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The Great Depression as a Credit Boom Gone Wrong


Barry Eichengreen


University of California, Berkeley - Department of Economics; Centre for International Finance and Regulation (CIFR); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Kris James Mitchener


Santa Clara University - Leavey School of Business - Economics Department; University of Warwick - Economics Department; National Bureau of Economic Research (NBER)

September 2003

BIS Working Paper No. 137

Abstract:     
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.

On 28-29 March 2003, the BIS held a conference on "Monetary stability, financial stability and the business cycle". This event brought together central bankers, academics and market participants to exchange views on this issue (see the conference programme and list of participants in this document). This paper was presented at the conference. Also included in this publication are the comments by the discussants. The views expressed are those of the author(s) and not those of the BIS. The opening speech at the conference by the BIS General Manager and the prepared remarks of the four participants on the policy panel are being published in a single volume in the BIS Papers series.

Number of Pages in PDF File: 103

JEL Classification: E3, N2

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Date posted: September 20, 2007  

Suggested Citation

Eichengreen, Barry and Mitchener, Kris James, The Great Depression as a Credit Boom Gone Wrong (September 2003). BIS Working Paper No. 137. Available at SSRN: http://ssrn.com/abstract=959644 or http://dx.doi.org/10.2139/ssrn.959644

Contact Information

Barry Eichengreen (Contact Author)
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-2772 (Phone)
510-642-0822 (Fax)
Centre for International Finance and Regulation (CIFR) ( email )
Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Kris James Mitchener
Santa Clara University - Leavey School of Business - Economics Department ( email )
500 El Camino Real
Santa Clara, CA California 95053
United States
408.554.4340 (Phone)
408.554.2331 (Fax)
HOME PAGE: http://lsb.scu.edu/~kmitchener/
University of Warwick - Economics Department ( email )
Gibbet Hill Rd.
Coventry CV4 7AL
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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