Determinants of high economic growth – Empirical evidence from Germany between 1860 and 1913

Abstract

We contribute to the controversy about the contribution of German banks to the high-growth income formation process from 1860 to 1913. We use recent improvements in integrating banks in economic modelling, deploy a more robust econometric modelling methodology, and use a broad dataset including all types of banks. Our statistical findings suggest a significant link between broad credit creation (as measured by total assets of the banking system) and nominal Net National Product (NNP), confirming earlier studies and contradicting some studies finding no such relationship. The findings support the case that banks exert a significant influence on economic activity and development. Furthermore, the controversy concerning the ‘too much finance’ argument may be resolved: Small local banks continued to act as conservative financial services providers and no financial excess was observed during the period.