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Banking on the Boom, Tripped by the Bust: Banks and the World War I Agricultural Price Shock -- by Matthew S. Jaremski, David C. Wheelock

Bank lending booms and asset price booms are often intertwined. Although possibly triggered by a fundamental shock, rising asset prices can stimulate lending that pushes asset prices higher, leading to more lending, and so on. Such a dynamic seems to have characterized the agricultural land boom surrounding World War I. This paper examines i) how banks responded to the boom and were affected by the bust; ii) how various banking regulations and policies influenced those effects; and iii) how bank closures contributed to falling land prices in the bust. We find that rising crop prices encouraged bank entry and balance sheet expansion in agricultural counties (with new banks accounting disproportionately for growth in lending and banking system risk). State deposit insurance systems amplified the impact of rising crop prices on bank portfolios, while higher minimum capital requirements dampened the effects. When farmland prices collapsed, banks that had responded most aggressively to the asset boom had a higher probability of closing, and counties with more bank closures experienced larger declines in land prices.
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