Introduction

As West European countries integrate their economies and East European countries move away from communism, both are reassessing their economic and financial institutions. One of the most important choices they face concerns the emphasis they should place on stock markets (including equity, bond and other markets) as opposed to banks for providing finance to their industries.

Although both stock markets and banks have existed in most advanced countries for many years, the relative importance of the two has varied. Stock-market-based financial systems have been associated with the nineteenth-century UK, which was the first country to go through the Industrial Revolution, and the twentieth-century US, which was the first country to go through the post-Industrial Revolution. Bank-based financial systems have been associated with France, Germany and Japan.

In the second half of the nineteenth century the stock market played an important role in the financing of industry in the UK. According to Michie (1987), roughly one-quarter of capital formation was raised through the London Stock Exchange in 1853; by 1913 this had grown to one-third. Table 4.1 gives a detailed breakdown of the distribution of securities by industry between 1853 and 1913. It can be seen that railways were the most important category apart from government debt. Urban services, financial services and commercial and industrial firms were all significant and constituted most of the remainder. Agriculture was a very minor component and consisted entirely of overseas investments.

In the first half of the twentieth century, the role of the London Stock Exchange in raising funds for industry declined and it was in the US that stock markets came to have the greatest relative importance.