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Why Does Financial Development Matter? The United States from 1900 to 1940

Listed author(s):
  • Rajeev Dehejia
  • Adriana Lleras-Muney

There is a substantial literature arguing that financial development contributes to economic growth. In this paper, we contribute to this literature by examining the effect of state-level banking regulation on financial development and economic growth in the United States from 1900 to 1940. Specifically, we make three contributions. First, drawing on the banking history literature, we carefully control for factors that could confound a causal interpretation of the effect of financial development on growth. Second, drawing on available data for this period, we examine the pathways through which financial development can affect growth; in particular, we examine the impact of these laws on a range of farm, manufacturing, and human capital outcomes. Third, we document that not all forms of financial development have a positive effect on economic growth. In particular indiscriminate lending can negatively impact economic growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9551.

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Date of creation: Mar 2003
Publication status: published as Dehejia, Rajeev and Adriana Lleras-Muney. “Financial Development and Pathways of Growth: State Branching and Deposit Insurance Laws in the United States From 1900 To 1940.” Journal of Law and Economics 50 (May 2007).
Handle: RePEc:nbr:nberwo:9551
Note: DAE ME
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