Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock
How do banks respond to asset booms? This paper examines i) how U.S. banks responded to the World War I farmland boom; ii) the impact of regulation; and iii) how bank closures exacerbated the post-war bust. The boom encouraged new bank formation and balance sheet expansion (especially by new banks). Deposit insurance amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. Banks that responded most aggressively to the asset boom had a higher probability of closing in the bust, and counties with more bank closures experienced larger declines in land prices.
The authors thank Lee Alston, Mark Carlson, Matteo Crosignani, Chris Hanes and participants in the 2018 Cliometrics conference, Central New York Economic History Conference, Economic History Association Annual Meetings, and NBER Summer Institute for comments on earlier versions of this paper. Views expressed herein are those of the authors and not necessarily official positions of the Federal Reserve Bank of St. Louis, the Federal Reserve System, or the National Bureau of Economic Research.
MATTHEW JAREMSKI & DAVID C. WHEELOCK, 2020. "Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock," Journal of Money, Credit and Banking, vol 52(7), pages 1719-1754. citation courtesy of