Discussion paper

DP17164 Real effects of supplying safe private money

Privately issued money usually bears devaluation risk that lowers its liquidity and usefulness as a medium of exchange. We evaluate the real economic consequences of eliminating devaluation risk and increasing the safety of private monies in the historical context of the National Banking Act of 1864 in the United States. The Act introduced a new type of federally-regulated bank that supplied safe currency to the local economy as an alternative to the previously existing varieties of unsecured notes. Towns faced a discontinuous cost in creating these banks, which we leverage as a source of exogenous variation in the change in their monetary transaction costs. We estimate the effects of gaining access to safe private money using a market access approach derived from general equilibrium trade theory, and we find that lowering monetary transaction costs increased production of traded goods overall, increased the production share of trade-cost sensitive goods, and spurred structural transformation with more manufacturing output, manufacturing employment, and urban population. Moreover, the growth in manufacturing output overall appears driven by employment and inputs rather than capital investment. These effects indicate that supplying safer money that lowered overall trade costs had a causal impact on US economic development.


Xu, C and H Yang (2022), ‘DP17164 Real effects of supplying safe private money‘, CEPR Discussion Paper No. 17164. CEPR Press, Paris & London. https://cepr.org/publications/dp17164