Question #ae339

1 Answer
Oct 13, 2017

They did not yet master the art of creating growth. Riches come from a multiplicative factor higher than one.


For $1 invested in an economy, one hopes to generate #k>1#, That supposes that $1 placed in a bank has been partially loaned and re-loaned many time, depending on margin requirements. For that you need a trustworthy banking system and economic agents who understand that capital is meant to circulate, not clog someone's bank account.

Such banking systems are typically found in democratic countries, of the kind that favor free circulation of goods, not just of people. Take Spain for instance. It came back from its exploration of America with more gold than it knew what to do with. Instead of buying goods with that gold (I'm simplifying) they tended to hoard that gold. Now inside a country, prices are determined by equating the amount of money with the amount of goods.

If you produce large quantities of goods and have small amounts of gold in the treasury, then much goods equals few gold coins means much goods cost little, prices are low. The reverse is what happened in Spain. More money, not more goods, prices went up. Spain became poor. It had more gold and it lost money! Again this is a sweeping statement, history is more nuanced. I hope I answered your question. Otherwise, let me know.