Italian cities where in the 16th century the local Jewish community effected an early development of banking have more banking and more prosperity today, suggests Prof. Luigi Pascalian, an economist at the University of Warwick and Pompeu Fabra University in Barcelona, in his study which has been published this month by MIT Press, Banks and Development: Jewish Communities in the Italian Renaissance and Current Economic Performance. “I show that a higher density of local banks increases aggregate productivity in the manufacturing sector, by reallocating resources towards the most productive firms.”
Pascalian found that a sudden change in the Catholic doctrine had driven the Jews toward money lending. Cities that were hosting Jewish communities developed complex banking institutions for two reasons: first, the Jews were the only people in Italy who were allowed to lend for a profit and, second, the Franciscan reaction to Jewish usury led to the creation of charity lending institutions, the Monti di Piet, that have survived until today and have become the basis of the Italian banking system.
“Using Jewish demography in 1500 as an instrument, I provide evidence of 1. an extraordinary persistence in the level of banking development across Italian cities, and 2. large effects of current local banking development on per-capita income,” Pascalian writes in the abstract of his new work. “Additional firm-level analyses suggest that well-functioning local banks exert large effects on aggregate productivity by reallocating resources toward more efficient firms.”
“I exploit the expulsion of the Jews from the Spanish territories in Italy in 1541 to argue that my results are not driven by omitted institutional, cultural and geographical characteristics,” he notes. “In particular, I show that, in Central Italy, the difference in current income between cities that hosted Jewish communities and cities that did not exists only in those regions that were not Spanish territories in the 16th century.”
Pascalian’s conclusion reads: “A significant historiography has conjectured that the Jewish communities in Italy had an important role in fostering the origin of local banks, and through this channel, the economic development of a large number of Italian cities. In particular, a fascinating hypothesis that has been presented by this literature is that the same decline of Southern Italy began with the expulsion of the Jews by the Spanish crown and its subsequent effects on the local credit markets.
“This conjecture, which has not been formally tested, is interesting for two reasons: it presupposes an extraordinary persistence in the level of local banking development, and it imputes to local banks a pivotal role in the development of local economies.
“My results confirm that the level of local banking development during the Renaissance had strong causal effects on the current availability of credit in Italian municipalities. Moreover, there is evidence that local banks have had an important effect on current income. In particular, well-functioning banks are better able to reallocate resources toward the most productive firms and, in this way, boost aggregate productivity and income.
“Finally, my empirical estimates suggest that the Jewish expulsion from the Spanish territories in Italy is responsible for a significant portion of the income gap between Northern and Southern Italy,” Pascalian states.
