The Economic Consequences of Foreclosure Suspensions in the Great Depression

We study the effects of mortgage forbearance on local economies and individuals. During the Great Depression, twenty-five states adopted foreclosure moratoria that temporarily disallowed lenders from seizing farms. By interrupting foreclosures during a crisis, forbearance policies can prevent fire sales, protect bank balance sheets, and dampen credit contractions. However, they may also raise the cost of capital and keep land in the hands of less productive operators. We empirically examine these trade-offs using county-level agricultural data and linked full-count census records. The results show that the moratoria protected at least 250,000 farms. Counties most exposed to mortgages—and hence foreclosure risk—experienced a persistent 15% increase in the number of farms. These protected farmers and their children were more likely to remain in agriculture and less likely to shift into manufacturing almost two decades after policy enactment. The policy pushed agricultural production toward smaller, more labor-intensive farms operating on more marginal land with lower capital intensity. By preventing consolidation, the policy depressed farm revenues and values. At the same time, the moratoria increased local borrowing costs by 10% during a period in which local interest rates converged significantly. We also find suggestive evidence that highly exposed counties developed weaker manufacturing sectors in the long run, consistent with slower labor reallocation out of agriculture. Taken together, we show that well-intentioned policies that temporarily suspend creditor remedies come with significant long-run trade-offs.