DP17164 Real effects of stabilizing private money creation

Author(s): Chenzi Xu, He Yang
Publication Date: March 2022
Date Revised: May 2022
Keyword(s): Banking, monetary, stablecoin
JEL(s): E42, E51, N11, N21
Programme Areas: Financial Economics, International Trade and Regional Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17164

We show that decentralized privately created money with unstable values can hinder the traded, more transaction-friction sensitive, sector of the economy. We do so in the context of the National Banking Act of 1864 in the United States that created a new federally-regulated, fully-backed currency as an alternative to the pre-existing money supply, which consisted of unsecured notes printed by thousands of local private banks. Using a discontinuous change across towns in the costs of accessing this new type of stable, federally-backed money as a natural experiment, we show that places gaining access to the new currency experienced a shift in the composition of agricultural production from non-traded to traded goods and increased employment in trade-related professions. In addition, counties gaining access to the new stable money increased their manufacturing output by sourcing more inputs, and they innovated more, all consistent with the stable currency improving their market access and allowing them to expand through trade.