Political Institutions and Financial Development: Evidence from the Economic Histories of Mexico and the United States

Type:
SCID Working Paper 268

Author(s):

Published:
11/1/05

Region:
Latin America

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Abstract:
Why is there considerable variation across countries in levels of financial development? The extant literature points to two explanations: legal origin and political institutions. This paper adjudicates between these two explanations by tracing the process by which the banking systems of the United States and Mexico developed from independence to 1913. This analysis indicates that political institutions—particularly those that created institutionalized competition among political entities—played a determinative role in the size and structure of each country's banking system. It therefore lends considerable support to the political institutions view of financial development, while providing no support for the legal origins view.