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The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s

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  • Raghuram Rajan
  • Rodney Ramcharan

Abstract

Does credit availability exacerbate asset price inflation? Are there long run consequences? During the farm land price boom and bust before the Great Depression, we find that credit availability directly inflated land prices. Credit also amplified the relationship between positive fundamentals and land prices, leading to greater indebtedness. When fundamentals soured, areas with higher credit availability suffered a greater fall in land prices and had more bank failures. Land prices and credit availability also remained disproportionately low for decades in these areas, suggesting that leverage might render temporary credit induced booms and busts persistent. We draw lessons for regulatory policy.

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  • Raghuram Rajan & Rodney Ramcharan, 2012. "The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s," NBER Working Papers 18027, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:18027
    Note: CF DAE ME
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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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