Big Business by Tyler Cowen

Author:Tyler Cowen
Language: eng
Format: epub
Publisher: St. Martin's Press

7.

WHAT IS WALL STREET GOOD FOR, ANYWAY?

Since 2008, the financial crash, and the Great Recession, the financial sector has been a major whipping boy in American politics and rhetoric. If you’re looking for a pretty typical headline, consider this one from the Wall Street Journal: “Elizabeth Warren Maintains a Hard Line on the Big Banks.” I’d like to suggest a broader perspective. At this point you might not be surprised to hear that I think America’s financial sector is very much overcriticized and underrated. Toward that end, let’s first consider some history.

If we look at the rise of the West over the centuries, the rise of civilization and the rise of finance have gone hand in hand. The first sophisticated city-states of Sumer appear to have made big advances in accounting, record keeping, lending, and banking by five thousand or so years ago. That helped the major ancient civilizations get their starts, eventually transforming Europe and the Middle East. The Greek city-states had advanced systems of banking for lending and also wealth storage.

Later, the rise of the Renaissance, as well as the patronage of art, was closely connected to advanced systems of banking that tied together many parts of Europe through lending, capital accumulation, and bills of exchange. The medieval money fairs turned into more systematic and far-ranging institutions that were major drivers of economic growth. Accounting technologies advanced accordingly, and many of the prerequisites for the modern state were put into place, most of all through the record-keeping techniques of financial institutions. Later, banking and public credit helped Britain rise as a leading power and gave the country the ability to protect itself from European invasion and depredation, thereby enabling the later Industrial Revolution. In fact, the rise of banking and finance was essential to civilizational development, the rise of Europe, and the best parts of Western civilization.

In other words, the growth of banking and finance has usually been very good for economies, and thus good for most citizens too. It can be debated to what extent banking and finance were causes or effects of earlier economic growth, but probably they were both. It is hard to imagine sustained economic growth without an ongoing and concomitant growth of banking and finance to allocate the capital that goes along with that new wealth. Banking and finance take society’s saved resources and convert them into higher-yielding investments, and without that function, economic growth won’t take off.

Consistent with this truth, banking and finance are important for the building of the American republic, the settling of the nation, and the rise of New York as a major global city. To side with banking and finance was to embrace these processes of development and to be on the right side of the debate. The more radical Jeffersonians, who were skeptical of banking in quite general terms, also were skeptical about the broader industrialization of the United States. Indeed, throughout the nineteenth century, anti-banking rhetoric was common in the United States and also quite similar to a lot of the current charges.

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