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Surviving the Great Depression: Firms, Workers, and Banks

Paper Session

Friday, Jan. 5, 2018 8:00 AM - 10:00 AM

Pennsylvania Convention Center, 112-A
Hosted By: American Economic Association
  • Chair: Charles Calomiris, Columbia University

Friends During Hard Times: Evidence From the Great Depression

Tania Babina
,
Columbia University
Diego Garcia
,
University of Colorado-Boulder
Geoffrey Tate
,
University of North Carolina-Chapel Hill

Abstract

We test whether network connections to other firms through executives and directors increase value by exploiting differences in survival rates in response to a common negative shock. We find that firms that had more connections on the eve of the 1929 financial market crash have higher 10-year survival rates during the Great Depression. Consistent with a financing channel, we find that the results are particularly strong for small firms, private firms and firms with small cash holdings relative to the sample median prior to the shock. Moreover, connections to cash-rich firms are stronger predictors of survival, overall and among financially constrained firms. Because of the greater segmentation of markets in the 1920s and 1930s than in modern data samples, we can mitigate the potential endogeneity of network connections at the time of the shock by exploiting variation in the local demand for directors’ services. We also find evidence that the information that flows through network links increases the odds that a firm will be acquired.

Contagion of Fear

Kris Mitchener
,
Santa Clara University
Gary Richardson
,
University of California-Irvine

Abstract

Using new archival data, Mitchener and Richardson directly test for the existence of Depression‐era panics and assess their effects on high‐powered money and on bank lending – a previously unexplored but related channel through which banking panics could have magnified the Great Depression. They will extend The Friedman and Schwartz analysis to calculate the economy‐wide decline in lending due to panicky-depositor withdrawals.

Financial Frictions and Employment During the Great Depression

Efraim Benmelech
,
Northwestern University
Carola Frydman
,
Northwestern University
Dimitris Papanikolaou
,
Northwestern University

Abstract

We provide new evidence that a disruption in credit supply played a quantitatively significant role in the unprecedented contraction of employment during the Great Depression. To analyze the role of financing frictions in firms' employment decisions, we use a novel, hand-collected dataset of large industrial firms. Our identification strategy exploits preexisting variation in the need to raise external funds at a time when public bond markets essentially froze. Local bank failures inhibited firms' ability to substitute public debt for private debt, which exacerbated financial constraints. We estimate a large and negative causal effect of financing frictions on firm employment. Interpreting the estimated elasticities through the lens of a simple structural model, we find that the lack of access to credit may have accounted for 10% to 33% of the aggregate decline in employment of large firms between 1928 and 1933.
Discussant(s)
Eric Hilt
,
Wesley College
Mark Carlson
,
Federal Reserve Board
Robert Margo
,
Boston University
JEL Classifications
  • N0 - General
  • G0 - General