The industrial revolution was (partially) enabled by finance. Especially Scotland managed to catch up so much with England during that time, because it had a better and more robust financial system.
I bring up the industrial revolution, because manufacturing before the industrial revolution existed, but with such low productivity that I am sure you wouldn't want to go back to that state.
I'm not sure the notion that interest was considered a sin by some people at some point in time carries much weight. First, have a look at all the other things considered great sins. Second, banks in the European middle ages did functionally earn interest income, they just used techniques that should be familiar to any modern tax optimiser or even sanction buster to officially call is something else.
One technique was to charge late fees. Technically as a debtor, you could pay your loan back on time at 0%, but if you ever wanted another loan, you better be fashionable late and pay your interest disguised as a late fee.
Another technique was to give you the loan in one currency and have you pay back in another. Then you can disguise the interest payments in the exchange rate.
There's also plenty of examples involving shenanigans with derivatives.
Have a look at modern Muslim finance for more examples.
So that golden age of no interest never really existed to begin with.
I don't buy your arguments that industrial revolution wouldn't happened without banking system. Industrialization of the Soviet Union is a prime example, Soviets pulled it off on a massive scale without any shenanigans with the debts and whatnot. You yourself actually proving this stating that the semi-modern banking with loans with interest already existed in the Middle Ages yet the industrial revolution only really kicked off in the XIX century. Industrial revolution was driven by the progress of science (steam machines, electric motors etc) and would have happened without any modern banking anyway. Pooling money of individual investors for great infrastructure projects like railways or factories etc. doesn't require any debt or bank mediation, in fact the entire idea of a corporation as we know know where investors are shielded from the liability doesn't need banking system at all to function just fine. And such investments were the most common of financing industrial projects during the peak of the industrialization, along side with the direct government subsidies, not banking loans
Be careful: are we talking about The Industrial Revolution, or later copy-cats?
Unlike the inventions of agriculture which happened multiple times independently, The Industrial Revolution happened only once and then spread.
It's still debated amongst historians and economists what factors caused The Industrial Revolution to happen in Britain when it did, and not earlier or later or elsewhere.
We know a bit more about what factors help or hinder copy-cat industrialisers. Just because we have more examples to study. You bring up a few yourself.
Btw, I never made the argument that you absolutely need a reasonable financial system to have any kind of industrialisation. I would argue that such a system helps with prosperity, but is not absolutely required.
(One good example that you didn't mention is actually the US. They got quite prosperous despite absolutely hobbling their financial system throughout all of their short history. See eg their bans on branch banking, and obsession with unit banks.)
But all else being equal, I'd rather live in a more prosperous society than the Soviet Union, which barely managed to industrialize at great cost and largely thanks to oil money.
> Maybe the fact that you need the physical, manufactured goods to live a comfortable life unlike 'financial services', that won't cloth you, won't transport you and definitively won't feed you.
Thanks to the division of labour, the tailor doesn't have to drive a car, nor does the bus driver have to make her own clothes. Similarly, people can work in a bank and trade to acquire clothing and transportation.
If they are particularly good at providing banking services, they will be able to acquire a bigger bundle of those manufactured resources than if they worked the factories themselves.
Just like the tailor can get more bus rides with less hassle by selling clothing, then by getting behind the wheel herself.
Btw, what do you have against fractional reserve banking? It seems to universally spring up in anything remotely resembling a free market. Systems with 100% reserves only ever exist when governments interfere, and even then only briefly, because they are brittle. See eg https://www.cato.org/blog/friday-flashback-state-100-percent...
You make some good points. Yes, Soviet Union didn't 'invent' industrialization, just copied what was already well known and didn't need to go through the pains of incremental improvements and some dead ends in science etc. and instead could just look up to the already industrialized Western countries to see what works and what doesn't. You are however wrong stating that they did it thanks to oil money. They didn't trade any oil with the West till the late 60s and by then they already started their decline.
Regarding the financial services, I acknowledge that they are useful, my problem with them is that they disconnected from the real economy and instead of being a tool subservient to the needs of that economy they started to live on their own and even enslave big swaths of the actual economy. That is simply not sustainable, sooner or later the countries that actually produce real products decide that they don't need a third party skimming off top of their work and develop their own finance sector and then you are left with nothing, there's no _sustainable_ wealth creation by slushing money around between different banks and accounts, the money needs to be put to some _productive_ use. Some tiny countries can survive as tax heavens but it's a very precarious situation and can change over night. Sure you can have one Switzerland, but it's just an exception related to specific history, you really can't have two Switzerland-like countries living off finance, there's simply no room for that.
My beef with the fractional reserve is that it is too easy to abuse it. The idea is sound and good, it works nice and makes everyone more wealthy as long as the money creation is kept in line with the growth of the economy. But that's not the case in practice. That's the problem. Countries start pumping in 'empty' money into the system to paper over structural problems, but then these issues come back with double force to bite in the ass.
Singapore does fine as a 'second Switzerland'. So I'm not sure where you get the notion that there can be only one Switzerland-like country? (Hong Kong was in a similar boat for quite a while, but it has decreased in importance lately. Not because the global economy didn't want finance any more, but mostly because of PRC mismanagement.)
If NYC or London were independent countries, they would be in similar situations. They even have similar population numbers as the financial centres mentioned above.
When has a financial centre ever imploded overnight? Especially where that was not due to internal mismanagement, but due to shifts in the outside economy? (Though even with plenty of mismanagement, Hong Kong is still around as an important financial centre. Just not as important as before, and the decline has been slow.)
Amsterdam was once a more important financial centre, but its relatively decline has also been slow.
> The idea is sound and good, it works nice and makes everyone more wealthy as long as the money creation is kept in line with the growth of the economy.
I agree that government should be kept out of the money creation business. Private note issuing banks tend to do better. See George Selgin's work for more.
> Countries start pumping in 'empty' money into the system to paper over structural problems, but then these issues come back with double force to bite in the ass.
I am not sure what you are talking about here. You mention countries, so I assume you are talking about a system with a central bank?
Well as long as the central bank makes sure inflation (or nominal GDP) stay on target, the problem you describe just doesn't exist.
> Regarding the financial services, I acknowledge that they are useful, my problem with them is that they disconnected from the real economy and instead of being a tool subservient to the needs of that economy they started to live on their own and even enslave big swaths of the actual economy.
I'm not sure how this enslaving is supposed to happen.
OK, again, you make good points about Singapore being like a second Switzerland. But what I was trying to convey initially is that such countries are like oversized tax heavens. Combined population of both is what, 10 million? Compared to 8 billion humans living in this world. That was my point. How many more countries can you convert to live off finance? It's a niche, a very cozy one for sure, but it's not something that would be globally applicable. And anyway, since most of the capital flowing through these small countries is foreign, it's subject to the restrictions of the countries of the origin. So it's not really Switzerland or Singapore's capital.
The enslaving happens by 'financialization' of industries. This term has already well known meaning which you can look-up to get a good description because I'm afraid I can't articulate it good enough. But in a nutshell it means destroying industrial base for short-term gains and siphoning off of _existing_ wealth from the industry into finance.
Finance is one example of a service based industry. Tourism is another, and there are plenty of countries with extensive tourism industries. There's also healthcare, hospitality in general, media, education, etc.
> And anyway, since most of the capital flowing through these small countries is foreign, it's subject to the restrictions of the countries of the origin. So it's not really Switzerland or Singapore's capital. The enslaving happens by 'financialization' of industries.
There are basically two ways to use other people's money: via debt or via equity. Those other people would either be your creditors or your shareholders.
When people use 'slavery' metaphors in the context of finance, they usually mean to say that debtors are the slaves of the creditors. You seem to imply that the notion is the other way round? That's somewhat peculiar.
For 'financialisation', I am going by https://en.wikipedia.org/wiki/Financialization and it doesn't seem particularly scary. Though different people seem to mean very different things by that word. Eg the introduction talks about increasing debt-to-equity ratios.
If you are worried about those ratios, ie about leverage, one targeted change you could make is to remove the tax advantage that debt enjoys over equity: companies typically get to pay interest with pre-tax dollars and have to pay dividends with post-tax dollars.
If you want companies to use relatively more equity and less debt, you should remove that subsidy of debt.
> But in a nutshell it means destroying industrial base for short-term gains and siphoning off of _existing_ wealth from the industry into finance.
How do you 'destroy' an 'industrial base for short-term gains'? Usually a short term focus in the economy means that interest rates are high. But I'm not quite sure how that fits here.
I bring up the industrial revolution, because manufacturing before the industrial revolution existed, but with such low productivity that I am sure you wouldn't want to go back to that state.
I'm not sure the notion that interest was considered a sin by some people at some point in time carries much weight. First, have a look at all the other things considered great sins. Second, banks in the European middle ages did functionally earn interest income, they just used techniques that should be familiar to any modern tax optimiser or even sanction buster to officially call is something else.
One technique was to charge late fees. Technically as a debtor, you could pay your loan back on time at 0%, but if you ever wanted another loan, you better be fashionable late and pay your interest disguised as a late fee.
Another technique was to give you the loan in one currency and have you pay back in another. Then you can disguise the interest payments in the exchange rate.
There's also plenty of examples involving shenanigans with derivatives.
Have a look at modern Muslim finance for more examples.
So that golden age of no interest never really existed to begin with.