Financial History 25th Anniversary Special Edition (104, Fall 2012) | Page 27

The Power of Finance: Evident, But Underappreciated It is said that imitation is the sincerest form of flattery. As the Museum of American Finance observes its 25th anniversary, those of us connected with it are pleased that its model is being emulated in other countries. China has several financerelated museums, all of recent vintage. Italy recently opened one. Plans for one in France are well along, and people in Poland and the UK are interested in forming one. The Museum of American Finance inspired some of these ventures. Others started independently and then were encouraged by discovery of the Museum’s model. What accounts for this burgeoning interest in the past and present — and of course, the future — of finance? The worldwide financial crises of 2007–2009 and their aftershocks have contributed. They showed many people unfamiliar with the long history of financial crises that when financial systems go off the rails, the economic consequences can be serious indeed. and securities markets grew faster than those without them. Moreover, sophisticated statistical analyses indicated that financial development caused economic growth rather than the other way around. The related findings of economic historians are discussed below. The other root of the growing interest in financial development is the realization that most people are not aware of the power of finance, either in history or now. In fact, although most people use some part of the financial system daily, many of them, sad to say, are unaware of all that it offers or have but a limited understanding of the various options. Financial illiteracy is a real problem. If the power of finance is to be more fully realized, the solution to this problem is financial education. Museums of finance are logical places to illustrate and teach about financial history, and to stimulate people to become more aware of the power that finance can have in their own lives. At the start of the 17th century, the Dutch Republic, to help win its independence from Spain, developed the first fullyarticulated modern financial system. It featured a public debt market, a stable currency, the Bank of Amsterdam and other banks, the Amsterdam Bourse and corporations such as the Dutch East and West India Companies. These two companies, as it happened, were involved in founding New Amsterdam/New York. Powered by modern financial arrangements, the Dutch Republic could borrow more money at a lower cost than could far larger Spain to put armies in the field and fleets on the seas. They won their independence. With modern finance, the Dutch went on during the 17th century to have their Golden Age and what historian Simon Schama termed “the Embarrassment of Riches.” They became the first modern economy. The English, in the Glorious Revolution of 1688, invited the Dutch leader Willem of Orange to become King William III of These recent developments, however, have only amplified an interest that was increasing before they occurred. Before the recent crises, the growing interest in finance and its history developed two deeper roots. One derived from the work of scholars — economists and economic historians — that demonstrated what for short can be termed “the power of finance.” Economists, using the wealth of data on financial development and economic growth for most of the world’s nations during the past half century, showed that countries with more highly-developed banking systems Museum of American Finance Why? Bond issued to, and signed by, President George Washington, 1792. The Power of Finance in History Financial historians, myself included, were not surprised by the findings of the economists on finance-led economic growth. History offers even stronger confirmation of it. The medieval Italian city states, for example, invented modern banking and public debt markets before the Renaissance . . . and then had the Renaissance. But one example cannot establish a cause-effect relationship. Fortunately there are more. England. William brought Dutch financiers with him, and England shortly had a modern public debt market, a stable currency, the Bank of England (1694), a banking system, many companies and a stock market. In a reprise of the Dutch-Spanish story, there followed a string of English military victories over ]X