Edited by Philip Arestis and Malcolm Sawyer
Chapter 21: Financial Liberalization and the Relationship Between Finance and Growth
21 Financial liberalization and the relationship between ﬁnance and growth Philip Arestis Introduction1 The relationship between ﬁnancial development and economic growth has received a great deal of attention throughout the modern history of economics. Its roots can be traced in Lydia of Asia Minor, where the ﬁrst money was in evidence. The ﬁrst signs of public debate, however, on the relationship between ﬁnance and growth, and indeed on experiments with free banking, can be located in Rome in the year 33. In that year there was probably the ﬁrst classic case of public panic and run on the banks. The Romans debated intensely and ﬁercely at that time the possibility of placing a hitherto free banking system under the control of the government. Since then, of course, a great number of economists have dealt with the issue. An early and intellectual development came from Bagehot (1873), in his classic Lombard Street, where he emphasized the critical importance of the banking system in economic growth and highlighted circumstances when banks could actively spur innovation and future growth by identifying and funding productive investments. The work of Schumpeter (1911) should also be mentioned. He argued that ﬁnancial services are paramount in promoting economic growth. In this view production requires credit to materialize, and one ‘can only become an entrepreneur by previously becoming a debtor . . . What [the entrepreneur] ﬁrst wants is credit. Before he requires any goods whatever, he requires purchasing power. He is the typical debtor in capitalist society’ (p. 102). In...
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