'Loans for the Little Fellow:' Credit, Crisis, and Recovery in the Great Depression

Abstract

This paper documents that the financial crisis of the early 1930s significantly hindered recovery from the Great Depression using newly-collected archival records to identify shocks to local credit supply. Due to regulatory constraints, the Bank of America did not select into better-performing cities in California before 1929, but a change in headquarters policy led them cut lending from 1929 to 1934 by 50 percent less than the median California bank. Bank of America branched cities had smaller contractions which quickly compounded into persistently stronger recoveries. Linked individual data demonstrate that local credit supply led to skill-biased structural change, creating a barrier to wage convergence for more credit-scarce areas even in 1940.

Keywords: Great Depression, Credit Supply, Branch Banking, Structural Transformation

JEL Classification: E44, G01, G21, N22, R23