Banks, Insider Connections, and Industrialization in New England: Evidence from the Panic of 1873

Abstract

for research assistance. The author declares that he has no relevant or material financial interests that relate to the research described in this paper. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

For Richer, for Poorer: Bankers' Liability and Bank Risk in New England, 1867 to 1880

“…Earnings bottomed out in 1878, the last year of the Long Depression, and started to recover thereafter. This pattern is consistent with the timing of the crisis documented by Hilt (2015) based on firm-level data.…”

“…Lamoreaux (1994) refers to this as "insider lending." Hilt (2015) confirms that this state of affairs persisted into the 1870s.…”

“…In nominal terms, industrial production fell by 34.7% between 1873 and 1878. 35 This had an important impact on the New England manufacturers who had used credit extensively to fund their post-Civil War expansion (Hilt (2015)). The dollar value of production was insufficient to service their debts, and the number of bad loans on national banks' balance sheets increased significantly.…”

The distributional effect of a financial crisis: Russia 1899–1905

“…The Economist, in its May 1901 issue, reported that Russian '(b)anks generally have been in 5 of 34 difficulties from having sunk too much money in loans to factories as working capital, which, though paying a high rate of interest, could not be readily called in when money was urgently required' (p. 667). As is often the case, it is companies with better financial backing that weather a crisis, not necessarily the most efficient ones (Franklin et al, 2015;Hilt, 2017). As a result, banks' response to the crisis created corporate winners and losers by propping up large companies whilst limiting credit to smaller firms.…”

For Richer, for Poorer: Bankers' Liability and Risk-taking in New England, 1867-1880

“…The example of Elijah C. Drew illustrates the mechanism we have in mind. 30 In 1872, amounted to more than 10% of paid-in capital: "I fail to be convinced that they are bona fide bills of exchange drawn against existing values of commercial or business paper actually owned by the person negotiating the same." Later, it turned out that these loans, rather than safe commercial paper, were backed with speculative real estate investments in Houston, Texas.…”