1930: First Modern Crisis

34 Pages Posted: 8 Jan 2019 Last revised: 27 Aug 2019

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Toomas Laarits

New York University (NYU) - Department of Finance

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: August 8, 2019

Abstract

Modern financial crises are difficult to explain because they do not always involve bank runs, or the bank runs occur late. For this reason, the first year of the Great Depression, 1930, has remained a puzzle. Industrial production dropped by 20.8 percent despite no nationwide bank run. Using cross-sectional variation in external finance dependence, we demonstrate that banks' decision to not use the discount window and instead cut back lending and invest in safe assets can account for the majority of this decline. In effect, the banks ran on themselves before the crisis became evident.

Keywords: Financial Crises, Great Depression

JEL Classification: E3, G01

Suggested Citation

Gorton, Gary B. and Laarits, Toomas and Muir, Tyler, 1930: First Modern Crisis (August 8, 2019). Yale ICF Working Paper No. 2018-24, Available at SSRN: https://ssrn.com/abstract=3306789 or http://dx.doi.org/10.2139/ssrn.3306789

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Toomas Laarits

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
New York, NY 10012
United States

HOME PAGE: http://sites.google.com/view/toomaslaarits/

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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