All our banks are reaching out in an endeavor to liquefy their assets p 1

All our banks are reaching out in an endeavor to

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All our banks are reaching out in an endeavor to liquefy their assets .... [p. 1] Canadian lenders other than banks also tried to retrench: According to the Financial Post, May 14, 1932, "Insurance, trust, and loan companies were increasingly unwilling to lend funds with real estate and rental values falling, a growing number of defaults of interest and principal, the increasing burden of property taxes, and legislation which adversely affected creditors" (quoted in Safarian, p. 130). More careful study of the Canadian expe- rience in the Great Depression would be useful. However, on first appraisal, that ex- perience does not seem to be inconsistent with the point that even good borrowers may find it more difficult or costly to obtain credit when there is extensive insolvency. The debt crisis should be added to the bank- ing crises as a potential source of disruption of the credit system. III. Credit Markets and Macroeconomic Performance If it is taken as given that the financial crises during the depression did interfere with the normal flows of credit, it still must be shown how this might have had an effect on the course of the aggregate economy. There are many ways in which problems in credit markets might potentially affect the macroeconomy. Several of these could be grouped under the heading of "effects on aggregate supply." For example, if credit flows are dammed up, potential borrowers in the economy may not be able to secure funds to undertake worthwhile activities or invest- ments; at the same time, savers may have to devote their funds to inferior uses. Other possible problems resulting from poorly functioning credit markets include a reduced feasibility of effective risk sharing and greater difficulties in funding large, indivisible proj- ects. Each of these might limit the economy's productive capacity. These arguments are reminiscent of some ideas advanced by John Gurley and E. S. Shaw (1955), Ronald McKinnon (1973), and others in an economic development context. The claim of this literature is that immature or repressed financial sectors cause the "fragmentation" of less developed econo- mies, reducing the effective set of production possibilities available to the society. Did the financial crisis of the 1930's turn the United States into a " temporarily under- developed economy" (to use Bob Hall's felic- itous phrase)? Although this possibility is intriguing, the answer to the question is probably no. While many businesses did suffer drains of working capital and invest- ment funds, most larger corporations entered the decade with sufficient cash and liquid reserves to finance operations and any de- sired expansion (see, for example, Friedrich Lutz, 1945). Unless it is believed that the outputs of large and of small businesses are not potentially substitutes, the aggregate supply effect must be regarded as not of great quantitative importance.
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