Financial Crises and Economic Growth: U.S. Cities, Counties, and School Districts During the Great Depression

Janas, Pawel

doi:https://doi.org/10.21985/n2-8y6s-fp97

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Financial Crises and Economic Growth: U.S. Cities, Counties, and School Districts During the Great Depression

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This dissertation is the culmination of a four-year project on local governments and local economic activity during the Great Depression in the United States (1929 - 1937). Chapter 1 investigates how U.S. municipal governments coped during the Depression and studies whether debt-induced financial constraints affected local public good provision. Local governments in the U.S. issue debt to fund infrastructure projects and provide important public services to residents. When a financial crisis occurs, financially leveraged cities can suffer distress and curtail public spending, which may lead to out-migration by households. I collect novel archival panel data on cities and municipal bonds during the 1920s and 1930s and examine local public good provision during the Depression. I find that distressed cities significantly lowered public good pro- vision - roughly 20 percent of the drop in expenditure can be explained through a re-allocation of budgets towards debt repayment. In addition, I find suggestive evidence that households subsequently relocated away from distressed cities in response. In Chapter 2, I shift my attention to school districts. We know that investment in formal schooling varies with macroeconomic conditions that alter the resources available and the opportunity cost of education. I study whether recessions can serve a long-run benefit to youth by pushing them out of the labor market and back into school and investigate if education spending cuts attenuate this effect. I collect novel archival data on youth unemployment and school quality during the Depression and study how each affected overall high school graduation rates and average earnings across U.S. cities during the last stage of the High School Movement. My difference-in-differences empirical strategy attempts to explain the within-city variation in high school graduation rates across cohorts using across-city variation in unemployment and public education spending. I find that worsening local labor markets for youth significantly increased their secondary school attendance and graduation rates while education spending cuts decreased them, but to a smaller extent. The effect is most prominent for youth from lower socioeconomic backgrounds. I estimate that 80 thousand urban youth obtained a high school diploma due to the Depression, and 7.5 thousand dropped out due to school district expenditure cuts. Finally, in Chapter 3, I explore a central question of the Great Depression: what was the local economic effect of banking failures? Economic recovery from financial crises is typically slower than from other crises, possibly due to credit rationing by financial intermediaries. I study whether lender-of-last-resort policies of the Atlanta Federal Reserve Bank during the Great Depression eased firms’ financial constraints using a novel database of local economic conditions from 1927 to 1937. My identification strategy relies on the willingness of the Federal Reserve to extend credit in some regions and not in others and plausibly exogenous placement of Federal Reserve boundaries. I find evidence that Fed intervention stymied banking panics, but I do not, surprisingly, find any meaningful effect of Fed policies on local economic outcomes.

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