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Financial Inclusion, Human Capital, and Wealth Accumulation: Evidence from the Freedman's Savings Bank

Journal: Review of Financial Studies

Date: 20201101

Author: Stein, Luke C. D.; Yannelis, Constantine

Abstract:
This paper studies how access to financial services among a previously unbanked group affects human capital, labor market, and wealth outcomes. We use novel data from the Freedman's Savings Bank--created following the American Civil War to serve free Blacks--employing an instrumental variables strategy exploiting the staggered rollout of bank branches. Families with accounts are more likely to have children in school, be literate, work, and have higher occupational income, business ownership, and real estate wealth. Placebo effects are not present using planned but unbuilt branches, or for Whites, suggesting significant positive effects of financial inclusion.

Link: Google Scholar

Key Findings

Impact on Human Capital

Access to Freedman's Savings Bank accounts increased school attendance by 14 percentage points and literacy rates by 13-19 percentage points among account holders.

Labor Market Outcomes

Account holders were 3-6 percentage points more likely to work and had 4% higher occupational income compared to non-account holders.

Wealth Accumulation

Having a bank account increased real estate wealth by 2.5-2.6 percentage points and business ownership rates by approximately 0.5 percentage points.

Human Capital Development

  • Account holders showed 14 percentage point higher school attendance
  • Average literacy rate increase of 16.5 percentage points (average of 13-19 range)
  • Based on IV estimates controlling for demographic and location factors

Labor Market Effects

  • Employment rate increased by 4.5 percentage points (midpoint of 3-6 range)
  • 4% higher occupational income for account holders
  • Effects remained significant across multiple specification tests

Wealth and Business Outcomes

  • 2.55 percentage point increase in real estate wealth (average of 2.5-2.6 range)
  • 0.5 percentage point increase in business ownership rates
  • Effects were larger for those who opened accounts earlier

Contribution and Implications

  • First study to examine large-scale financial inclusion effects in post-Civil War era
  • Demonstrates significant positive impact of access to banking services on economic outcomes for formerly unbanked populations
  • Historical evidence supporting modern financial inclusion initiatives
  • Suggests lasting effects of financial institutions on wealth accumulation and economic opportunity

Data Sources

  • Human Capital Chart: Based on Table 7a IV estimates showing effects on school attendance and literacy
  • Labor Market Chart: Based on Table 7b IV estimates for employment and income effects
  • Wealth Outcomes Chart: Based on Tables 7b and 9 showing effects on real estate wealth and business ownership