The Promotion of the “Banking Habit” and Economic Development*+

Publisher Summary This chapter focuses on the effect of the promotion of the banking habit on economic development. In some countries, the profitability of new banks and of new branches to existing banks has been sufficient to cause the expansion; in most, however, the growth has been induced or encouraged by central bank policies and often spearheaded by government-owned banks. The chapter discusses the possible grounds upon which the case for a prior or leading expansion of the banking system can be based and to display some of the problems connected with each of these grounds. The conclusions that can be reached from such an analysis are fundamentally two: (1) a case can be made for pushing the growth of the banking system ahead of the real growth of the economy, however, it is far from indisputable; and (2) for a policy of rapid bank office expansion to be beneficial, other concomitant changes must be made in the structure and conduct of the financial system.