The rise of securities markets : what can government do?

Using U.S. securities markets as a case history, the author explores the role securities markets play in economic development, how they emerge, and how regulation can make them more effective. Why the United States? Two centuries ago, it was a small undeveloped country with serious financial problems. It confronted those problems and, guided by Alexander Hamilton, creatively reformed its financial system, which then became a foundation of the U.S. economic infrastructure and a bulwark for long-term growth. When Hamilton's program established public credit and securitiesmarkets in the 1790s, U.S. citizens were immediately able to borrow from older, richer countries. U.S. wealth then increased until, by the end of the nineteenth century, U.S. residents began to lend and invest more abroad than they borrowed. During the 1820s and 1830s, the United States (usually state governments) borrowed large sums from foreign investors to build roads, canals, and early railroads, to make other transportation improvements, and to capitalize state banks. From the 1830s to the end of the century, still larger sums from overseas went into private U.S. railway companies that provided cheap transcontinental transportation. Most of this borrowing took the form of state and corporate bond sales to overseas investors. The pristine U.S. government credit established by Hamilton thus rubbed off on U.S. state and corporate debt. The British stock market did better than the U.S. market until the United States adopted security-market regulation (including disclosuire rules) under the SEC. Then the U.S. market became a world leader. The U.S. stock market developed more slowly than the bond market, but it both aided and benefited from foreign investment in U.S. bonds. Foreign investors preferred debt securities to equities, yet equities create a safety margin for bondholders who, because of this margin, are more willing to purchase and hold bonds. Foreign investors preferred bonds; U.S. investors, after exporting bonds, held more stocks than bonds at home. Why? Because good stock markets permit the conversion of equity securities into cash.Environmental Economics&Policies,Payment Systems&Infrastructure,Financial Intermediation,International Terrorism&Counterterrorism,Economic Theory&Research,Housing Finance,Insurance&Risk Mitigation,Financial Intermediation,Environmental Economics&Policies,Economic Theory&Research

U.S. securities markets and the banking system, 1790-1840

Banks and banking - History ; Stock market ; Securities ; Bank stocks

"Financial Disturbances and Depressions: The View from Economic History"

Events of the past quarter century have renewed the interest of economic historians in major financial disturbances. The study of financial crises was common before World War II, but for the next quarter century little fresh work was done in the area. The chief exception was J. K. Galbraith's The Great Crash. 1929 (1954). Then came M. Friedman and A. J. Schwartz's Monetarv History of the United States. 1867-1960 (1963) with its bold analysis of the great contraction of 1929-1933. Just as that analysis was gaining the attention of economic historians, the United States began to experience credit crunches, steeply rising interest rates, bank failures, debt crises, and a host of other financial disturbances the likes of which had not been seen for a good long time. Soon C. P. Kindleberger's widely read book, Manias. Panics. and Crashes--A Historv of Financial Crises (1978) reminded economic historians and others of the long history of such disturbances. My assignment here, from H. Minsky, is to review what economic historians, especially in recent years, have had to say about financial disturbances and depressions. I inferred from discussions with Prof. Minsky and from some familiarity with his own work that he very much wanted to tie together the two concepts, financial disturbance and depression. The "It" in his book, Can "It Can Happen Again" (1982) is, it will be recalled, a Great Depression. In Minsky's work, a Great Depression results from a debt deflation or, in other words, from an extreme form of t he financial instability that he and others regard as inherent in a capitalist economic system.

Emerging Financial Markets and Early U.S. Growth

Studies of early U.S. growth traditionally have emphasized real-sector explanations for an acceleration that by many accounts became detectable between 1815 and 1840. Interestingly, the establishment of the nation's basic financial structure predated by three decades the canals, railroads, and widespread use of water and steam-powered machinery that are thought to have triggered modernization. We argue that this innovative and expanding financial system, by providing debt and equity financing to businesses and governments as new technologies emerged, was central to the nation's early growth and modernization. The analysis includes a set of multivariate time series models that relate measures of banking and equity market activity to measures of investment, imports and business incorporations from 1790 to 1850. The findings offer support for our hypothesis of "finance-led" growth in the U.S. case. By implication, the interest today in improving financial systems as a means of fostering sustainable growth is not misplaced.

Financial Systems, Economic Growth, and Globalization

This paper brings together two strands of the economic literature -- that on the finance-growth nexus and that on capital market integration -- and explores key issues surrounding each strand through both institutional/country histories and formal quantitative analysis. We begin with studies of the Dutch Republic, England, the U.S., France, Germany and Japan that span three centuries, detailing how in each case the emergence of a financial system jump-started economic growth. Using a cross-country panel of seventeen countries covering the 1850-1997 period, we then uncover a robust correlation between financial factors and economic growth that is consistent with a leading role for finance, and show that these effects were strongest over the 80 years preceding the Great Depression. Next, we show that countries with more sophisticated financial systems engage in more trade and appear to be better integrated with other economies by identifying roles for both finance and trade in the convergence of interest rates that occurred among the Atlantic economies prior to 1914. Our results suggest that the growth and increasing globalization of these economies might indeed have been 'finance-led.'

Emerging Financial Markets and Early U.S. Growth

Studies of early U.S. growth traditionally have emphasized real-sector explanations for an acceleration that by many accounts became detectable between 1815 and 1840. Interestingly, the establishment of the nation's basic financial structure predated by three decades the canals, railroads, and widespread use of water and steam-powered machinery that are thought to have triggered modernization. We argue that this innovative and expanding financial system, by providing debt and equity financing to businesses and governments as new technologies emerged, was central to the nation's early growth and modernization. The analysis includes a set of multivariate time series models that relate measures of banking and equity market activity to measures of investment, imports and business incorporations from 1790 to 1850. The findings offer support for our hypothesis of finance-led' growth in the U.S. case. By implication, the interest today in improving financial systems as a means of fostering sustainable growth is not misplaced.