Finance, Farms, and the Fed's Early Years

Abstract

We provide causal evidence that discount rate changes by the Federal Reserve affected economic output in the 1920s. Our identification strategy exploits county-level variation in access to the Fed's discount window, and we implement this strategy with hand-collected data on banking and agriculture in Illinois in the early 20th century. The mechanism for the Fed's effect on agriculture was a bank credit channel, operating independently of any deflationary effect on money supply. Our findings suggest that the Fed deliberately managed transitory shocks during 1920-1921, mitigating debt burdens with which farms would struggle in the years leading to the Great Depression.