Discussion of “How Important Historically Were Financial Systems for Growth in the

U.K., U.S., Germany, and Japan?”

Financial Structure and Economic Development Conference, World Bank

Philip T. Hoffman, Caltech (pth@hss.caltech.edu)

Long run overview of relationship between growth and financial development

Examines 4 developed countries banks, securities markets, governments, internal

finance, and alternative sources over long run

Bottom line Financial development matters But different financial structures Optimal structure may not matter much

Most will agree that financial development matters for growth

Issue: is there an optimal financial structure and does it matter?

Those who say yes would want control for endowments and history of growth Results might then fit trend toward large

financial markets and banks But you have to control for political

institutions All 4 cases have secure property rights and fairly

open entry

What about those who, like authors, disagree?

There was even more variety than paper suggests particularly in alternative sources of

financing (often matching markets) These sources hard to get at but

important German and Japanese sections do a good

of suggesting as much Japan: coordinators help small joint stock

firms raise money from investors

Another example of alternative finance: mortgages

Left out except in German section But important for growth

for infrastructure, housing, life cycle and even initial industrial finance

And big too; circa 1900 mortgages 38% GDP US; bank loans only 24% GDP 12-25% or more GDP UK > 55% NNP Germany > 20% GDP France

Much mortgage finance came from alternative matching markets

Difficult to estimate but circa 1900 Financial institutions hold only 36% of

mortgages US Individuals hold 50 to 65% of British

mortgages nearly 80% France > 32% Germany

Alternative sources big: how do they fit into choice of optimal system?