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Droughts, Floods, and Financial Distress in the United States

Droughts, Floods, and Financial Distress in the United States

(p.73) 3 Droughts, Floods, and Financial Distress in the United States
The Economics of Climate Change
John Landon-LaneHugh RockoffRichard H. Steckel
University of Chicago Press

This chapter determines the frequency and severity of weather-generated banking stress in American financial history. It examines the relationships among weather, agriculture, and financial markets and the effects of extreme weather on farm incomes and mortgage foreclosure rates. The chapter also examines how drought has affected both bank failures and rates of return to bank equity in the United States. Two major droughts are emphasized, those between 1874 and 1896 in Kansas and those during the 1930s in Oklahoma. Both of these climatic events crippled agriculture, a major sector of the state economies. The econometric evidence shows that weather-related bank stress was more important prior to 1940. The declining role of agriculture and the increased integration of financial markets in the postwar era seem to have cushioned local banks from the full effects of local weather shocks after 1940. The study also suggests that organizational innovations that lowered the cost of accessing capital across banks during times of climate shocks was an important factor in mitigating financial and overall macroeconomic distress.

Keywords:   droughts, floods, financial distress, farm incomes, mortgage foreclosure rates, bank failures, extreme weather, Kansas, Oklahoma

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