Famine and Finance: Credit and the Great Famine of Ireland
Utilizing original archival data, I examine the role of access to microfinance credit in facilitating adjustment to the Great Famine of Ireland. I find that worse affected districts with a microfinance fund experienced substantially smaller relative population declines and larger relative increases in buffer livestock during the famine, and greater relative medium- and long-run substitutions toward other crops and grazing livestock, than worse affected districts without a fund. However, I also find that the potential benefits of access to credit in mitigating the effects of a major environmental shock were limited by the fact that the survival of microfinance institutions depended critically on an ability to substantially contract lending through flight to higher-quality borrowers, such that microfinance was not an effective mitigant for the most vulnerable Irish farmers.
Microcredit and Adjustment to Environmental Shock: Evidence from the Great Famine in Ireland
The Great Famine of Ireland from 1845 to 51 ranks as one of the most lethal of all time, claiming approximately one eighth of the country’s population. Utilizing Famine Relief Commission reports to develop a micro-level dataset of blight severity, I find that in the short run, districts more severely infected by blight experienced larger population declines and accumulations of buffer livestock by small- to medium-sized farms. In the medium and long runs, however, worse affected districts experienced greater substitutions toward other tillage crops and grazing livestock, particularly by small- to medium-sized farms. Using annual reports of the Irish Loan Funds, I further find that access to microfinance credit was an important factor in non-demographic adjustment to blight. Worse affected districts with at least one microfinance fund during the famine experienced substantially smaller relative population declines and larger relative increases in buffer livestock during and immediately after the famine, and greater relative medium- and long-run substitutions toward other crops and grazing livestock, than worse affected districts without a fund.
Environmental Shocks and Sustainability in Microfinance: Evidence from the Great Famine of Ireland
I study the effects of a major environmental shock on microfinance lending by analyzing the Irish Loan Funds during the Great Famine of Ireland. I find that funds in districts worse affected by blight experienced higher failure rates and greater credit retrenchment and flight-to-quality than funds in less affected districts. Though greater leverage was generally associated with a higher predicted probability of institutional survival, the reverse was true where blight infection was more severe, and though more profitable funds were generally no more likely to survive, higher pre-famine margins were positive predictors of institutional survival where blight infection was worse. Results further indicate that the primary mechanisms by which pre-famine balance sheet metrics influenced survival probabilities were differential balance sheet contraction and flight-to-quality during the famine. The results of this study therefore suggest that optimal lending models in ordinary circumstances may render MFI’s more vulnerable to tail-probability aggregate shocks, with higher leverage, lower paid staff, lower economic rents, and more extensive liabilities limiting scope for credit retrenchment and flight-to-quality. Results further indicate that one cost of MFI resilience to adverse environmental change is substantially reduced outreach to borrowers of lower credit quality.
Legislating Instability: Adam Smith, Free Banking, and the Financial Crisis of 1772
From 1716 to 1845, the Scottish financial system functioned with no official central bank or lender of last resort, no public (or private) monopoly on currency issuance, no legal reserve requirements, and no formal limits on bank size. In support of previous research on Scottish “free banking,” I find that this absence of legal restrictions on Scottish banking contributed to a proliferation of what Adam Smith derisively referred to as “beggarly bankers” which rendered the Scottish financial system both intensely competitive and remarkably resilient to a series of severe adverse shocks to the small developing economy. In particular, despite large speculative capital flows, a fixed exchange rate, and substantial external debt, Scotland’s highly decentralized banking sector effectively mitigated the effects of two severe balance of payments crises arising from exogenous political shocks during the Seven Years’ War. I further find that the introduction of regulations and legal restrictions into Scottish banking in 1765 was the result of aggressive political lobbying by the largest Scottish banks, and effectively raised barriers to entry and encouraged banking sector consolidation. I argue that while these results did not cause the severe financial crisis of 1772, they amplified the level of systemic risk in Scottish credit markets and increased the likelihood that portfolio losses in the event of an adverse economic shock would be transmitted to depositors and noteholders through disorderly bank runs, suspensions of payment, and institutional liquidation. Finally, I find that unlimited liability on the part of Scottish bank shareholders attenuated the effects of financial instability on the real economy.
Rethinking the Keynesian Revolution: Keynes, Hayek, and the Wicksell Connection
While standard accounts of the 1930s debates in macroeconomic thought pit John Maynard Keynes against Friedrich Hayek in a clash of ideology, this contrast is in many respects misleading. In this book, I argue that both Keynes and Hayek developed their respective theories of the business cycle within the tradition of Swedish economist Knut Wicksell, and thus shared Wicksell’s vision of economic fluctuations as intertemporal coordination failures. I further argue that, considered through this lens, Keynes and Hayek were by no means the theoretical antagonists they have subsequently been made out to be. Rather, both were fundamentally concerned with monetary dynamics outside of general intertemporal equilibrium, with Hayek exploring the conditions under which relative price changes might counteract deviations from intertemporal equilibrium, and Keynes those under which they might amplify such deviations.
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Keynes’ Obsession: The Worry Over Global Imbalances