The experience of the 1990s renewed economists' interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organisation and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realised. In addition, the structure of management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression. JEL classification codes: E3, N2. 1 We thank Pipat Luengnaruemitchai and Justin Jones for research assistance and Michael Bordo, Alex Field, Charles Goodhart, and Ian McLean for comments. The views expressed are those of the authors and not those of the BIS. We dedicate this paper to the memory of Charles Kindleberger, whose passing coincided with its completion. 2 See for example Bernanke and Gertler (1999) or Tornell and Westerman (2002). 3 See Vila (2000), Borio, Fufine and Lowe (2001), and Borio and Lowe (2002). That this is the right policy conclusion is, of course, not universally agreed. On the controversy over the role of asset prices and credit conditions in the conduct of monetary policy, see Bullard and
We employ a new database of over 21,000 bilateral trade observations from 1870-1913 to assess the contemporaneous effects of empire on trade. Our analysis shows that belonging to an empire roughly doubled trade relative to those countries that were not part of an empire. The use of a common language, the establishment of currency unions, the monetisation of recently acquired colonies, and the establishment of preferential trade agreements and customs unions help to account for the observed increase in trade associated with empire.
Interbank networks amplified the contraction in lending during the Great Depression. Banking panics induced banks in the hinterland to withdraw interbank deposits from Federal Reserve member banks located in reserve and central reserve cities. These correspondent banks responded by curtailing lending to businesses. Between the peak in the summer of 1929 and the banking holiday in the winter of 1933, interbank amplification reduced aggregate lending in the U.S. economy by an estimated 15 percent.
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