Fellow financial historians,

This week marks the first step in a series of updates to the Financial History: Sunday Reads posts. I’m excited about the new format, and I hope you enjoy it as well. If you haven’t subscribed to the newsletter yet, you can fix that here!

Chart of the Week: Junk Bond Yields Since 1929

Financial History: Primary Source of the Week

Sunday Reads

  • A History of Junk Bonds
    • In a period decades before the ‘Junk Bond King’, Michael Milken, rose to notoriety in the 1980s, this paper analyzes the behavior of junk bonds in the Great Depression. The article assesses five different areas:
      1. Was There a Decline in Lending Standards the Late 1920s?
      2. Did the First Banking Crisis Produce a Fire Sale of Junk Bonds?
      3. Did the Cost of Credit Remain High throughout the 1930s?
      4. Was There a Liquidity Trap in the 1930s?
      5. Were Junk Bonds a Leading Indicator?

Yields of Corporate Bonds, 1910-55.

  • Microbes and Markets: Was the Black Death an Economic Revolution?
    • There are some moments or events in history that irrevocably change the course of human progress. The Black Death or bubonic plague in Medieval Europe, is a perfect example. How did the Black Death effect markets, though? Is it a coincidence that ‘the Return on Capital did fall from 10% around 1300 to about 5% by 1400, the biggest change in English history’?

  • Anticipating the Stock Market Crash of 1929: The View from the Floor of the Stock Exchange
    • Everyone saw the crisis coming after it’s occurred. One just has to think about the number of investors claiming to have predicted the 2008 crisis after the fact. However, looking at the price of a seat on the New York Stock Exchange during the 1920s, evidence suggests that brokers appear to have anticipated the 1929 crash, but investors were in the dark.
      • Rising stock prices and volume should have driven up seat prices during the boom of 1929; instead there were negative cumulative abnormal returns to seats of approximately 20% in the months just before the crash.’
  • Financial Asset Ownership and Political Partisanship: Liberty Bonds and Republican Electoral Success in the 1920s
    • There is a well known correlation between the strength of the economy, and the results of Presidential elections. If the economy is good, sitting presidents tend to get re-elected. This paper dives into a similar situation in the 1920s involving Liberty Bonds.
      • We find that counties with higher liberty bond ownership rates turned against the Democratic Party in the presidential elections of 1920 and 1924. This was a reaction to the depreciation of the bonds prior to the 1920 election (when the Democrats held the presidency), and the appreciation of the bonds in the early 1920s (under a Republican president), as the Fed raised and then subsequently lowered interest rates.’
  • Measuring Technological Innovation over the Long Run
    • ‘We use textual analysis of high-dimensional data from patent documents to create new indicators of technological innovation. We identify significant patents based on textual similarity of a given patent to previous and subsequent work: these patents are distinct from previous work but are related to subsequent innovations. Our measure of patent significance is predictive of future citations and correlates strongly with measures of market value. We identify breakthrough innovations as the most significant patents those in the right tail of our measure – to construct indices of technological change at the aggregate, sectoral, and firm level. Our technology indices span two centuries (1840-2010) and cover innovation by private and public firms, as well as non-profit organizations and the US government. These indices capture the evolution of technological waves over a long time span and are strong predictors of productivity at the aggregate, sectoral, and firm level.’