Do banks affect long-term economic performance? I answer this question by relying on an historical development that occurred in Italian cities during the 15th century. A sudden change in the Catholic doctrine had driven the Jews toward money lending. Cities that were hosting Jewish communities developed complex banking institutions for two reasons: first, the Jews were the only people in Italy allowed to lend for a profit; second the Franciscan reaction to Jewish usury led to the creation of charity lending institutions that evolved into many of the current Italian banks. Using Jewish demography in 1450 as an instrument, I estimate large effects of current banking development on the income-per-capita of Italian cities. Additional firm-level analyses suggest that well-functioning local banks exert large effects on aggregate productivity by reallocating resources toward more efficient firms. Controlling for province effects, using additional historical data on Jewish demography and exploiting the expulsion of the Jews from the Spanish territories in Italy in 1541, I argue that my results are not driven by omitted institutional, cultural and geographical characteristics. In particular, I show that the difference in current income between cities that hosted Jewish communities and cities that did not exists only in those regions that were not Spanish territories in the 16th century. These difference-in-difference estimates suggest that the Jewish Diaspora can explain at least 10% of the current income gap between Northern and Southern Italy.
Published as: Banks and Development: Jewish Communities in the Italian Renaissance and Current Economic Performance in Review of Economics and Statistics , Vol. 98, No. 1, 140-158, March, 2016