Banks: Believe It Or Not, They Can Actually Be a Source of Good

We hear a lot about scandal in the banking sector, which can make it hard to remember that they can also do good things. The story of the wild west is a perfect illustration.

Aug 9, 2014 at 12:00PM

In this era of bad behavior and constant scandal in the banking sector, it can be hard to remember what good banks do in the first place.

We put up with them because we need a place to park our money, but if you're anything like me you often do it with an eye-roll. 

But then something reminds you about the good that banks can do for countries, and a recent National Bureau of Economic Research paper does just that. The researchers take us back to the wild west, a time when burgeoning railroads were bringing promise to the Western United States. 

It all started with the railroads
What made the mid-west such a successful development story? That's exactly what the researchers wanted to find out.

Turns out that it was a little bit of magic involving railroads and banks. Railway lines connected major financial hubs, and in the process they connected quiet little towns that were formerly out on their own. 


Flickr / dok1.

The result? Banks started moving into those towns, and businesses wanting to use the railroads to, say, move crops or manufactured goods suddenly had easier access to financing. As railway lines were laid, banks sprung up quickly alongside them, and the result was the immense growth we saw in the wild west in the wake of the great railroads.

Another part of this success was the standardization of banking rules, which removed the provision of bank charters from the realm of politics and who-you-know and made it merit-based activity.

This little change leveled the playing field and opened the floodgates to new bank charters.

Why should we care about this?
By financing the expansion of rail, banks were also financing the expansion of economic activities across railway lines, and the new banks that filled the demand for loans were able to amplify this process. 

Today, we can see much of the same thing in other regions -- we Americans are spoiled for choice when it comes to financial services, but an enormous amount of people around the world have limited access to the boring stuff of loans and bank accounts.

In Africa, for example, it's estimated that less than 25% of people have a bank account.  

Exporting the American success story
This story is, in a way, deeply relevant to such people. If banks invest in productive infrastructure projects, maybe they can positively affect the growth and development of societies across the world. What a mandate! 

Of course, as it happens, interest in rail -- for example in Africa -- is increasing. China recently announced plans to invest in an East African railroad network, and a 7-year West African project funded in part by the European Union began last year.

Much of the interest is probably fueled by natural resources wealth for now, but with any luck everyone else will benefit as well -- farmers, manufacturers, flower growers, and the myriad other businesses that could benefit from more convenient transport. 

So perhaps we'll see the American railroad success story again, just on another continent. And hopefully, we'll see all the good that can come with it. 

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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