output figures were also somewhat flattered by the artificial prices) the true money to GDP ratio was surely much smaller. In the event, rapid inflation fueled by the printing press following price liberalization soon made the initial stock of bank deposits in Russia almost worthless. Russians were slow to return to trusting their banking system, which remained small, and collapsed again in the exchange rate and debt default crisis of 1998. Even today, the Russian banking system does very little of the classic activities for which the theoreticians would have us look. A decade after the collapse of the old system, by end-2000, the M2/GDP ratio had recovered, but only to 22%. Three-quarters of household deposits are with the state-owned Sberbank, which accounts for over a quarter of the total banking system and still lends more than half of its resources to the state. It is evident that Russia did not have what we would regard as a developed financial system when it had a high M2/GDP ratio and it does not have one now.

A feature common to Russia and China is that much of the banking resources were being lent to the public sector either as part of a plan (pre-reform Russia)<sup>13</sup> or in a vestigial survival of plan-type allocation. The use, by econometricians like Levine, of lending to the private sector as a better measure than simply M2 or total credit is one way of getting around this problem.

# _Britain and Korea_

One further dimension must be mentioned to complete the catalog of shortcomings of monetary aggregates as measures of financial development. Let me do this by way of two examples: the United Kingdom and Korea. In deference to our hosts today, I will begin with the British data. Figure 4 shows a time series of money (wide money as measured in _International Financial Statistics_ ) and bank credit to the private sector each deflated by GDP. The series end in 1980 because of a major change in data definitions that year; but the series is long enough to show some interesting and, to observers of UK monetary policy, well-known features. The first of these is the declining monetary depth throughout the 1950s.<sup>14</sup> High monetary depth was clearly not a sufficient condition for sustaining rapid growth in the Britain in the 1950s. On the other hand, the share of private credit in GDP does start to grow fairly steadily from 1958 on and this coincides with a period of higher average GDP growth in the 1960s; but before we get too excited about a possible correlation look what happens at the beginning of the 1970s: a huge credit boom followed by a crash. Of course the crash is mainly related to the first oil crisis, but somewhat exacerbated by the collapse of a property bubble that had been fuelled by credit.<sup>15</sup> This experience points to a myriad of other considerations that need to be brought into the picture in any particular instance, and especially over the short- to medium-term, to determine the relation between financial aggregates and growth; microeconomic policies on credit; wider macroeconomic stabilization issues; and business cycle effects.

> 13 Even if lending is to the private sector, heavy involvement of the state in allocating this credit can have much the same effect as if credit was simply going to the state.  This is the underlying rationale for the use by some researchers of the ratio of central bank assets to total banking assets as a supplementary banking indicator of financial development.

> 14 Essentially this was the working off of an inherited over-liquid situation created by war-time borrowing. The problem was addressed by the famous Radcliffe Report of 1958.

> 15 The credit boom had been unleashed be a relaxation of quantitative credit controls.

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