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
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
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