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1930: first modern crisis

Published online by Cambridge University Press:  08 April 2024

Gary Gorton ,
Toomas Laarits  and
Tyler Muir
Gary Gorton*
Affiliation:
Yale University and NBER
Toomas Laarits*
Affiliation:
NYU Stern School of Business
Tyler Muir*
Affiliation:
UCLA Anderson School of Management and NBER
*
Gary Gorton, Yale School of Management, Edward P. Evans Hall, 165 Whitney Avenue, New Haven, CT 06511–3729, USA, email: gary.gorton@yale.edu; Toomas Laarits, NYU Stern School of Business, Kaufman Management Center, 44 West Fourth Street, 9–85, New York, NY 10012, USA, email: tlaarits@stern.nyu.edu; Tyler Muir, UCLA Anderson School of Management, 110 Westwood Plaza, Los Angeles, CA 90095-1481, USA, email: tyler.muir@anderson.edu.
Gary Gorton, Yale School of Management, Edward P. Evans Hall, 165 Whitney Avenue, New Haven, CT 06511–3729, USA, email: gary.gorton@yale.edu; Toomas Laarits, NYU Stern School of Business, Kaufman Management Center, 44 West Fourth Street, 9–85, New York, NY 10012, USA, email: tlaarits@stern.nyu.edu; Tyler Muir, UCLA Anderson School of Management, 110 Westwood Plaza, Los Angeles, CA 90095-1481, USA, email: tyler.muir@anderson.edu.
Gary Gorton, Yale School of Management, Edward P. Evans Hall, 165 Whitney Avenue, New Haven, CT 06511–3729, USA, email: gary.gorton@yale.edu; Toomas Laarits, NYU Stern School of Business, Kaufman Management Center, 44 West Fourth Street, 9–85, New York, NY 10012, USA, email: tlaarits@stern.nyu.edu; Tyler Muir, UCLA Anderson School of Management, 110 Westwood Plaza, Los Angeles, CA 90095-1481, USA, email: tyler.muir@anderson.edu.
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Abstract

Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks’ decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.

Keywords

Great Depressionfinancial crisesbank runsexternal finance dependencesafe assetsdiscount window stigmaindustrial output

JEL classification

E52: Monetary Policy E44: Financial Markets and the Macroeconomy G21: Banks • Depository Institutions • Micro Finance Institutions • Mortgages G01: Financial Crises E58: Central Banks and Their Policies
Type
Article
Information
Financial History Review , Volume 30 , Issue 3 , December 2023 , pp. 277 - 307
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Copyright
Copyright © The Author(s), 2024. Published by Cambridge University Press on behalf of the European Association for Banking and Financial History

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Footnotes

We thank Andy Law, Chase Ross, Alex Yang and Arwin Zeissler for research assistance. We thank Josh Hausman, Filippo Mezzanotti and Nicolas Ziebarth for comments on the article. We thank Joshua Rosenbloom and William Sundstrom for sharing their Census of Manufacturing data with us; see Rosenbloom and Sundstrom (1999). We also thank Mrdjan Mladjan for sharing his data on the instruments used in Mladjan (2016).

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