Railroad Bailouts in the Great Depression

TL;DR

This paper examines the effects of government bailouts on U.S. railroads during the Great Depression, finding limited impact on employment and bond defaults but increased wages and bond prices, with spillover benefits to nearby manufacturing firms.

Contribution

It provides empirical evidence on the limited economic impact of railroad bailouts during the Great Depression and highlights spillover effects on local manufacturing firms.

Findings

Bailouts increased employee wages.

Bailouts raised bond prices and reduced downgrades.

Limited effect on employment and bond default rates.

Abstract

The Reconstruction Finance Corporation and Public Works Administration loaned 50 U.S. railroads over $1.1 billion between 1932 and 1939. The government goal was to decrease the likelihood of bond defaults and increase employment. Bailouts had little effect on employment, instead they increased the average wage of their employees. Bailouts reduced leverage, but did not significantly impact bond default. Overall, bailing out railroads had little effect on their stock prices, but resulted in an increase in their bond prices and reduced the likelihood of ratings downgrades. We find some evidence that manufacturing firms located close to railroads benefited from bailout spillovers.