Relationship Lending and the Great Depression
The collapse of long-term lending relationships amplified the Great Depression and perturbed recovery. We demonstrate this by developing a new measure of lending relationships that can be calculated from widely available data at any level of aggregation. Our approach exploits differences in the responsiveness of loan rates to bank funding costs and is supported by historical evidence and theoretical arguments. The new measure reveals that bank suspensions’ marginal impact on economic activity in the early 1930s was higher in more relationship-intensive areas. Furthermore, the rebuilding of destroyed relationships helps explain regional variation in economic performance during the 1937-38 recession.
Document Object Identifier (DOI): 10.3386/w22891
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