The Adversity/Hysteresis Effect: Depression Era Productivity Growth in the U.S. Railroad Sector

Throughout its history the United States has endured cycles of fi nancial boom and bust. Boom periods have been marked by weakened or absent regulation of the fi nancial sector and a growing willingness on the part of households, nonfi nancial businesses, and fi nancial businesses to hold riskier assets and to fi nance these positions with higher leverage (higher debt to equity ratios). These twin engines fuel fi nancial sector profi ts and remuneration so long as asset prices continue to appreciate, but they (especially the trend toward higher leverage) render the system vulnerable when asset bubbles burst. In the boom phase, as the fi nancial system becomes more interconnected, with narrowing capital cushions and complex webs of rights to receive from and obligations to pay to, it becomes more fragile and vulnerable. The failure of one fi nancial institution now has the potential to bring down others like a row of dominoes, with the potential for severe impacts on the real economy as credit fl ows seize up (Minsky 1986)