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December 1985

The Farm Credit Crisis: Will It Hurt the Whole Economy?

by Michael T. Belongia and R. Alton Gilbert

R. Alton Gilbert. Whether farm loan losses will harm aggregate economic activity is quite important since, to a large extent, greater federal aid to farmers and their lenders is being justified by some legislators on this basis. Belongia and Gilbert examine the effects of farmers’ financial problems on general economic activity in several ways. Looking at data since 1981, when farm sector loan problems began to arise, they do not find the kinds of effects described in studies that project adverse effects on the economy from farm financial problems. They then review data for the 1920s when a similar financial crisis was concentrated in the farm sector. This earlier episode also fails to reveal any strong links between losses on farm loans and general economic activity. Overall, Belongia and Gilbert conclude there is little historical evidence to support the assertion that farm loan losses imperil aggregate economic activity.