Financial frictions and employment during the Great Depression

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 using a novel, hand-collected dataset of large industrial firms. Our identification strategy exploits preexisting variation i...

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Bibliographic Details
Published inJournal of financial economics Vol. 133; no. 3; pp. 541 - 563
Main Authors Benmelech, Efraim, Frydman, Carola, Papanikolaou, Dimitris
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.09.2019
Elsevier Sequoia S.A
Subjects
Access to credit
Bank failures
Bond markets
Companies
Credit
Debt
Disruption
Employment
Financial constraints
Great Depression
Labor
Labor market
Mental depression
Unemployment
Credit
E44
G32
Financial constraints
Labor
Unemployment
Great Depression
N22
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Summary: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 using 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. We find that the lack of access to credit likely accounted for a substantial fraction of the aggregate decline in employment of large firms between 1928 and 1933.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2019.02.005