American development has been characterized by large movements of capital and labor headed to the economic frontier in search of higher returns. Historically, the rise of national financial markets allowed borrowers in the developing South and West to draw capital from the rich Northeast, financing ventures from gold rushes to steel railways. In parallel, waves of workers migrated to opportunity along the same geographical lines, providing the labor needed for these growing economies. Were these processes related? That is, did the flow of capital also enable the flow of people by stimulating growth where scarce local savings limited it?

In a new working paper, Maxim Alekseev and I study the American mid-century experience to explore how the geographic integration of financial markets—the idea that markets allow financial capital to fund projects wherever opportunity arises—affects the process of regional growth.

From the 1950s to the early 1980s, US banks faced strict regulations, which prevented them from branching across state lines and resulted in substantial financial segmentation. During the 1950s, bank lending rates varied dramatically across states—loans could cost nearly 1.8 percentage points more in the South and West compared to the Northern financial centers of Chicago and New York. By the early 1980s, however, these regional differences had significantly narrowed, and financial markets had become more integrated nationally.

Our paper highlights a new channel through which financial markets integrated: the rise of nominal interest rates. During periods of high nominal interest rates, households shifted their deposits away from banks—where deposits typically earned no interest—and into national money markets offering higher returns. As deposits moved into these national markets, these markets reshuffled liquidity across all banks in the United States, making bank lending less dependent on local deposits and more on national sources of funding.  

This shift leveled the financial playing field. Initially, Northern banks, flush with abundant local deposits, had a significant advantage over their Southern and Western counterparts. However, as deposits flowed to national financial markets, this advantage eroded, reducing differences in bank funding costs and, consequently, in lending rates across regions. Banks also improved their ability to tap national funding sources, inventing new financial instruments that allowed them to decouple local loan-making from deposit-taking, which also ultimately spurred convergence in borrowing costs across states.

The economic effects of this financial integration were substantial. As borrowing costs differentials eroded, regions initially starved of financial resources—particularly the South and West—experienced accelerated growth. Improved access to cheaper capital allowed local businesses to expand, boosting employment and wages, which in turn attracted workers from other states. Ultimately, financial integration alone can explain up to one-fifth of the higher population and GDP growth observed in these initially capital-scarce regions.

This process mirrored what happened with the convergence of mortgage rates in the wake of the Great Depression, which I study in a separate working paper with Victoria Angelova. The government-driven integration of American mortgage markets in the 1930s, due to the introduction of Fannie Mae and the Federal Home Loan Banks, resulted in a convergence in mortgage rates between the initially young American cities of the South and West and the older ones of the Northeast. As mortgage costs converged, cities that initially lacked mortgage capital experienced higher homeownership, population growth, and building.

These insights have implications for current policy debates. In regions where local savings still dominate financial markets—and where these savings fall short of local investment opportunities—removing barriers to capital mobility can significantly accelerate growth. This is especially relevant today in economies such as the European Union, where regulatory and institutional constraints continue to limit cross-border banking activities.

Policymakers aiming to stimulate economic growth should consider measures that enhance financial market integration. The American experience shows that facilitating the free flow of financial capital is a powerful catalyst for regional economic dynamism.