Abstract:

I provide evidence from the most severe banking crisis in British history that financial shocks can have a long-lasting impact on the patterns of international trade. The setting for my study is the unexpected failure in May 1866 of Overend and Gurney, London's largest interbank lender. Overend's failure led to widespread bank runs in London that caused 12 percent of British multinational banks to fail. These multinational banks played a dominant role in financing international trade during the 19th century. Using detailed archival records, I document that 10 percent exposure to these failed banks led to 5.6 percent fewer exports the following year. Strikingly, the impact on international trade patterns persisted for almost four decades despite a rapid recovery of the banking sector following the crisis. There was limited within-country substitution, leading to permanent divergence in exports levels across countries: those more exposed to bank failures had 1.8 percent lower annual export growth from 1866 to 1914. Countries that faced high export competition and those that had little access to alternative forms of credit experienced more persistent effects.