How Important Are Banks for Development? National Banks in the United States, 1870–1900

There is a growing consensus that financial development contributes to growth. Yet since financial institutions typically go where they expect to make the most profits, it is difficult to determine just how important they are for growth. Moreover, since financial institutions typically do many things and may alleviate many different types of constraints, it is still unclear which financial services matter most.

While the focus of much of financial development theory has been on how financial institutions fund new investments, the working capital, liquidity, and payments services of banks or other financial institutions may be equally or even more important. The rapid expansion of mobile phone banking in many developing countries illustrates that there is still a large unmet demand for basic banking and payment networks today. The national banks played a critical role in the payments system, giving people access to funds where and when they needed them. It is not a coincidence that mail order catalogs from companies like Sears grew explosively during the period. Just as the ability to transfer funds online has allowed new ways to buy goods today, the ability to transfer funds then promoted new forms of commerce. Because the modern financial system is so developed and the advent of telecommunications and information technology has made the payments system so efficient in developed countries, it is easy to forget that one of the primary roles of banking historically was to provide basic working capital and facilitate commerce by connecting distant places financially.

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