1930: First Modern Crisis

1930: First Modern Crisis

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.

Gary Gorton, Toomas Laarits, and Tyler Muir

NBER

January 2019

I didn't find this helpful.This was helpful. Please let us know if you found this article helpful.
Loading...