Towards a History of the Junk Bond Market, 1910-1955
We present a new monthly index of the yield on junk (high yield) bonds from 1910-1955. We then use the index to reexamine some of the main debates about the financial history of the interwar years. A close look at junk bond yields: (1) strengthens the view that the decline in lending standards in the late 1920s was modest at best: (2) casts doubt on the view that the banking crisis that began in 1930 disrupted financial markets because banks liquidated their holdings of risky bonds; (3) strengthens the view that the cost of capital rose substantially in the early 1930s and remained high for the rest of the decade; (4) casts doubt on the view that financial markets entered a liquidity trap in the second half of the 1930s; and (5) strengthens the case for believing that junk bond yields contain some information useful for making economic forecasts.
We thank the participants in a session at the Southern Economic Association Meetings in 2002, especially Frank G. Steindl who organized the session, for many helpful comments. We also benefitted from presentations to the workshop on the Development of the American Economy at the NBER summer institute in July 2004 and to the Monetary and Financial History Workshop at the Federal Reserve Bank of Atlanta in May 2015. Elmus Wicker and Ellis Tallman provided thoughtful comments on a previous draft. Larry Officer generously shared his knowledge of interest rate series. Deepa Bhat provided able research assistance. The Sidney I. Simon Memorial Fund of Rutgers University provided financial assistance. We are responsible for the remaining errors. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.