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Financial Intermediaries: Banking Matters

Jun 11, 2013 • Behavioral Economics, Developing Economies, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Government, Households, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Regulation • 244 Views    No Comments

Imagine selling your house without depositing the money in a bank or taking your savings with you wherever you go.

In Myanmar (Burma), this seemingly irrational behavior has been logical.

In 1987, when Myanmar’s socialist government became concerned that people were getting too rich, they simply proclaimed that high denomination bills were worthless and a new currency system would be based on the number 9 (the dictator’s lucky number). Practically and emotionally, the impact was catastrophic.

People avoided financial institutions. Because private property and contractual obligations had no government protection, demand for US dollars and gold increased. Where to keep your assets? A mattress felt more secure than a bank. One taxi cab driver used a book with carved out pages as a hiding place for cash.

Our bottom line? For a viable economy, financial intermediaries need to connect savers and borrowers. Only then can businesses invest and expand while households can finance new homes and buy cars.

Financial intermediaries always remind me of one of my favorite people, Alexander Hamilton. Knowing a nascent economy needs financial intermediaries, in 1790 he proposed the First National Bank that would springboard a much needed banking system in the United States.

Alexander Hamilton made sure that we would use banks to buy houses, preserve our savings and start businesses. Having just announced that their country would soon establish an independent central bank, perhaps Myanmar’s banking officials now have the same goal.

Sources and Resources: With the US lifting most economic sanctions against Myanmar and Coca-Cola returning (here at econlife), news articles have abounded. NPR’s Planet Money has a reporter in Myanmar with a fascinating podcast about the daily realities of the country’s catastrophic economy. For more stories and an overview, CNN had a good report, WSJ spoke about Myanmar’s new central bank and here is the scholarly perspective on the Myanmar economy.

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