An experiment in tight monetary policy: Revisiting the 1920-1921 depression∗

What are the real effects of tight monetary policy during recessions? We provide novel evidence from the United States depression of 1920-1921. Our identification strategy exploits county-level variation in access to the Federal Reserve’s discount window, and hand-collected data on banking and agriculture in Illinois. In the short term, tightened conditions at the discount window decreased bank lending and lowered farm revenues. In the long term, however, they lowered debt-to-output levels and led to greater farm productivity and scale, suggesting an avoidance of debt overhang problems. These findings establish a tradeoff between the shortand long-run effects of tight monetary policy. ∗carlin@rice.edu, william.giles.mann@emory.edu. We thank conference discussants and seminar participants at the University of Chicago, UC Berkeley, UCLA, Rice University, Arizona State University, University of Colorado, University of Rochester, Indiana University, Michigan State University, the University of Queensland, the UBC Summer Finance Conference, the SFS Cavalcade, the Financial Intermediation Research Society Meetings, the Yale Junior Finance Conference, and the Australia National University Summer Research Camp, for valuable comments and suggestions. Darren Tan, Joseph Needle, and Alex Simon provided excellent research assistance. Mann gratefully acknowledges financial support from the Laurence and Lori Fink Center for Finance and Investments.