{"title":"Accelerating into the Abyss: Financial Dependence and the Great Depression","authors":"Mrdjan M. Mladjan","doi":"10.2139/ssrn.2366291","DOIUrl":null,"url":null,"abstract":"This paper gives new evidence for the importance of bank failures during the Great Depression. Using a panel of state-industry observations from the interwar years, I demonstrate that financially dependent industries saw bigger declines in output relative to their peers. This differential is largest in states that were affected the most by banking failures. The main findings are obtained using the standard indicator of financial dependence for the purposes of investment, pioneered by Rajan and Zingales (1998). I complement them by using a novel measure of financial dependence, based on hand-collected data from the 1920s and specifically designed for periods of severe recessions when investment is not a priority. This is inverse interest cover which describes different channels by which bank failures reduce output compared to the standard measure of dependence. I furthermore find evidence that bank failures reduced output in several more ways than by causing a decline in loan supply. Particularly important was the reduction in demand for durables caused by uncertainty created by local bank failures. To establish causality, I first use Altonji et al. (2005) ratios to exclude omitted variable bias and then instrument bank failures with newly-proposed indicators of predetermined vulnerability of each state’s banking system. My findings show that bank failures can explain a third of decline in manufacturing output during the Great Depression.","PeriodicalId":305946,"journal":{"name":"AARN: Economic Systems (Sub-Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0000,"publicationDate":"2016-04-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"12","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"AARN: Economic Systems (Sub-Topic)","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.2366291","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 12
Abstract
This paper gives new evidence for the importance of bank failures during the Great Depression. Using a panel of state-industry observations from the interwar years, I demonstrate that financially dependent industries saw bigger declines in output relative to their peers. This differential is largest in states that were affected the most by banking failures. The main findings are obtained using the standard indicator of financial dependence for the purposes of investment, pioneered by Rajan and Zingales (1998). I complement them by using a novel measure of financial dependence, based on hand-collected data from the 1920s and specifically designed for periods of severe recessions when investment is not a priority. This is inverse interest cover which describes different channels by which bank failures reduce output compared to the standard measure of dependence. I furthermore find evidence that bank failures reduced output in several more ways than by causing a decline in loan supply. Particularly important was the reduction in demand for durables caused by uncertainty created by local bank failures. To establish causality, I first use Altonji et al. (2005) ratios to exclude omitted variable bias and then instrument bank failures with newly-proposed indicators of predetermined vulnerability of each state’s banking system. My findings show that bank failures can explain a third of decline in manufacturing output during the Great Depression.