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1930: First Modern Crisis

Author

Listed:
  • Gary Gorton
  • Toomas Laarits
  • Tyler Muir

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.

Suggested Citation

  • Gary Gorton & Toomas Laarits & Tyler Muir, 2019. "1930: First Modern Crisis," NBER Working Papers 25452, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25452
    Note: CF DAE EFG ME
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    File URL: http://www.nber.org/papers/w25452.pdf
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    Cited by:

    1. Constantinescu, Mihnea & Nguyen, Anh Dinh Minh, 2021. "A century of gaps: Untangling business cycles from secular trends," Economic Modelling, Elsevier, vol. 100(C).
    2. Monnet, Eric & Velde, François R., 2020. "Money, Banking, and Old-School Historical Economics," CEPR Discussion Papers 15348, C.E.P.R. Discussion Papers.
    3. Gary B. Gorton, 2019. "The Regulation of Private Money," NBER Working Papers 25891, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G01 - Financial Economics - - General - - - Financial Crises

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