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The Great Depression as a credit boom gone wrong

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Author Info

  • Barry Eichengreen

    (University of California, Berkeley - Department of Economics)

  • Kris Mitchener

    (Santa Clara University - Department of Economics)

Abstract

The experience of the 1990s renewed economists' interest in the role of credit in macroeconomic fluctuations. The locus classicus of the credit-boom view of economic cycles is the expansion of the 1920s and the Great Depression. In this paper we ask how well quantitative measures of the credit boom phenomenon can explain the uneven expansion of the 1920s and the slump of the 1930s. We complement this macroeconomic analysis with three sectoral studies that shed further light on the explanatory power of the credit boom interpretation: the property market, consumer durables industries, and high-tech sectors. We conclude that the credit boom view provides a useful perspective on both the boom of the 1920s and the subsequent slump. In particular, it directs attention to the role played by the structure of the financial sector and the interaction of finance and innovation. The credit boom and its ultimate impact were especially pronounced where the organisation and history of the financial sector led intermediaries to compete aggressively in providing credit. And the impact on financial markets and the economy was particularly evident in countries that saw the development of new network technologies with commercial potential that in practice took considerable time to be realised. In addition, the structure of management of the monetary regime mattered importantly. The procyclical character of the foreign exchange component of global international reserves and the failure of domestic monetary authorities to use stable policy rules to guide the more discretionary approach to monetary management that replaced the more rigid rules-based gold standard of the earlier era are key for explaining the developments in credit markets that helped to set the stage for the Great Depression.

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Bibliographic Info

Paper provided by Bank for International Settlements in its series BIS Working Papers with number 137.

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Length: 103 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:bis:biswps:137

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Related research

Keywords: Great Depression; credit boom; macroeconomic fluctuations; monetary regime;

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Citations

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Cited by:
  1. Ari Aisen & Michael Franken, 2009. "Bank Credit and the 2008 Financial Crisis: A cross-country Comparison," Working Papers Central Bank of Chile 532, Central Bank of Chile.
  2. Michael D. Bordo & David C. Wheelock, 2004. "Monetary Policy and Asset Prices: A Look Back at Past U.S. Stock Market Booms," NBER Working Papers 10704, National Bureau of Economic Research, Inc.
  3. Natacha Postel-Vinay, 2011. "From a “normal recession” to the “Great Depression”: finding the turning point in Chicago bank portfolios, 1923-1933," Economic History Working Papers 35518, London School of Economics and Political Science, Department of Economic History.
  4. Walter Block & William Barnett II,, 2011. "Contra Eichengreen and Mitchener on ABCT," Studies in Economics and Finance, Emerald Group Publishing, vol. 28(2), pages 111-117, June.
  5. Ari Aisen & Michael Franken, 2010. "Bank Credit during the 2008 Financial Crisis: A Cross-Country Comparison," IMF Working Papers 10/47, International Monetary Fund.
  6. Ehsan U. Choudhri & Lawrence L. Schembri, 2013. "A Tale of Two Countries and Two Booms, Canada and the United States in the 1920s and the 2000s: The Roles of Monetary and Financial Stability Policies," Working Paper Series 44_13, The Rimini Centre for Economic Analysis.
  7. Borio, Claudio & Filardo, Andrew J., 2004. "Looking back at the international deflation record," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 287-311, December.
  8. Michael Frömmel & Torsten Schmidt, 2006. "Bank Lending and Asset Prices in the Euro Area," RWI Discussion Papers 0042, Rheinisch-Westfälisches Institut für Wirtschaftsforschung.
  9. Moritz Schularick & Alan M. Taylor, 2009. "Credit Booms Gone Bust: Monetary Policy, Leverage Cycles and Financial Crises, 1870–2008," NBER Working Papers 15512, National Bureau of Economic Research, Inc.
  10. Barry Eichengreen, 2002. "Still Fettered After All These Years," NBER Working Papers 9276, National Bureau of Economic Research, Inc.
  11. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: challenges for macroeconomics and policy," Discussion Papers 27, Monetary Policy Committee Unit, Bank of England.
  12. Concha Betrán & María A. Pons, 2013. "Understanding Spanish Financial crises, 1850-2000: What determined their severity?," Working Papers 0048, European Historical Economics Society (EHES).
  13. Atif Mian, 2013. "Monetary Policy and Macro-Prudential Regulation: The Risk-Sharing Paradigm," Working Papers Central Bank of Chile 713, Central Bank of Chile.
  14. Miguel A. Segoviano Basurto & Bradley Jones & Peter Lindner & Johannes Blankenheim, 2013. "Securitization: Lessons Learned and the Road Ahead," IMF Working Papers 13/255, International Monetary Fund.
  15. Andreas Hoffmann & Gunther Schnabl, 2011. "National Monetary Policy, Internatinal Economic Instability and Feeback Effects - An Overinvestment View," Global Financial Markets Working Paper Series 19-2011, Friedrich-Schiller-University Jena.

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