Public Goods Under Financial Distress

I examine the effects of public debt on municipal services and real outcomes during financial crises using a unique archival dataset of U.S. cities from 1924 to 1943. Unlike today’s countercyclical fiscal policies, the Great Depression provides a rare setting to observe fiscal shocks without substantial intergovernmental or Federal Reserve support. My findings show that financial market frictions – especially the need to refinance debt – led cities to sharply cut expenditures, particularly on capital projects and police services. As urban development halted during the Depression, cities with high pre-crisis debt levels faced significant austerity pressures, a decline in population growth, a rise in crime, and a departure of skilled public servants from municipal governments.