I exploit historical border discontinuities before the U.S. National Bank Act of 1863 to investigate the effects of liability insurance, extended shareholder liability, and branching on bank activity and financial stability within contiguous county pairs. I find that while double liability and branching lowered the probability of bank failure, public and mutual liability insurance generally elevated the probability of failure in both crisis and non-crisis years. Banks with double liability experienced smaller declines in deposits, note circulation, and lending during crises, while mutually insured banks experienced larger declines. I also find that liability insurance and double liability significantly affected ex ante risk-taking; insured banks substituted deposits and interbank borrowing for note issuance, increased exposure to real estate and interbank lending, and reduced cash reserves, while banks with double liability were less levered, less exposed to real estate, less reliant on deposits for funding, and maintained higher cash reserves. Finally, though I find no evidence of a trade-off between stability and credit provision, there is evidence of trade-offs between stability and industrial development.
From 1735 to 1751, the Board of Trustees of the Province of Georgia imposed the only ban on slavery among the North American colonies. Exploiting the historical boundary between the 88 counties of Trustee Georgia and the 71 counties that were appended to the colony after 1751, I analyze the effects of this initial institutional difference on subsequent differences in slave dependence, land inequality, income, and poverty. I find that counties that had been covered by the initial Trustee ban subsequently had lower slave population density, fewer farms holding more than 10 slaves, and have higher income and lower poverty rates today. I further find that while counties affected by the ban did not have significant differences in pre-Civil War land inequality, productivity, industrial development, or educational investment, their economic output was significantly more diversified and less reliant upon the production of cash crops. Finally, I demonstrate that controlling for pre-war output diversification significantly reduces the estimated relationship between Trusteeship and current income. Results therefore suggest that the effects of initial differences in labor institutions can persist even where those differences are not determined by geography, and that a primary channel of persistence is the path-dependence of early economic specialization.
General adoption of the limited liability corporation during the nineteenth century has often been credited with mobilizing passive investment capital for entrepreneurial ventures of the “Second Industrial Revolution.” Utilizing a dataset of innovations presented at the World’s Fair in 1851 and Centennial Exhibition in 1876, this paper examines the effects of the limitation of shareholder liability on the volume and sectoral distribution of industrial innovation. I find that the introduction of limited liability was associated with a higher marginal, but not inframarginal, propensity to innovate. Though countries allowing limited liability exhibited no more or fewer inventions than countries without limited liability, a longer period of legal existence of the limited liability corporation was associated with more inventions. Moreover, I find that the effect of an additional year of limited liability on the propensity to innovate was highly concentrated in the invention categories of mining and food processing. The results of this study therefore suggest that the limited liability corporation was not a significant determinant of technological innovation in the aggregate, but was an important factor in facilitating innovation within particular industrial sectors.
This paper exploits the historical location of water mills in the United Kingdom prior to the Industrial Revolution to examine 1) the short- versus long-run local labor market effects of labor-saving technological change; 2) the relative importance of access to coal in the growth of British textile manufacturing; and 3) the persistence of early agglomeration effects on subsequent economic development following the obsolescence of initial geographic advantages. With the invention of the Arkwright spinning frame and Cartwright power loom, locations which were more or less suitable to the generation of hydro power experienced differential changes in the cost of textile production. I therefore exploit parish-level differences in hydraulic suitability for a water wheel to instrument for historical water mill location using the second moment of river flow, and then estimate average changes in textile employment after 1768 and 1785 in parishes with a water mill versus without. Preliminary results indicate that while overall employment in textile manufacturing increased in parishes with a water mill, relative to parishes without, employment in particular occupations declined, and vagrancy counts rose. Results also show that the association between water mills and post-water frame and power loom employment changes is attenuated after 1820 by including various measures of access to coal as independent variables, suggesting that relative abundance of coal may have been a determining factor in the growth of textile manufacturing in later, but not initial, stages of the Industrial Revolution in Britain.
Utilizing original archival data, I examine the role of access to microfinance credit in facilitating adjustment to the Great Famine of Ireland. I find that worse affected districts with a microfinance fund experienced substantially smaller relative population declines and larger relative increases in buffer livestock during the famine, and greater relative medium- and long-run substitutions toward other crops and grazing livestock, than worse affected districts without a fund. However, I also find that the potential benefits of access to credit in mitigating the effects of a major environmental shock were limited by the fact that the survival of microfinance institutions depended critically on an ability to substantially contract lending through flight to higher-quality borrowers, such that microfinance was not an effective mitigant for the most vulnerable Irish farmers.
The Great Famine of Ireland from 1845 to 51 ranks as one of the most lethal of all time, claiming approximately one eighth of the country's population. Utilizing Famine Relief Commission reports to develop a micro-level dataset of blight severity, I find that in the short run, districts more severely infected by blight experienced larger population declines and accumulations of buffer livestock by small- to medium-sized farms. In the medium and long runs, however, worse affected districts experienced greater substitutions toward other tillage crops and grazing livestock, particularly by small- to medium-sized farms. Using annual reports of the Irish Loan Funds, I further find that access to microfinance credit was an important factor in non-demographic adjustment to blight. Worse affected districts with at least one microfinance fund during the famine experienced substantially smaller relative population declines and larger relative increases in buffer livestock during and immediately after the famine, and greater relative medium- and long-run substitutions toward other crops and grazing livestock, than worse affected districts without a fund.
From 1716 to 1845, the Scottish financial system functioned with no official central bank or lender of last resort, no public (or private) monopoly on currency issuance, no legal reserve requirements, and no formal limits on bank size. In support of previous research on Scottish “free banking,” I find that this absence of legal restrictions on Scottish banking contributed to a proliferation of what Adam Smith derisively referred to as “beggarly bankers” which rendered the Scottish financial system both intensely competitive and remarkably resilient to a series of severe adverse shocks to the small developing economy. In particular, despite large speculative capital flows, a fixed exchange rate, and substantial external debt, Scotland’s highly decentralized banking sector effectively mitigated the effects of two severe balance of payments crises arising from exogenous political shocks during the Seven Years’ War. I further find that the introduction of regulations and legal restrictions into Scottish banking in 1765 was the result of aggressive political lobbying by the largest Scottish banks, and effectively raised barriers to entry and encouraged banking sector consolidation. I argue that while these results did not cause the severe financial crisis of 1772, they amplified the level of systemic risk in Scottish credit markets and increased the likelihood that portfolio losses in the event of an adverse economic shock would be transmitted to depositors and noteholders through disorderly bank runs, suspensions of payment, and institutional liquidation. Finally, I find that unlimited liability on the part of Scottish bank shareholders attenuated the effects of financial instability on the real economy.
I study the effects of a major environmental shock on microfinance lending by analyzing the Irish Loan Funds during the Great Famine of Ireland. I find that funds in districts worse affected by blight experienced higher failure rates and greater credit retrenchment and flight-to-quality than funds in less affected districts. Though greater leverage was generally associated with a higher predicted probability of institutional survival, the reverse was true where blight infection was more severe, and though more profitable funds were generally no more likely to survive, higher pre-famine margins were positive predictors of institutional survival where blight infection was worse. Results further indicate that the primary mechanisms by which pre-famine balance sheet metrics influenced survival probabilities were differential balance sheet contraction and flight-to-quality during the famine. The results of this study therefore suggest that optimal lending models in ordinary circumstances may render MFI’s more vulnerable to tail-probability aggregate shocks, with higher leverage, lower paid staff, lower economic rents, and more extensive liabilities limiting scope for credit retrenchment and flight-to-quality. Results further indicate that one cost of MFI resilience to adverse environmental change is substantially reduced outreach to borrowers of lower credit quality.
While standard accounts of the 1930s debates in macroeconomic thought pit John Maynard Keynes against Friedrich Hayek in a clash of ideology, this contrast is in many respects misleading. In this book, I argue that both Keynes and Hayek developed their respective theories of the business cycle within the tradition of Swedish economist Knut Wicksell, and thus shared Wicksell’s vision of economic fluctuations as intertemporal coordination failures. I further argue that, considered through this lens, Keynes and Hayek were by no means the theoretical antagonists they have subsequently been made out to be. Rather, both were fundamentally concerned with monetary dynamics outside of general intertemporal equilibrium, with Hayek exploring the conditions under which relative price changes might counteract deviations from intertemporal equilibrium, and Keynes those under which they might amplify such deviations.