Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience
Philipp Ager, assistant
professor at University of
What is the optimal level of bank competition? New research by Philipp Ager and Fabrizio Spargoli sheds light on this question by testing how the introduction of free banking laws between 1837 and 1863 affected bank competition and economic growth in US counties. With the introduction of free banking laws, governments gave up their power over bank chartering and allowed any individual to establish a bank provided that certain legal requirements were satisfied. Together with the change in bank-chartering policy, the other main feature of the 1837-1863 period was that the US did not have a central bank nor a prudential regulator as today. Hence, studying the US during the 1837-1863 period allows the authors to isolate the effects of bank competition from those of state implicit guarantees. Ager and Spargoli’s central conclusion is that, in an institutional framework without a central bank and a prudential regulator, bank competition leads to more bank failures but enhances economic growth in the long run.
assistant professor at
Erasmus Research institute
The working paper can be found here: