National Security and National Finance: Locating the Origins of Modern Financial Capitalism

EUI Working Papers RSCAS No. 2004/21

26 Pages Posted: 15 Dec 2012

See all articles by Richard W. Carney

Richard W. Carney

China Europe International Business School (CEIBS)

Date Written: April 21, 2004

Abstract

Modern political economies are distinguished from each other by the institutions that mediate actors' interactions, falling somewhere along a spectrum between pure market and non-market mechanisms. But how did these institutions originally emerge? With regard to the financial sector, I argue that higher levels of national security threats in combination with economic backwardness lead to a financial system more dominated by banking relationships. To evaluate the argument, I conduct a focused comparison of Japan and Germany before WWII since they had similar political and legal institutions and were both 'backward', but differed with regard to the security threats they faced. Germany confronted more menacing threats from neighbouring great powers as well as greater domestic unrest following unification in 1871, which led the government to direct lending to sectors vital to the nation's security via banks. Japan, by contrast, did not face the same level of threats to its security, and consequently securities markets were more dominant.

Keywords: national security, finance, Germany, Japan, political economy, banking, securities markets, stock markets

JEL Classification: G28, G38, N23, N25

Suggested Citation

Carney, Richard W., National Security and National Finance: Locating the Origins of Modern Financial Capitalism (April 21, 2004). EUI Working Papers RSCAS No. 2004/21, Available at SSRN: https://ssrn.com/abstract=2188902 or http://dx.doi.org/10.2139/ssrn.2188902

Richard W. Carney (Contact Author)

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

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