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Stock markets aren’t all that important
CBC Radio 1, “Commentary,” July 31, 2002
What’s all this fuss about the ups and downs of the stock market? Reporters prattle on about it. Commentators frown over it. We’re led to believe serious consequences for the economy are involved. What, though, if stock markets aren’t all that important?

Well, as it happens, they’re not. We can relax.

We all know now of the disconnect between stock markets and the state of the economy. Stock prices plunge but the real economy does fine. The notion remains, however, that stock markets are essential to financing business enterprise in the first place. This, too, is a fiction.

Contrary to what you have been led to believe, stock markets have played only a marginal role or no role at all in the development of modern economies, at least until the 1980s. The great leap forward of the American economy, in the 19th century, was financed largely by personal savings, bank loans, government subsidies for railroads, investment syndicates, and especially retained earnings - profits ploughed back into the business. Stock exchanges came after - speculators battening on to real economic and technical surges after they had taken place.

The same kinds of business finance occurred in western Europe, Canada and Japan. This carried on into the next century as well. In Canada, “capital formation,” as it’s called, occurred independently of weak, marginal stock markets. During World War II, in North America - an immensely productive, innovative time - stock market activity was nominal. Similarly, most of the capital for the spectacular U.S. post-war boom was raised by corporations internally, and the rest largely through bank loans and bond issues. In Canada, Crown corporations played a major role. Ditto for the post-war economic miracles in Japan, Germany, and also France and Italy, not to mention the equally remarkable economic blossoming of smaller countries like Sweden, Austria and Finland. Stock markets, inasmuch as one could call them that, were sluggish little backwaters, going through the motions. As in Canada, state enterprise played a large role.

Even in the more recent, much ballyhooed bull markets of the 1980s and 90s, most stock market activity involved just churning of paper. Microsoft, the icon of the age, was well on its way and generating all the capital it needed, when Bill Gates who, like Henry Ford, was suspicious of stock markets, finally took his company public. Many young companies did raise developmental money through stock issues in that period, but don’t mistake that for how the overall economy works and generates capital and innovation.

So the next time you see a reporter, or politician, waxing solemn on television about the stock markets, just zap them with your remote control. There are more important things to worry about.
Copyright © Herschel Hardin 2005
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