Ben S. Bernanke, Non-Monetary Effects Of The Financial Crisis In The Propagation Of The Great Depression, Enero 1983

NBER WORKING PAPER SERIES

NON—MONETARY EFFECTS OF THE FINANCIAL CRISIS IN THE PROPAGATION OF THE GREAT DEPRESSION

Ben S. Bernanke

Working Paper No. 10514

NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge MP 02138

January 1983

Stanford Graduate School of Business and Hoover Institution. I received useful comments from too many people to list here by name,but I am grateful to each of them. The National Science Foundation provided partial research support. The research reported here is part of the NBER's research program in Economic Fluctuations. Any opinions expressed are those of the author and not those of the National Bureau of Economic Research.

NBER Working Paper #1054
January 1983

Non-Monetary Effects of the Financial Crisis in thePropagation of the Great Depression

ABSTRACT

This paper examines the effects of the financial crisis of the 1930s on the path of aggregate output during that period. Our approach is complementary to that of Friedman and Schwartz, who emphasized the monetary impact of the bank failures; we focus on non-monetary (primarily creditrelated) aspects of the financial sector--output link and considerthe problems of debtors as well as those of the banking system. We argue that the financial disruptions of 1930-33 reduced the efficiency of the credit allocation process; and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand. Evidence suggests that effects of this type can help explain the unusual length and depth of the Great Depression.

Ben S.Bernanke Stanford Graduate School of Business 94305 Stanford, California
(415) 497—3285 (415) 497—2763

I. Introduction

During 1930—33 the U.S. financial system experienced conditions

that were among the most difficult and chaotic in its history. Waves
of bank failures culminated in the shutdown of the banking system (and

of a number of other intermediaries and markets) in March1933. On
the other side of the ledger, exceptionally high rates of default and

bankruptcy affected every class of borrower except the Federal
government.

An interesting aspect of the general financial crises—-most
clearly, of the bank failures——was their coincidence in timing with

adverse developments in the maeroeconomy.1

Notably, an apparent

attempt at recovery from the 1929—30recession2 was stalled at the

time of the first banking crisis (November—December 1930); the
incipient recovery degenerated into a new slump during the mid-1931

and the economy and the financial system both reached their respective low points at the time of the bank "holiday" of March 1933.
panics;

Only with the New Deal's rehabilitation of the financial system in
1933—35

did theeconomy begin its slow emergence from Depression. A possible explanation of these synchronous movements is that the

financial system simply responded, without feedback, to the declines in aggregate output. This is contradicted by the facts that problems

of the financial system tended to lead output declines, and that
sources of financial panics unconnected with •the fall in U.S. output
havebeen documented by many writers. (See Section V below. )
Among

explanations that emphasize the opposite direction of

causality, the most prominent is the one due to Friedman and Schwartz

(1963). Concentrating on the difficulties of the banks, they pointed

—2—

out two ways in which these worsened the general economic contraction:

first, by reducing the wealth of bank shareholders;second, and much

more important, by leading to a rapid fall in the supply of money.
There is much support for the monetary view.

However, it is not a

complete explanation of the link between the financial sector and
aggregate output in the 1930s. One problem is that there is no theory

of monetary effects on the real economy that can explain protracted
non-neutrality. Another is...