Are differences in local banking development long-lasting? Do they affect long-term economic performance?\udI answer these questions by relying on an historical development that occurred in Italian cities during the 15th\udcentury. A sudden change in the Catholic doctrine had driven the Jews toward money lending. Cities that\udwere hosting Jewish communities developed complex banking institutions for two reasons: first, the Jews were\udthe only people in Italy who were allowed to lend for a profit and, second, the Franciscan reaction to Jewish\udusury led to the creation of charity lending institutions, the Monti di Pietá, that have survived until today and\udhave become the basis of the Italian banking system. Using Jewish demography in 1500 as an instrument, I\udprovide evidence of (1) an extraordinary persistence in the level of banking development across Italian cities (2)\udlarge effects of current local banking development on per-capita income. Additional firm-level analyses suggest\udthat well-functioning local banks exert large effects on aggregate productivity by reallocating resources toward\udmore efficient firms. I exploit the expulsion of the Jews from the Spanish territories in Italy in 1541 to argue\udthat my results are not driven by omitted institutional, cultural and geographical characteristics. In particular,\udI show that, in Central Italy, the difference in current income between cities that hosted Jewish communities\udand cities that did not exists only in those regions that were not Spanish territories in the 16th century.\ud
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