Abstract: Regional Economic Development and Variation in Postbellum National Bank Profit Rates

Scott A. Redenius


During the period following the U.S. Civil War, real and financial rates of return were higher in the South and West than in the Northeast. Despite over forty years of debate, economic historians have not yet reached a final consensus on the causes of these interregional rate differentials or their implications for how we assess the efficiency of the postbellum financial system. Most previous studies have attributed the rate differentials to supply factors—for example, transaction costs that limited interregional capital flows or regional differences in market power or risk. However, the evidence presented here on the relationships between regional growth rates, profit rate differentials, bank entry, and interregional capital flows is consistent with the hypothesis that regional differences in the growth in demand for banking services generated the interregional differences in bank profit rates. According to this interpretation, we should see the profit rate differentials as a mechanism through which the financial system allocated capital within and between regions rather than a sign that the postbellum financial system failed to allocate resources efficiently.

BEH On-Line Paper