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Information to Users INFORMATION TO USERS This manuscript has been reproduced from the microfilm master. UMI films the text directly firom the original or copy submitted. Thus, some thesis and dissertation copies are in typewriter fiice, vdiile others may be fi-om any type o f computer printer. The quality of this reproduction is dependent upon the quality of the copy submitted. Broken or indistinct print, colored or poor quality illustrations and photographs, print bleedthrough, substandard margins, and improper alignment can adversely afifect rq>roduction. In the unlikely event that the author did not send UMI a complete manuscript and there are missing pages, these will be noted. Also, if unauthorized copyright material had to be removed, a note will indicate the deletion. Oversize materials (e.g., maps, drawings, charts) are reproduced by sectioning the original, beginning at the upper left-hand comer and continuing fi'om left to right in equal sections with small overlaps. Each original is also photographed in one exposure and is included in reduced form at the back of the book. Photographs included in the original manuscript have been reproduced xerographically in this copy. Higher quality 6” x 9” black and white photographic prints are available for any photographs or illustrations appearing in this copy for an additional charge. Contact UMI directly to order. UMI A Bell & Howell Infoimation Company 300 North Zed) Road, Ann Aibor MI 48106-1346 USA 313/761-4700 800/521-0600 Essays on Credit and Goods Market Imperfections in the U.S. Economy: 1895 - 1940 DISSERTATION Presented in Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University By Margaret Mary McConnell, M.S. ***** The Ohio State University 1997 Dissertation Committee: Approved by Stephen G. Cecchetti, Adviser Pok Sang Lam y Adviser Alan D. Viaxd y r Department of Economics UMI Number: 9721138 Copyright 1997 by McConnell, Margaret Mary All rights reserved. UMI Microform 9721138 Copyright 1997, by UMI Company. All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. UMI 300 North Zeeb Road Ann Arbor, MI 48103 © Copyright by Margaret Mary McConnell 1997 ABSTRACT In this dissertation, I examine theories of credit and goods market imperfections using U.S. economic data from the period 1913 to 1940. Chapter 1 provides a brief overview of the dissertation. Chapter 2 is the historical background for the third chapter. In it, I focus on those aspects of the period that make it an ideal one for studying the effects of shifts in bank credit and balance sheet positions on credit constrained firms. The third chapter uses panel data on the number and liabUities of business failures from 1895 to 1935, by industry, to test theories of monetary transmission based on asymmetric information. These theories imply that a contraction will increase the relative likelihood of default for credit constrained firms. I find that movements in the number of failures are better explained by the variation in aggregate prices and bank failures than by changes in real output. I also find that while cychcal downturns tended to decrease size in trade industries and had little effect in manufacturing industries, periods of deflation and bank failure were accompanied by increases in the size of failed firms within an industry. These findings suggest the importance of financial variables in explaining firm failure and that moderately-sized, more highly leveraged firms had a greater difficulty withstanding deflation and banking crises. In Chapter 4, I examine the correlation between the mean and the skewness of wholesale price changes across industries from 1913 to 1940 to test for price rigidity. ii Just as others have found for the post-war period, I find a positive and statistically significant correlation. In contrast to the findings of other authors for the post-war period, however, the pre-war correlation cannot be explained by sampling bias in the correlation estimator. These results are consistent with the presence of price rigidity in the pre-war period. The difference between the pre- and post-war results is shown to be a smaller degree of heterogeneity in the variance of price changes across industries in the pre-war period. Finally, I look for evidence that the direction of price rigidity is a function of the underlying inflationary trend. m To my parents. IV ACKNOWLEDGMENTS I am grateful to many people for their help in the completion of this dissertation. I am particularly indebted my advisor, Stephen Cecchetti, for the example he sets as an economist and a scholar; his encouragement and direction have been invaluable. I thank Pok Sang Lam and Alan Viaxd. Both spent long hours helping me to clarify my ideas and my exposition, primarily by listening and offering suggestions, rather than lecturing. They are both wonderful teachers, and I appreciate and admire their patience and insight. I am grateful to Nelson Mark and Mario Crucini, who at different points in my graduate career, gave me some very important advice that I needed, more than wanted, to hear. I thank Jim Butkiewicz for stimulating my interest in macroeco­ nomic research and for his advisement and ffiendship. My family provided constant support and encouragement. Without them, I could not have finished this dissertation. Finally, I thank Melaney, Cristina, Wajme, Cor- rina, Sven, Monica, Christina, Carolyn, Michelle and Larry for always listening and reminding me to laugh. VITA June 12, 1967 ...................................................Bom - Belmax, NJ 1989 .................................................................. B.A. Economics, University of Delaware. 1992 .................................................................. M.S. Economics, University of Delaware. 1991-1993 ..........................................................Graduate Teaching Associate, The Ohio State University. 1993-1996 ..........................................................Graduate Research Associate, The Ohio State University. 1996-Present .................................................... Economist, Federal Rjeserve Bank of New York. PUBLICATIONS Research Publications Butkiewicz, James L. and Margaret Mary McConnell “The Stability of the Demand for Money and Ml Velocity; Evidence from the Sectoral Data”. Quarterly Review of Eœnomics and Finance., 35(2):223-243, Fall 1995. FIELDS OF STUDY Major Field: Economics Studies in: Monetary and Macroeconomics Profs. Stephen G. Cecchetti and Pok Sang Lam Public Finance Prof. Alan Viard VI TABLE OF CONTENTS P age A bstract ........................................................................................................................ ii Dedication................................................................................................................. iv Acknowledgments ......................................................................................................... v V i t a ........................................................................................................................... vi List of T ables ........................................................................................................... ix List of Figures ............................................................................................................ x Chapters: 1. Overview ............................................................................................................ 1 2. Historical Background ....................................................................................... 5 2.1 Introduction .......................................................................................... 5 2.2 Aggregate Fluctuations: 1985 to 1940 ................................................ 6 2.2.1 The National Banking System......................................... 7 2.2.2 Aggregate Fluctuations In the National Banking Era .... 9 2.2.3 The Federal Reserve System............................................ 11 2.2.4 Aggregate Fluctuations Under the Early Years of the Federal Reserve System......................................................................... 14 2.3 Business Financing and the Use and Availability of Bank Credit . 18 2.3.1 Business Financing and the Use of Bank C re d it .......... 19 2.3.2 The Availability of Bank Credit ...................................... 23 2.4 C onclusion ............................................................................................. 25 vu 3. Business Failures and Credit Market Imperfections: Debt-Deflation and Bank Panics in the Pre-WWII U.S ................................................................. 27 3.1 Introduction ......................................................................................... 27 3.2 The D a t a ............................................................................................... 30 3.3 Business Failures and Alternative Views of the Monetary Transmis­ sion Mechanism..................................................................................... 37 3.4 E stim a tio n ............................................................................................ 42 3.4.1 Aggregate Shocks and the Number of Business Failures . 42 3.4.2 Aggregate Shocks and the Size of Business Failures 51 3.4.3 Summary of Empirical Findings............................................... 57 3.5 Conclusion ...........................................................................................
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