Money Versus Credit Rationing: Evidence for the National Banking Era, 1880-1914

68 Pages Posted: 13 Aug 2001 Last revised: 11 Aug 2010

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Peter Rappoport

Newark College of Arts & Sciences - Department of Economics

Anna J. Schwartz

City University of New York (CUNY); National Bureau of Economic Research (NBER) - NY Office

Date Written: April 1991

Abstract

In this paper we examine the evidence for two competing views of how monetary and financial disturbances influenced the real economy during the national banking era, 1880-1914. According to the monetarist view, monetary disturbances affected the real economy through changes on the liability side of the banking system's balance sheet independent of the composition of bank portfolios. According to the credit rationing view, equilibrium credit rationing in a world of asymmetric information can explain short-run fluctuations in real output. Using structural VARs we incorporate monetary variables in credit models and credit variables in monetarist models, with inconclusive results. To resolve this ambiguity, we invoke the institutional features of the national banking era. Most of the variation in bank loans is accounted for by loans secured by stock, which in turn reflect volatility in the stock market. When account is taken of the stock market, the influence of credit in the VAR model is greatly reduced, while the influence of money remains robust. The breakdown of the composition of bank loans into stock market loans (traded in open asset markets) and other business loans (a possible setting for credit rationing) reveals that other business loans remained remarkably stable over the business cycle.

Suggested Citation

Bordo, Michael D. and Rappoport, Peter and Schwartz, Anna J., Money Versus Credit Rationing: Evidence for the National Banking Era, 1880-1914 (April 1991). NBER Working Paper No. w3689. Available at SSRN: https://ssrn.com/abstract=279410

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Peter Rappoport

Newark College of Arts & Sciences - Department of Economics

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Newark, NJ 07102
United States

Anna J. Schwartz

City University of New York (CUNY) ( email )

17 Lexington Avenue
New York, NY 10010
United States

National Bureau of Economic Research (NBER) - NY Office

365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
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212-817-7957 (Phone)

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