Pandemics and Financial Development: a Lesson from the 1918 Influenza Pandemic

Abstract

This paper examines the long-lasting impact of one of the deadliest pandemics in history on present-day financial development. Based on the variation in the severity of the 1918 influenza pandemic (Spanish flu) across the regions within Italy and the variation across 34 countries, we find that people living in the regions with higher historical death rates are associated with a lower level of present-day trust. As a result, firms in these regions face more financial obstacles and have greater difficulty in accessing both bank loans and trade credit. Furthermore, households in these regions display a lower take-up of credit cards and mortgages. They also use Fintech services less. Because laboratory results suggest that an avian H1N1 virus can form clear plaques at a lower temperature, we instrument the death rates with the temperature in autumn of 1918, and find the results remain consistent, confirming the causal link between the severity of the 1918 flu pandemic and present-day financial development.

Keywords: Disease; Financial development; Pandemic, Spanish Flu, Trust

JEL Classification: G21, G30; O13; O16; O52