• E44;
  • E50;
  • N12
  • Great Depression;
  • commercial paper;
  • financial frictions;
  • credit rationing

Consistent with theories of financial frictions, this study finds that higher corporate risk premia and flight-to-quality events contributed to the increased use of a collateralized form of business lending (bankers acceptances) in real levels and relative to that of noncollateralized commercial paper (which plunged) during the Great Depression. These short-lived instruments are more timely measures of credit availability than are bank/business failures and bank loan outstandings. These shifts in the composition of external finance were large, supporting the view that financial frictions rose and credit availability fell during the Great Depression.