Durable consumption, bank distress, economic concerns, and how they interacted during the great depression

Abstract

This paper explores simultaneous developments in the banking sector and the real economy during the Great Depression and whether these are related to shifts in beliefs about economic prospects. It identifies a notable coincidence of bank closures and declines in consumer durable consumption (new automobile purchases) in Ohio in the early 1930s. To examine whether shifts in beliefs and the economic concerns of households and businesses may have mattered, I test whether keywords from local newspapers related to economic prospects or sentiments are associated with subsequent bank closures and declines in automobile purchases. The results support the idea that beliefs mattered for both of those outcomes, even after accounting for economic fundamentals. The analysis also highlights the importance of local economic conditions in shaping behavior.