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Emerging Financial Markets and Early U.S. Growth

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  • Peter L. Rousseau

    ()
    (Department of Economics, Vanderbilt University)

  • Richard Sylla

    ()
    (Department of Economics, Leonard N. Stern School of Business, New York University)

Abstract

Studies of early U.S. growth traditionally have emphasized real-sector explanations for an acceleration that by many accounts became detectable between 1815 and 1840. Interestingly, the establishment of the nation's basic financial structure predated by three decades the canals, railroads, and widespread use of water and steam-powered machinery that are thought to have triggered modernization. We argue that this innovative and expanding financial system, by providing debt and equity financing to businesses and governments as new technologies emerged, was central to the nation's early growth and modernization. The analysis includes a set of multivariate time series models that relate measures of banking and equity market activity to measures of investment, imports and business incorporations from 1790 to 1850. The findings offer support for our hypothesis of "finance-led" growth in the U.S. case. By implication, the interest today in improving financial systems as a means of fostering sustainable growth is not misplaced.

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File URL: http://www.accessecon.com/pubs/VUECON/vu00-w15.pdf
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 0015.

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Date of creation: May 2000
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Handle: RePEc:van:wpaper:0015

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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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Keywords: Financial markets; securities markets; growth; early national period; VAR;

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References

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  1. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report, Federal Reserve Bank of Minneapolis 45, Federal Reserve Bank of Minneapolis.
  2. Taylor, George Rogers, 1964. "American Economic Growth Before 1840: An Exploratory Essay," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 24(04), pages 427-444, December.
  3. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(4), pages 657-78, November.
  4. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, Elsevier, vol. 66(1-2), pages 225-250.
  5. Greenwood, J. & Smith, B.D., 1995. "Financial Markets in Development, and the Development of Financial Markets," RCER Working Papers 406, University of Rochester - Center for Economic Research (RCER).
  6. Peter L. Rousseau, 2002. "Historical Perspectives on Financial Development and Economic Growth," NBER Working Papers 9333, National Bureau of Economic Research, Inc.
  7. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
  8. Van Fenstermaker, J., 1965. "The Statistics of American Commercial Banking, 1782–1818," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 25(03), pages 400-413, September.
  9. Rousseau, Peter L., 1998. "The permanent effects of innovation on financial depth:: Theory and US historical evidence from unobservable components models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 42(2), pages 387-425, July.
  10. David, Paul A., 1967. "The Growth of Real Product in the United States Before 1840: New Evidence, Controlled Conjectures," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 27(02), pages 151-197, June.
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  12. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  13. Douglass North, 1960. "The United States Balance of Payments, 1790-1860," NBER Chapters, in: Trends in the American Economy in the Nineteenth Century, pages 573-628 National Bureau of Economic Research, Inc.
  14. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  15. Richard Sylla, 1998. "U.S. securities markets and the banking system, 1790-1840," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue May, pages 83-98.
  16. Peter L. Rousseau, 1999. "Share Liquidity and Industrial Growth in an Emerging Market: The Case of New England, 1854-1897," NBER Historical Working Papers, National Bureau of Economic Research, Inc 0117, National Bureau of Economic Research, Inc.
  17. Anna Jacobson Schwartz, 1947. "The Beginning of Competitive Banking in Philadelphia, 1782-1809," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 55, pages 417.
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  27. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, Elsevier, vol. 69(1), pages 5-50, July.
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