From The Monetary And Institutional Point Of View The Rise Of The Western World

NORTH (1973) ARGUED INSTITUTIONAL INNOVATIONS IN European countries played avital role in the rise of the western world. However, the factors leading to institutional innovations themselves remained unknown. This paper aims to rationalize the logic of institutional innovations for which North and other New institutional economists have not given satisfactory explanation. All of the interesting conclusions drawn in this paper are based on the fact that American bullion was continuously supplied to European countries in 16th to 19th century. The contribution of this paper can be seen as a supplement to North and his fellows.In our framework of "exogenous money - institutional change - economic growth", the reasons of change of the institutions and the rise of western world could be examined in an alternative way. And as we can prove, "Monetary nonneutrality" still existed in the very long run. Our empirical analysis shows that no significant difference can be found between European countries and China from the 16th to mid-18th century. They almost equaled in the growth rate of population, the efficiency of market, the level of science and technology and even the environment of institutions. American Exploration, a chance event, led to a surge in the money supply in European countries, a chain effect followed. 16th-Century Price-Revolution and thus the wealth redistribution cause the sequent changes in class structure, especially the rise of the merchant class. Government financed by the rising class changed accordingly. Their mutual interest was embodied in "Mercantile policy" which provided property rights protection and supported the overseas expansion. Credit demand accumulated with the increase in the volume of foreign trade. The advent of efficient capital market, combined with the money creation system guaranteed the long time decline of interest rates and the convenience of the credit. Low interest rates stimulated the volume of investment. Industries expansion paved the way for the so-called "take-off in the European countries. Institutional change favorable to economic growth appeared due to the rise of the interest of merchant class; in turn, the efficient institutions reinforced the power of the merchant class. In this positive feedback loop, European revolutions like the Glorious Revolution (1688) or the French Revolution (1789-1793) give the institutional changes a further push. And in this way, the efficient institutions were established and the outstanding economic growth performance achieved.North, among others, attributed endogenous factors as the reason of the rise of western world. The main contribution of this paper is to introduce the exogenous factor oney. The moral of this conclusion is that a chance event in the history can change the way the institution evolves and lead to unanticipated outcomes.