American Finance Evolution and Its Stages Essay
The financial sector, or simply finance, is a system of economic activities aimed at providing a wide range of financial services such as banking, investment, insurance, credit card issuing, accounting, etc. Since 1860, the American finance system had a history of three waves of rapid growth and two crashes that are characterized by the changes in the industry and its share in GDP as well as the role it plays in economic development. What is significant about the beginning of the 1860s is the establishment of the national banking system and putting an end to the era of free banking defining the hierarchy of banks. Moreover, it is characterized by the conflict between President Jackson’s propaganda of the hard-money policy, i.e. money having real gold value, and the National Bank’s soft money policy, issuing paper currency not tied to gold. However, in 1879, the decision to make paper have real gold valuable and be convertible into gold was reached (Bilginsoy, 2015).
Speaking of the stages of the U.S. finance evolution, the first one is the growth of 1880-1900. It was motivated by the construction of the railroad and the start of building up heavy industries in the country provoked by the Industrial Revolution (Philippon, 2008). The development of the financial sector was necessary due to the renewal of foreign investment from the European countries and for funding massive infrastructure projects. It was the period of short-term loans to internal agents of economic activities, the boost in the stock market in response to the railroad system construction, and the small companies uniting to form influential conglomerates in the heavy industry sector (Bilginsoy, 2015).
Further development of science, especially discoveries in the field of medications and electricity, led to the second wave of growth lasting from 1918 to 1933. Its primary feature is financing companies in the automobile construction and pharmaceutical spheres. The period in between these two stages of development cannot be called a crash, however, it may be viewed as a stalemate. The only sign of it is the rapid drop in the number of banks (Hollow, Akinbami, & Michie, 2016).
The following stage is the collapse of the U.S. financial sector caused by the Great Depression, however, the government managed to relatively quickly renew it due to the prudent decision of developing infrastructure across the country and joining the World War II. Even though the human losses were significant, there were many positive impacts on the American finance sector and the economy as the whole, as there were additional sources of funds coming from selling arms and ammunition abroad and that later came as the result of the absence of large-scale military operations in the U.S. territories.
The further development of the finance sector was relatively stable as the share of financial services in GDP remained pretty the same. It was not until the IT revolution of the 1970s that it boosted another wave of growth of the finance sector. It is especially true of the period after the 1990s (Hollow et al., 2016) when all financial institutions underwent the reforms due to the technological progress and globalization of the economic relations promoted by the IT revolution. What is also significant about this period is the 1971 cancellation of the gold exchange rate that would allow issuing money not tied to gold and later enforce the influence of the U.S. dollar in the global economy.
It should be said that the outburst of information and communication technologies had both positive effects on the development of finance. On one hand, it made providing financial services easier, led to the diversification of the financial sector, and added to quick globalization. On the other hand, globalization and the interconnectedness of the financial systems are the primary reasons for the 2008 global economic crisis. Even though the American economy managed to recover, there are significant risks that there may be similar crises in the future.
Bilginsoy, C. (2015). A history of financial crises: Dreams and follies of expectations. New York, New York: Routledge.
Hollow, M., Akinbami, F., & Michie, R. (2016). Complexity and crisis in the financial system: Critical perspectives on the evolution of American and British banking. Cheltenham, United Kingdom: Edward Elgar Pub.
Philippon, T. (2008). The Evolution of the US financial industry from 1860 to 2007: Theory and evidence. New York, New York: New York University.
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