Accelerating into the Abyss: Financial Dependence and the Great Depression

Abstract

This paper gives new evidence for the importance of bank suspensions during the Great Depression. I establish that more financially dependent manufacturing industries exhibited steeper declines in output relative to peers. This differential is largest in states that were most affected by banking suspensions, and the same pattern also holds for value added, number of establishments, and employment. The findings are based on a new measure of financial dependence, designed for deep recessions, and a new instrument of bank suspensions. The results show that bank suspensions could explain a third of the decline in manufacturing output during the Great Depression.

Keywords: Bank Failures, Great Depression, Economic Growth, Manufacturing

JEL Classification: E32, G21, L60, N12, N22, N62