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Credit and Social Unrest: Evidence from 1930s China

Journal: Journal of Financial Economics

Date: 20201101

Author: Braggion, Fabio; Manconi, Alberto; Zhu, Haikun

Abstract:
Do credit contractions trigger social unrest? To answer this question, we turn to a natural experiment from 1930s China, where the 1933 U.S. Silver Purchase program acts as a shock to bank lending. We assemble a hand-collected data set of loan contracts between banks and firms, labor unrest episodes, and underground Communist Party penetration. The Silver Purchase shock results in a severe credit contraction, and firms borrowing from banks with a larger exposure to it experience increased labor unrest and Communist Party penetration among their workers. These findings contribute to understanding the socio-political consequences of credit shocks.

Link: Google Scholar

Key Findings

Credit Contraction Impact

Banks with lower silver reserves reduced lending by 12-13% after the 1933 U.S. Silver Purchase program, demonstrating a significant credit supply shock

Labor Unrest Effect

Firms borrowing from banks with lowest silver reserves experienced 30% more labor unrest episodes compared to firms with access to highest reserves

Communist Activity Impact

Firms with limited access to bank silver reserves saw 6% higher Communist Party penetration among workers after the credit shock

Bank Lending Response to Silver Purchase Program

  • Banks with lower silver reserves showed steeper decline in lending after 1933
  • Credit volume dropped approximately 15% between 1933-1935
  • Effect was stronger for banks at minimum reserve requirements

Labor Unrest Episodes by Cause

  • Layoffs were the primary cause of labor unrest (56% of episodes)
  • Salary disputes accounted for 21% of unrest incidents
  • Other causes including work conditions and union activities were less common

Impact on Cotton Mill Operations

  • 40% increase in worker layoffs for firms with lowest silver reserves access
  • 60% higher likelihood of reduced electricity consumption
  • 31% greater probability of reduced output

Contribution and Implications

  • First study demonstrating causal link between credit shocks and social unrest using micro-level historical data
  • Shows how financial sector disruptions can have broader sociopolitical consequences beyond economic effects
  • Provides evidence that credit contractions can trigger labor tensions and increase support for anti-system movements

Data Sources

  • Lending chart constructed using aggregate credit data from Figure 3 Panel A
  • Labor unrest causes visualization based on data from Figure 4
  • Cotton mill operations impact based on results from Table 10 Panels A-C