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Land and Credit: A Study of the Political Economy of Banking in the United States in the Early 20th Century

  • RAGHURAM G. RAJAN
  • RODNEY RAMCHARAN

Economists have argued that a high concentration of land holdings in a country can create powerful interest groups that retard the creation of economic institutions, and thus hold back economic development. Could these arguments apply beyond underdeveloped countries with backward political institutions? We find that in the early 20th century, the distribution of land in the United States is correlated with the extent of banking development. Correcting for state effects, counties with very concentrated land holdings tend to have disproportionately fewer banks per capita in the 1920s. Banks were especially scarce both when landed elites' incentive to suppress finance, as well as their ability to exercise local influence, was higher, suggesting support for a political economy explanation. Counties with high land concentration and fewer banks also had higher interest rates and lower loan to value ratios, consistent with more restricted access to finance. Interestingly, counties with greater land concentration had fewer loan losses during the Great Depression, consistent with borrowers in those counties being less risky, even while they had more limited access to credit in the years leading up to the Depression. We draw lessons from this episode for understanding financial and economic development.

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File URL: http://hdl.handle.net/10.1111/j.1540-6261.2011.01694.x
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Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 66 (2011)
Issue (Month): 6 (December)
Pages: 1895-1931

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Handle: RePEc:bla:jfinan:v:66:y:2011:i:6:p:1895-1931
DOI: j.1540-6261.2011.01694.x
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