Do economic shocks inflame political unrest? To answer this question, we study a natural experiment from 1930s China, where the 1933 U.S. Silver Purchase program acts as a shock to bank lending. This setting eliminates potential confounding effects of policy, narrows the set of relevant social actors (factory workers and the Communist Party), and provides an exogenous shock to credit, limiting the scope for reverse causality. We assemble a novel, hand-collected dataset of loan contracts between banks and individual firms, labor unrest episodes, and underground Communist Party penetration. We show that the Silver Purchase shock results in a severe credit contraction, and that firms borrowing from banks with a larger exposure to the shock experience increased labor unrest and Communist Party penetration among their workers. These findings contribute to understanding the socio-political consequences of credit, and more in general economic, shocks.

Credit, Labor, and Political Unrest: Evidence from 1930s China

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