Credit, Labor, and Political Unrest: Evidence from 1930s China (with Fabio Braggion and Haikun Zhu)

Abstract:
Can tight credit inflame political unrest? We study a natural experiment from 1930s China, where the 1933 U.S. Silver Purchase program acts as a shock to bank lending. We assemble a novel, hand-collected dataset of loan contracts to individual firms, labor unrest episodes, and support for the underground Communist Party. 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 and Communist Party penetration among their workers. These findings contribute to understanding the (unintended) socio-political consequences of credit.