Credit Rationing and Social Stability: Evidence from 1930s China

Can credit affect social stability? To answer this question, we turn to a natural experiment from 1930s China, where credit contracted as a consequence of the 1933 U.S. Silver Purchase program. Building on extensive archival information, we assemble a novel, hand-collected data set of loan contracts to individual firms as well as labor unrest episodes. We show that the Silver Purchase shock results in a severe credit contraction, and that firms borrowing from banks with a larger exposure to the shock experience increased labor unrest intensity. These findings support Milton Friedman’s (1992) conjecture that the U.S. Silver Purchase program exacerbated social tensions in 1930s China, and contribute to our understanding of the (unintended) social consequences of credit provision.