Money, Banking and Financial Sophistication

Abstract

During the period 1850–1913, the banking systems of Europe grew very rapidly by historical standards. The typical pattern was for the money stock to grow considerably faster than nominal gross national (or domestic) output, as we illustrate below, and as we noted in Chapter 3, real gross output also grew rapidly by historical comparison throughout much of Europe during this period. Indeed, the money supply grew more rapidly than nominal output in every country for which we have the appropriate data, except the United Kingdom. This finding implies that velocity — that is, the average number of times a unit of domestic currency changes hands — fell during the period 1850–1913.¹ The period also features price levels that fell about as often as they rose, so that growth rates of money were also generally much in excess of rates of inflation. It follows that the rapidly expanding banking systems on the Continent were filling a need, at the same time many of the economies were industrializing at unprecedented rates, by providing new financial services at an equally unprecedented rate.