Reshaping Global Trade: the Immediate and Long-Run Effects of Bank Failures

Abstract

I study the first modern global banking crisis that began in London in 1866 and provide causal evidence that financial sector disruptions can reshape international trade patterns for decades. Using newly collected archival loan records that link banks to their operations abroad, I estimate that countries exposed to banks whose headquarters in London failed exported 17% less on average to each destination until 1905. Exporters trading with destinations for the first time, facing more competition in goods markets, and with little access to alternative forms of credit experienced more persistent losses, consistent with hysteresis arising from high sunk costs of entry into exporting.