International Liquidity Shocks, the Real Economy, and Social Unrest: China, 1931-1935

What are the social consequences of liquidity shocks? We answer this question relying on a natural experiment from 1930s China, where the money supply contracted as a consequence of the 1933 US Silver Purchase program. Using a novel, hand-collected data set of loan contracts to individual Chinese firms and labor unrest, we find that the resulting bank liquidity shock led to a widespread, large credit contraction. We also find that firms borrowing from banks with a larger exposure to the monetary shock were more likely to experience labor unrest. These findings support Milton Friedman’s (1992) conjecture that the US Silver Purchase program exacerbated social tensions in 1930s China, and contribute to our understanding of the (unintended) social consequences of liquidity shocks.