This paper studies how banks impact the local economy and in particular examines their role in providing monetary services through stable liabilities. We study the United States National Banking Act of 1864 that passed during a period when the circulat- ing money supply primarily consisted of privately issued bank notes. The Act required “national banks” to guarantee bank note liabilities with federal bonds, thereby creating a new and stable currency, reducing transactions costs and facilitating exchange. National banks also faced regulatory capital requirements that varied by town population. Using the jump in the capital requirement as an instrument for national bank entry, we find that the composition of agricultural production shifted from non-traded crops to traded crops while total production was unaffected. Moreover, trade activity proxied by employment in trade-related professions grew. National banks also led to significant manufacturing output growth that was primarily driven by inputs use, and these changes can be attributed to national banks’ role in providing short-term credit and reducing transactions costs in trade. Furthermore, the higher levels of manufacturing output persisted for two decades.
WFA Cubist Systematic Strategies PhD Candidate Award for Outstanding Research 2019