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The Telegraph and Modern Banking Development, 1881-1936

Journal: Journal of Financial Economics

Date: 20210801

Author: Lin, Chen; Ma, Chicheng; Sun, Yuchen; Xu, Yuchen

Abstract:
The telegraph was introduced to China in the late 19th century, a time when China also saw the rise of modern banks. Based on this historical context, this paper documents the importance of information technology in banking development. We construct a data set on the distributions of telegraph stations and banks across 287 prefectures between 1881 and 1936. The results show that the telegraph significantly expanded banks' branch networks in terms of both number and geographic scope. The effect of the telegraph remains robust when we instrument it using proximity to the early military telegraph trunk.

Link: Google Scholar

Key Findings

Telegraph Promoted Banking Growth

An additional telegraph station in 1896 increased the annual average growth of banks by 0.091 between 1897-1936, leading to 3.622 more banks by 1936

Expanded Branch Networks

Telegraph enabled banks to expand their branch networks geographically - the presence of telegraph increased branch-headquarters distance by up to 954km by 1936

Information Flow Impact

Telegraph stations significantly increased information flow and transparency between regions, with connected prefectures receiving more newspaper coverage

Telegraph Impact on Banking Development

  • Telegraph stations in 1896 had significant positive impact on number of banks by 1911 and 1936
  • Effect increased over time - from 0.366 more banks in 1911 to 3.622 more banks in 1936 per telegraph station
  • Shows sustained long-term impact of early telegraph adoption on banking development

Branch Network Expansion

  • Telegraph connection enabled banks to open branches at greater distances from headquarters
  • Average branch-HQ distance increased by 173km by 1911 and 954km by 1936 per telegraph station
  • Demonstrates telegraph's role in enabling geographic expansion of banking networks

Economic Development Channel

  • Telegraph promoted banking both directly and through economic development
  • Economic factors explain up to 49% of telegraph's effect on banking growth
  • Direct information technology effect remains significant even after controlling for economic development

Contribution and Implications

  • First systematic evidence of how information technology shaped early banking development
  • Demonstrates importance of communications infrastructure in financial sector growth
  • Shows how technology adoption can drive financial modernization even in traditional economies

Data Sources

  • Bank Growth Chart: Based on Table 1 showing OLS regression results of telegraph impact on number of banks
  • Branch Distance Chart: Based on Table 7 showing impact of telegraph on branch-headquarters distance
  • Economic Impact Chart: Based on Table 3 showing telegraph effects through economic development channel