EXPLAINING CREDIT PROBLEMS IN THE U.S. CONSUMER DURABLE GOODS INDUSTRY IN THE 1930’S CREDIT CHANNEL OR BANK LIQUIDITY PREFERENCE?

Abstract

Argument is made, contra Temin, that the recovery of the consumer durable goods industry in the 1930’s was stalled by a breakdown in markets for dealers’ inventory financing and consumer installment credit. The Friedman-Schwartz-Hamilton-Bernanke view holds that durable goods sector credit problems in the Depression were linked to Federal Reserve tightening measures via the “credit” channel of the transmission mechanism. The view is expressed that , though the FED could have done more to ease conditions, congestion in markets for wholesale and retail finance developed for reasons largely unrelated to the prevailing course of monetary policy. A shift, beginning in late 1930, in the average preference of banks for liquid and/or re-discountable portfolio assets, or a change in bank liquidity preference, is interpreted to be a primary cause of diminished credit available to durable goods retailers and buyers during the 1931-33 period. The bank liquidity preference hypothesis is supported by data on the shifting composition of bank assets in favor of investment grade securities, a fall in the ratio of loans to deposits, a steepening of the Treasury yield curve, as well as the time path of high-powered money after 1930.