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Real Effects of Supplying Safe Private Money

Journal: Journal of Financial Economics

Date: 20240701

Author: Xu, Chenzi; Yang, He

Abstract:
Privately issued money often bears default risk, which creates transaction frictions when used as a medium of exchange. The late 19th century US provides a unique context to evaluate the real effects of supplying a new type of money that is safe from default. We measure the local change in "monetary" transaction frictions with a market access approach derived from general equilibrium trade theory. Consistent with theories hypothesizing that lowering transaction frictions benefits the traded and inputs-intensive sectors, we find an increase in traded goods production, in the share of manufacturing output and employment, and in innovation.

Link: Google Scholar

Key Findings

Increased Tradable Production

A one standard deviation increase in monetary market access led to a 15.1% increase in tradable goods production between 1880-1890

Manufacturing Growth

Manufacturing production increased by 13.1% and manufacturing inputs grew by 11.4% with improved monetary market access

Structural Transformation

Share of manufacturing in overall production increased by 11.1% and manufacturing employment share grew by 8.4%

Impact on Traded Output (1880-1890)

  • Total tradable goods production increased by 15.1% relative to pre-period mean
  • Share of commodity crops in agricultural production grew by 2.3%
  • Effects are statistically significant across different specifications

Manufacturing Sector Growth

  • Manufacturing production increased 13.1% per capita
  • Manufacturing inputs grew by 11.4%, indicating improved input sourcing
  • Capital effects were much smaller at 1.6% and not statistically significant

Long-Term Innovation Effects

  • No difference in innovation rates before 1880
  • Growing divergence after 1880 between high and low MMA change areas
  • By 1910, patent activity was 1.3x higher in areas with above-median MMA change

Contribution and Implications

  • First empirical evidence that improving the safety of privately issued money positively affects real economic activity
  • Demonstrates how reducing monetary transaction frictions can promote structural transformation toward manufacturing
  • Provides historical lessons for modern digital currency design and regulation

Data Sources

  • Traded output effects based on Table 3 showing regression results for tradables production and commodities share
  • Manufacturing growth data from Tables 4 and 5 showing production, inputs and structural transformation effects
  • Long-term innovation trends constructed from Figure 4 showing patent growth and manufacturing persistence