Public borrowing (not forced loans) from late 16 th century Currency stabilization in early 17 th century Central bank: Bank of Amsterdam, 1609 Banks: kassiers by early 17 th century Securities markets: Amsterdam, 1600-10 Corporations: Dutch East India Co. (VOC) and West India Co., 1600-1620

14. The Dutch Golden Age, 17 th 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 17 th century is the Dutch “golden age”, an “embarrassment of riches.” Dutch build an overseas empire. Dutch found New Amsterdam, today’s New York City.

15. 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 18 th century (Sir Isaac Newton) Central bank: Bank of England, 1694 Banking system: London, late 17 th century; nationwide after 1750 Securities markets, 1690s Corporations: Bank of England, East India Company, South Sea Co., and others, 1690s ff.

21. 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 19 th century.

22. 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

23. 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.

26. 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

27. 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.

29. 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.

33. 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.