Bank Financing and Growth: Evidence from Early 1900s Texas

Abstract

This paper explores the consequences of a deepening in financial markets by examining the case of Texas at the turn of the last century. In the early 1900s, the Texas legislature legalized state-chartered banks, and, as a result, Texas experienced increased financial-market depth. The evidence presented below suggests that newly-established state banks played an important role in local economic development, and that the role was linked to agriculture more than to manufacturing. It suggests that banks mostly provided short-term credit to farms for the crop itself, rather than providing credit to farms for improvements or credit to manufacturing firms. The results provide insights for policymakers considering the role of community banks today and more generally, for those considering policies to improve growth in agriculture-based economies today.