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National Banks and the Local Economy

Jun 2020
By  Chenzi Xu, He Yang
We use a historical laboratory to show that banks impact real economic activity through the liabilities side of their balance sheet, where safer liabilities provide better monetary services. The United States National Banking Act of 1864 was enacted when the circulating money supply primarily consisted of privately issued bank notes. The Act required "national banks" to fully back their bank note liabilities with federal bonds, thereby creating a new and stable currency, which reduced transactions costs and facilitated trade. National banks also faced regulatory capital requirements defined by town population cutoffs. Using the discontinuity in the capital requirement as an instrument for national bank entry, we nd that the composition of agricultural production shifted from non-traded crops to traded crops while total production was unaffected. More over, trade activity proxied by employment in trade-related professions and businesses engaged in trade grew. National banks also led to significant manufacturing output growth that was primarily driven by sourcing more inputs. Furthermore, the higher levels of manufacturing output persisted for two decades.