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Financial Development and Pathways of Growth: State Branching and Deposit Insurance Laws in the United States, 1900–1940

Rajeev Dehejia and Adriana Lleras-Muney

Journal of Law and Economics, 2007, vol. 50, 239-272

Abstract: This paper studies the effect of state-level banking regulation on financial development and on components of state-level growth in the United States from 1900 to 1940. We use these banking laws to assess the findings of a large recent literature that has argued that financial development contributes to economic growth. We contend that the institutional mechanism leading to financial development is important in determining its consequences and that some types of financial development can even retard economic growth. For the United States from 1900 to 1940, we argue that the financial expansion induced by expanded bank branching accelerated the mechanization of agriculture and spurred growth in manufacturing. In contrast, financial expansions induced by state deposit insurance had negative consequences for both the agricultural and manufacturing sectors.

Date: 2007
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