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This paper conducts a rigorous empirical test of the macroeconomic effects of the banking panics of the pre-Great Depression era. Specifically, there are two main problems in identifying the macroeconomic effects of financial panics of this period. First, it is not clear when panics occurred because prior panic series—lists of when panics occurred—differ in their identification of panic episodes. Second, establishing the direction of causality is inherently difficult: are panics causing downturns or are downturns causing panics? This paper addresses these two major problems. To address the first problem, this paper derives a new series on banking panics for the pre-Great Depression era. To address the second problem, this paper studies the output effects of major banking panics via vector autoregression (VAR ) and narrative-based methods. In the process, this paper creates a detailed chronol- ogy of banking panics in the United States before 1929—one that has important

Several key episodes in the 100-year history of the Federal Reserve have everal key episodes in the 100-year history of the Federal Reserve have been referred to in various contexts with the adjective “Great” attached to been referred to in various contexts with the adjective “Great” attached to them: the Great Experiment of the Federal Reserve’s founding, the Great them: the Great Experiment of the Federal Reserve’s founding, the Great Depression, the Great Infl ation and subsequent disinfl ation, the Great Moderation, Depression, the Great Infl ation and subsequent disinfl ation, the Great Moderation, and the recent Great Recession. Here, I’ll use this sequence of “Great” episodes and the recent Great Recession. Here, I’ll use this sequence of “Great” episodes to discuss the evolution over the past 100 years of three key aspects of Federal to discuss the evolution over the past 100 years of three key aspects of Federal Reserve policymaking: the goals of policy, the policy framework, and accountability Reserve policymaking: the goals of policy, the policy framework, and accountability and communication. The changes over time in these three areas provide a useful and communication. The changes over time in these three areas provide a useful perspective, I believe, on how the role and functioning of the Federal Reserve have perspective, I believe, on how the role and functioning of the Federal Reserve have changed since its founding in 1913, as well as some lessons for the present and for changed since its founding in 1913, as well as some lessons for the present and for the future. the future.

This paper examines the effects of the Reconstruction Finance Corporation's (RFC) loan and preferred stock programs on bank failure rates in Michigan during the period 1932-1934, which includes the important Michigan banking crisis of early 1933 and its aftermath. Using a new database on Michigan banks, we employ probit and survival duration analysis to examine the effectiveness of the RFC's loan program (the policy tool employed before March 1933) and the RFC's preferred stock purchases (the policy tool employed after March 1933) on bank failure rates. Our estimates treat the receipt of RFC assistance as an endogenous variable. We are able to identify apparently valid and powerful instruments (predictors of RFC assistance that are not directly related to failure risk) for analyzing the effects of RFC assistance on bank survival. We find that the loan program had no statistically significant effect on the failure rates of banks during the crisis; point estimates are sometimes positive, sometimes negative, and never estimated precisely. This finding is consistent with the view that the effectiveness of debt assistance was undermined by some combination of increasing the indebtedness of financial institutions and subordinating bank depositors. We find that RFC's purchases of preferred stock - which did not increase indebtedness or subordinate depositors - increased the chances that a bank would survive the financial crisis. We also perform a parallel analysis of the effects of RFC preferred stock assistance on the loan supply of surviving banks. We find that RFC assistance not only contributed to loan supply by reducing failure risk; conditional on bank survival, RFC assistance is associated with significantly higher lending by recipient banks from 1931 to 1935.

This paper examines the relationship between the structure of banking markets and economic growth using a new dataset on manufacturing industry-level growth rates and banking market concentration for U.S. states during 1899-1929 - a period when the manufacturing sector was expanding rapidly and restrictive branching laws segmented the U.S. banking system geographically. Unlike studies of modern developing and developed countries, we find that banking market concentration had a positive impact on manufacturing sector growth in the early twentieth century, with little variation across industries with different degrees of dependence on external financing or access to capital. However, because regulations affecting bank entry varied considerably across U.S. states and the industrial organization of the U.S. banking system differs markedly from those of other countries, we also examine the impact of other aspects of banking market structure and policy on growth. We continue to find that banking market concentration boosted industrial growth. In addition, we find evidence that a greater prevalence of branch banking and more banks per capita increased the growth of industries that rely relatively heavily on external financing or have greater access to external funding sources, while deposit insurance depressed growth in the manufacturing sector. Regulations on bank entry and other banking market characteristics thus appear to exert an independent influence on manufacturing growth in geographically fragmented banking markets.

I examine the causal effect of bank failures during the Great Depression using the quasi-experimental setup of Richardson and Troost (2009). The experiment is based on Mississippi being divided into two Federal Reserve districts, which followed different policies for liquidity provision. This translated into variation in bank failures across the state. Employing a plant-level sample from the Census of Manufactures, I find that banking failures had a negative effect on revenue stemming from a fall in physical output. I find no effect on employment at the plant-level and a large decline at the county-level. (JEL E32, E44, G21, G33, N12, N22, N92)

The hundredth anniversary of the founding of the Federal Reserve is a natural time to reflect on the record of US monetary policy. It is widely agreed that this record is far from perfect, and that there have been some major failures of monetary policy over the past century. Our thesis is that overly pessimistic views about the power of monetary policy have been a critical source of these failures. There is little doubt that the opposite problem—an overinflated belief in the power of monetary policy—has also contributed to important policy errors. Most famously, policymakers in the mid-1960s believed that they faced a longrun inflation-unemployment trade-off, and thus that monetary policy could move the economy to a sustained path of very low unemployment and low inflation. This belief led them to pursue highly expansionary policy, starting the economy down the road to the inflation of the 1970s (for example, Romer and Romer 2002 and Primiceri 2006). The record of such errors has led some to argue that perhaps the most impor tant attribute of a successful central banker is humility (for example, Booth 2012). In this paper, we present evidence that an unduly pessimistic view of what monetary policy can accomplish has been a more impor tant source of policy errors and poor outcomes over the history of the Federal Reserve. At various times in the 1930s, faced with the Great Depression, Federal Reserve officials believed that the power of monetary policy to combat the downturn or stimulate recovery was minimal. In

In this rejoinder, I address five issues raised by Eggertsson’s reply to my commentary. First, I argue that the pre-Depression gold standard, though not ideal, was not a barrier to a desirable reflation. I then offer an account of the 1937-38 recession that views it as a continuation of the Roosevelt regime in a way that contradicts Eggertsson’s attempt to cleave it from the expectations-enhancing regime change he focused on. I also respond to his invoking the “conventional wisdom†regarding Hoover and Roosevelt by offering additional evidence that said wisdom is faulty. Fourth, I respond to his admission of ignorance of Robert Higgs’s work by recapping and adding to the evidence for regime uncertainty’s role in extending the Great Depression (evidence notably about private investment and about private-sector hours worked). I critically assess the role investment played in Eggertsson’s original AER article by noting his failure to distinguish government and private investment, as it was the latter that Higgs demonstrates was affected by regime uncertainty and whose weakness constituted the failed recovery. Finally, I note that if narrow methodological strictures blind us to the evidence provided by narrative history, we will fail to understand that history at our own peril, as the growing parallels between the Great Recession and the Great Depression demonstrate.

This note responds to some issues raised by Steven Horwitz’s (EJW, September 2009) commentary on my article “Great Expectations and the End of the Depression”(AER, September 2008).

Gauti Eggertsson uses a dynamic stochastic general equilibrium model in arguing that the period 1933 to 1937 represented recovery from the Great Depression, by virtue of regime change between the Hoover and Roosevelt administrations. He claims that the Hoover administration was defined by adherence to three “policy dogmas,†and that Roosevelt shifted expectations for the better by making credible commitments rejecting those dogmas. Eggertsson’s argument is wrong on several counts. He misrepresents Hoover’s economic policies, he mischaracterizes Roosevelt as “dogma-free†and committed to a clear alternative plan for recovery, and he misreads the economic consequences of Roosevelt’s policies. Eggertsson’s problems begin with his notion of “recovery,†wherein the economy’s progression from critical condition to prolonged infirmity is trumpeted as “recovery.†Eggertsson’s article is entitled “Great Expectations;†I have titled this piece “Great Apprehensions†because the Hoover-Roosevelt period needs to be seen a whole, in which the statist trend of policy and rhetoric created great uncertainty about the rules under which enterprise and investment would proceed. Moreover, Eggertsson’s narrative cutoff at 1937 is misleading and opportunistic, as the ensuing years are all part of the same prolonged apprehension and under-performance.

This article examines the stock market's changing valuation of corporate patentable assets between 1910 and 1939. It shows that the value of knowledge capital increased significantly during the 1920s compared to the 1910s as investors responded to the quality of technological inventions. Innovation was an important driver of the late 1920s stock market runup, and the Great Crash did not reflect a significant revaluation of knowledge capital relative to physical capital. Although substantial quantities of influential patents were accumulated during the post-crash recovery, high technology firms did not earn significant excess returns over low technology firms for most of the 1930s. (JEL G14, N12, N22, O30)

In this paper I revisit the period leading to the abandonment of the gold standard by the U.S. in 1933. I analyze what the important players – and in particular FDR and the members of the advisory group known as the “Brains Trust” – thought about the gold standard. My conclusion is that during the primary and presidential campaigns, neither Roosevelt nor his inner circle had a strong view on gold or the dollar. They did believe in the need to experiment with different policies in order to get the country out of the slump. Tinkering with the value of the currency was a possible area for experimentation; but it was an option with a relatively low priority, lower than implementing a public works program, and passing a bill that included crops allotment. Until inauguration day FDR’s views on the gold standard were ambivalent and noncommittal; he was neither a diehard fan of the system, nor was he a severe critic.

During the 1920-1921 recession, the Federal Reserve Bank of Atlanta resisted the deflationary policy sanctioned by the Federal Reserve Board and pursued by other Reserve banks. By borrowing gold reserves from other Reserve banks, it facilitated a reallocation of liquidity to its district during the contraction. Viewing the collapse of the price of cotton, the dominant crop in the region, as a systemic shock to the Sixth District, the Atlanta Fed increased discounting and enabled capital infusions to aid its member banks. The Atlanta Fed believed that it had to limit bank failures to prevent a fire sale of cotton collateral that would precipitate a general panic. In this previously unknown episode, the Federal Reserve Board applied considerable pressure on the Atlanta Fed to adhere to its policy and follow a simple Bagehot-style rule. The Atlanta Fed was vindicated when the shock to cotton prices proved to be temporary, and the Board conceded that the Reserve Bank had intervened appropriately.

There is a growing literature comparing the current financial crisis or Great Recession to the worst economic crisis of capitalism, the Great Depression. However, the role of rising income inequality, which has risen dramatically before both crises, is rarely discussed. In this paper we discuss the rise of top-end inequality and its effects on household consumption, saving, and debt for the 1920s by applying a non-standard theory of consumption, the relative income hypothesis, to the period of interest. We argue that income inequality is linked to the increase of household consumption and the simultaneous decline of household savings as well as rapidly increasing household debt. Thus, the rise of top-end inequality in connection with a broader institutional change, such as the deregulation of financial markets, has contributed to a build-up of financial and macroeconomic instability, in the period leading to the Great Depression.

The aim of this article is to clearly identify the mechanisms of the money market spillovers between the United States, the United Kingdom and France during the interwar period. To describe these mechanisms in detail, a BEKK model, in which we introduce a structural break, is adopted. Our analysis sheds new light on key historical issues: Was the crisis imported into the US? Did France set off interest rate volatility in the rest of the world during the thirties? Does the propagation process of interest rate volatility corroborate the “Golden Fetters” hypothesis?

We use the Clayton Antitrust Act of 1914 to study the effect of bankers on corporate boards in facilitating access to external finance. In the early twentieth century, securities underwriters commonly held directorships with American corporations; this was especially true for railroads, which were the largest enterprises of the era. Section 10 of the Clayton Act prohibited investment bankers from serving on the boards of railroads for which they underwrote securities. Following the implementation of Section 10 in 1921, we find that railroads that had maintained strong affiliations with their underwriters saw declines in their valuations, investment rates and leverage ratios, and increases in their costs of external funds. We perform falsification tests using data for industrial corporations, which were not subject to the prohibitions of Section 10, and find no differential effect of relationships with underwriters on these firms following 1921. Our results are consistent with the predictions of a simple model of underwriters on corporate boards acting as delegated monitors. Our findings also highlight the potential risks of unintended consequences from financial regulations.

The history of regulation in America is as old as the republic itself. Since colonial times, Americans have struggled with the conflict between the desire for individual freedom and economic growth, and the need for rules and structure in a civil society. The evolution of the United States from a largely agrarian, libertarian society to one with strong industrial and consumer components that are regulated by the federal government has been greatly influenced by Progressive ideas, not only in financial services but in all aspects of economic life. The swing of public policy from periods of strict regulation to eras of greater permissiveness has enormous implications for economic growth. This paper examines the development of regulation in the US from the 19th century up to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) in 2010, from both a political and economic perspective.

Some bank reforms of the 1930s in the United States may have been overvalued. The Glass-Steagall Act of 1933 actually created new endogenous risks involving potential systemic effects. Deposit insurance failed to address the main cause of banking panics, and rather strengthened inefficient unit banks, while the prohibition of interstate bank branching continued to hinder banks to diversify idiosyncratic risks. The separation of commercial and investment banking put an end to certain conflicts of interest but it created an opportunity cost by preventing universal banking from developing effectively. Finally, an untimely intervention in a duopolistic conflict made the regulator a captive figure. By contrast, major innovations covering bailout processes and prudential regulation appear to have been underestimated. The Reconstruction Finance Corporation of 1932 established the foundations of an investor of last resort, giving the Treasury the authority to recapitalize insolvent financial institutions deemed too big to fail. The newly established banking regulator, the Federal Deposit Insurance Corporation of 1933, was given a special bank-closure rule, separate from the usual bankruptcy proceedings, which opened a way towards orderly resolution of failing banks in order to protect the economy from the spread of systemic risk.

This paper examines the ability of a simple stylized general equilibrium model that incorporates nominal wage rigidity to explain the magnitude and persistence of the Great Depression in the United States. The impulses to our analysis are money supply shocks. The Taylor contracts model is surprisingly successful in accounting for the behavior of major macroaggregates and real wages during the downturn phase of the Depression, i.e., from 1929:3 through mid-1933. Our analysis provides support for the hypothesis that a monetary contraction operating through a sticky wage channel played a significant role in accounting for the downturn, and also provides an interesting refinement to this explanation. In particular, both the absolute severity of the Depression's downturn and its relative severity compared to the 1920-21 recession are likely attributable to the price decline having a much larger unanticipated component during the Depression, as well as less flexible wage-setting practices during this latter period. Another finding casts doubt on explanations for the 1933-36 recovery that rely heavily on the substantial remonetization that began in 1933.

This is a perfect time to discuss inequality. After a period of three decades when wage inequality among men in the United States grew to approximate pre-World War II levels, measured inequality apparently has stabilized and may, in fact, be decreasing (Claudia Goldin and Robert A. Margo, 1992). It is, therefore, a good time to assess the changes, to compare the gains and losses. I choose this topic, not to offend, but because I believe inequality is an economic "good" that has received too much bad press. I also think you will agree that it is a good, which like any other, can be scarce or overly abundant. I am neither trying to praise nor defend poverty, and I hope it is understood that the link between wages and income is not especially close, particularly at lower incomes where nonemployment dominates. Wages play many roles in our economy; along with time worked, they determine labor income, but they also signal relative scarcity and abundance, and with malleable skills, wages provide incentives to render the services that are most highly valued. Further, we all buy and sell labor either directly or indirectly as labor is embodied in products. To reverse one of the themes of Milton Friedman's introductory theory class, "one man's poison can be another's meat." Together with rising relative wages, the post-1950 increase in the job-market employment of women is one of our major accomplishments, but it is an accomplishment that has been fueled in part by the low wages earned by those the Census classifies as private household workers, childcare workers, workers in laundries and cleaning establishments, food service workers, etc. As the population ages, the prospect of increasing dependence on personal assistance looms. For the most part, personal assistants and aides earn low wages, wages that extend the services we can afford. Friedman's actual observation is, however, that "one man's meat is not necessarily another's poison" (Friedman, 1976). The relatively high wages earned by physicians, scientists, and university professors have attracted many immigrants to the United States. Would we be better off if they had not immigrated? We could in fact reduce wage inequality by simply proscribing immigration, because the wage distribution of immigrants is U-shaped relative to that of natives (see J. P. Smith and B. Edmonston, 1997 p. 180 [table 5.4] ). My guess is that most economists, faced with such an option, would respond by directing attention to the services immigrants provide. My objective is to examine the recent period of increasing wage inequality with an eye toward the positive. I describe some of the changes that have occurred, speculate about the causes, and wrap up with illustrations of consequences. I contend that growing inequality has created opportunities that have been exploited by many and that the gains are not restricted to the traditional elite. Moreover, when we have adopted policies to mitigate the downside of increasing inequality, which is falling real wages in the lower parts of the distribution, a surprising number of individuals have also capitalized on those opportunities in ways that are not productive. Before turning to the data, I want to make a few general observations. * Department of Economics, Texas A&M University, College Station, TX 77843-4228. I am indebted to Martin Gritsch for assistance in extracting the data and to Barbara Charlton for secretarial support. I am also indebted to participants in the UCLA/RAND Labor Workshop and especially to Janet Currie and James P. Smith for comments and suggestions on an earlier draft. I have drawn heavily on my previous work, much of it in collaboration with Kevin M. Murphy.

Technological progress comes in waves. The British Industrial Revolution ( 1760 – 1850) ushered in Cort’s puddling and rolling process for making iron, Crompton’s mule for spinning cotton, and the Watt steam engine. The Second Industrial Revolution ( 1890 – 1930) witnessed the rise of electricity, the internal-combustion engine, and the chemical industry. The birth of information technology (IT) may herald the start of a Third Industrial Revolution. A new technology or product is often developed by the single entrepreneur who initially finds it hard to get funds, develop the product, and find customers. But if the product is good, customers eventually line up, and investors flock in. Other firms then move in to make the product and may drive the innovator out or acquire him. Whether he reaches the initial public offering (IPO) stage or is acquired by a listed firm, though, it takes time for the innovator to add value to the stock market. Indeed, the innovation may, at first, reduce the market’s value because some firms, usually large or old, will cling to old technologies that have lost their momentum. Figure 1 plots the market value of U.S. equity relative to GDP. This paper argues that (a) the market declined in the late 1960’s because it felt that the old technologies either had lost their momentum or would give way to IT, and that (b) IT innovators boosted the stock market’s value only in the 1980’s. If the stock market provides a forecast of future events, then the recent dramatic upswing represents a rosy estimate about growth in future profits for the economy. This translates into a forecast of higher output and productivity growth, holding other things equal (such as capital’s share

This paper argues that limited asset market participation is crucial in explaining U.S. macroeconomic performance and monetary policy before the 1980s, and their changes thereafter. We develop an otherwise standard sticky-price dynamic stochastic general equilibrium model, which implies that at low asset-market participation rates, the interest rate elasticity of output (the slope of the IS curve) becomes positive - that is, "non-Keynesian." Remarkably, in that case, a passive monetary policy rule ensures equilibrium determinacy and maximizes welfare. Consequently, we argue that the policy of the Federal Reserve System in the pre-Volcker era, often associated with a passive monetary policy rule, was closer to optimal than conventional wisdom suggests and may thus have remained unchanged at a fundamental level thereafter. We provide institutional and empirical evidence for our hypothesis, in the latter case using Bayesian estimation techniques, and show that our model is able to explain most features of the "Great Inflation."

In the summer of 1931, a financial crisis began in Austria, spread to Germany, forced Britain to abandon the gold standard, crossed the Atlantic, and afflicted financial institutions in the United States. This article describes how banks in New York City, the central money market of the United States, reacted to this trans-Atlantic trauma. New York's money-center banks anticipated the onset of a financial crisis, prepared for it by accumulating substantial reserves, and during the European crisis, continued business as usual. New York's leading bankers deliberately and collectively decided on the business-as-usual policy in order to minimize the impact of the panic in the United States. New York banks’ behavior changed only after the Federal Reserve raised discount rates to stem gold outflows in the fall of 1931.

In 1936-37, the Federal Reserve doubled the reserve requirements imposed on member banks. Ever since, the question of whether the doubling of reserve requirements increased reserve demand and produced a contraction of money and credit, and thereby helped to cause the recession of 1937-1938, has been a matter of controversy. Using microeconomic data to gauge the fundamental reserve demands of Fed member banks, we find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier. To the extent that increases in reserve demand occurred from 1935 to 1937, they reflected fundamental changes in the determinants of reserve demand and not changes in reserve requirements.

Although long obscured by the Great Depression, the nationwide "bubble" that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-war construction catch-up, low interest rates and a "Greenspan put," helped to ignite the boom in the twenties, but alternative monetary policies would have only dampened not eliminated it. Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision. Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the "Too Big To Fail" doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.

This paper examines the association between inflation, monetary policy and U.S. stock market conditions during the second half of the 20th century. We estimate a latent variable VAR to examine how macroeconomic and policy shocks affect the condition of the stock market. Further, we examine the contribution of various shocks to market conditions during particular episodes and find evidence that inflation and interest rate shocks had particularly strong impacts on market conditions in the postwar era. Disinflation shocks promoted market booms and inflation shocks contributed to busts. We conclude that central banks can contribute to financial market stability by minimizing unanticipated changes in inflation.

Most treatments of the Great Depression have focused on its onset and its aftermath. In contrast, we take a unified view of the interwar period. We look at the slide into and the emergence from the 1920-21 recession and the roaring 1920s boom, as well as the slide into the Great Depression after 1929, and attempt to explain these phenomena in a unified framework. The model framework combines monopolistic product market competition with search frictions and bargaining in the labour market, allowing for both individual and collective (unionized) wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. The pro-union provisions of the Clayton Act of 1914 contributed to the slide in asset prices and the depression of 1920-21, while a series of tough anti-union Supreme Court decisions in late 1921 and 1922 coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark court decisions in favour of trade unions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, made the economy increasingly susceptible to collapsing profit expectations. We model the onset of the great depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices.

We attempt to explain the severe 1920-21 recession, the roaring 1920s boom, and the slide into the Great Depression after 1929 in a unified framework. The model combines monopolistic product market competition with search frictions in the labor market, allowing for both individual and collective wage bargaining. We attribute the extraordinary macroeconomic and financial volatility of this period to two factors: Shifts in the wage bargaining regime and in the degree of monopoly power in the economy. A shift from individual to collective bargaining presents as a recession, involving declines in output and asset values, and increases in unemployment and real wages. The pro-union provisions of the Clayton Act of 1914 facilitated the rise of collective bargaining after World War I, leading to the asset price crash and recession of 1920-21. A series of tough anti-union Supreme Court decisions in late 1921 induced a shift back to individual bargaining, leading the economy out of the recession. This, coupled with the lax anti-trust enforcement of the Coolidge and Hoover administrations enabled a major rise in corporate profits and stock market valuations throughout the 1920s. Landmark pro-union court decisions in the late 1920s, as well as political pressure on firms to adopt the welfare capitalism model of high wages, led to collapsing profit expectations, contributing substantially to the stock market crash. We model the onset of the Great Depression as an equilibrium switch from individual wage bargaining to (actual or mimicked) collective wage bargaining. The general equilibrium effects of this regime change are consistent with large decreases in output, employment, and stock prices and moderate increases in real wages.

The extreme levels of stock price volatility found during the Great Depression have often been attributed to political uncertainty. This Paper performs an explicit test of the Merton/Schwert hypothesis that doubts about the survival of the capitalist system were partly responsible. It does so by using a panel data set on political unrest, demonstrations and other indicators of instability in a set of 10 developed countries during the interwar period. Fear of worker militancy and a possible revolution can explain a substantial part of the increase in stock market volatility during the Great Depression.

The theory of “financial fragility” emphasizes the role of weak balance sheets in propagating and magnifying macroeconomic shocks. I use a new panel dataset to investigate the relationship between financial fragility and real activity on U.S. railroads during 1929-1940. First, I formulate a flexible accelerator model of maintenance expenditures and employment. Then, using the model as a benchmark, I ask whether a firm’s degree of leverage, bankruptcy status, and size affect the responses of employment and maintenance expenditures to changes in operating revenues. My results provide strong support for the predictions of the financial fragility theory. Leverage and bankruptcy status had the greatest effect during the worst years of the Depression and their impact differed systematically by firm size. Firm leverage had a large negative effect and generally affected small firms only. That is, firms whose fixed interest burdens were heavier than average exhibited lower than average annual growth in maintenance and employment; in general, this was true of small firms only. Bankruptcy effects were large and positive, and were present in large firms only. In other words, large firms that were in bankruptcy exhibited higher annual growth in maintenance and employment. Various categories of maintenance expenditure were not equally sensitive to financial effects; I find that highly indebted firms mainly used track maintenance to absorb revenue shocks. U.S. Government attempted to keep the railroads out of bankruptcy through loans from the Reconstruction Finance Corporation. I conclude that this policy was counterproductive.

This paper provides an account of the complex changes taking place within New England in the years from 1880 to 1940. After 1880, technological changes and market shifts undermined the sources of comparative advantage that had promoted the concentration of textile and footwear production within the region and propelled regional economic growth. Despite the decline of these industries after 1880, New England's history after 1880 can hardly be characterized as one of economic decline. Regional economic growth did slow in the wake of these events, but the impact of this slowdown on living standards was moderated, by market driven adjustments in resources away from declining sectors, and by the region's increasing integration within national and international labor and financial markets. Within the region's traditional industries, manufacturers shifted product lines to take advantage of the areas in which they could still compete. At the same time, the growth of other manufacturing activities and an increasingly robust service sector created new employment opportunities that laid the foundation for the region's post-World War II recovery. The responsiveness of international and interregional labor migration moderated the growth of regional labor supplies in response to diminishing opportunities. Meanwhile, financial market integration enabled New Englanders to share in the benefits of more rapid growth elsewhere in the country.