Transportation Revolution and Banking Development：Evidence from Prewar China

Abstract This study investigates the effects of railroad placement on the development of modern banking in China from the late nineteenth century to the Pacific War. We construct datasets on railroad stations and bank locations across 250 prefectures between 1895 to 1937. The results show that construction of railroad stations significantly promoted the development of banking. More specifically, a new railroad station in a prefecture brought about 3.063, or 24%, more banks. We explore two potential mechanisms for this, finding that railroad placements stimulated modern banking both through 1) helping develop modern industries along rail routes and 2) through the cooperation of traditional local institutions (qianzhuang). Furthermore, we find that railroad placement allowed areas far from treaty ports to gain connection with the international market. The development of foreign trade also enabled modern banks to develop new business based on cargo mortgages, thus spurring geographic expansion of bank branches. JEL Classification: N25, N75, O16