are a great many such but which are now viewed with suspicion by lenders 1931 p

Are a great many such but which are now viewed with

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are a great many such), but which are now viewed with suspicion by lenders. [1931, p. 139] As this quote suggests, the idea that the low yields on Treasury or blue-chip corporation liabilities during this time signalled a general state of "easy money" is mistaken; money was easy for a few safe borrowers, but dif- ficult for everyone else. An indicator of the strength of lender preferences for safe, liquid assets (and hence of the difficulty of risky borrowers in ob- taining funds) is the yield differential be- tween Baa corporate bonds and Treasury bonds (Table 1, column 6). Because this vari- able contains no adjustment for the reclassi- fication of firms into higher risk categories, it tends to understate the true difference in yields between representative risky and safe assets. Nevertheless, this indicator showed some impressive shifts, going from 2.5 per- cent during 1929-30 to nearly 8 percent in mid-1932. (The differential never exceeded 3.5 percent in the sharp 1920-22 recession.) The yield differential reflected changing per- ceptions of default risk, of course; but note also the close relationship of the differential and the banking crises (a fact first pointed out by Friedman and Schwartz). Bank crises depressed the prices of lower-quality invest- ments as the fear of runs drove banks into assets that could be used as reserves or for rediscounting. This effect of bank portfolio choices on an asset price could not happen in a Fama-type, complete-markets world. Finally, it is instructive to consider the experience of a country that had a debt crisis without a banking crisis. Canada entered the Great Depression with a large external debt, much of it payable in foreign currencies. The combination of deflation and the devalua- tion of the Canadian dollar led to many defaults. Internally, debt problems in agri- culture and in mortgage markets were as severe as in the United States, while major industries (notably pulp and paper) expe- rienced many bankruptcies (A. E. Safarian, 1959, ch. 7). Although Canadian bankers did not face serious danger of runs, they shifted away from loans to safer assets. This shift toward safety and liquidity, though less pro- nounced than in the U.S. case, drew criticism from all facets of Canadian society. The American Banker of December 6, 1932, re- ported the following complaint from a non- populist Canadian politician: The chief criticism of our present system appears to be that in good times credit is expanded to great extremes... but, when the pinch of hard times is first being felt, credit is suddenly and drastically restricted by the banks... At the present time, loans are only being made when the banks have a very wide This content downloaded from on Wed, 17 May 2017 02:12:24 UTC All use subject to
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VOL. 73 NO. 3 BERNANKE: GREAT DEPRESSION 267 margin of security and every effort is being made to collect outstanding loans.
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