The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison

Pnt research has providel stron circntantial evidence for the prcositici that sustainI deflation-the result of a mismanaged international gold starxard-was a major cause of the Great Depression of the 1930s. Less clear is the itcthanism by 'which deflation led to depression. In this paper cnsider several channels, I luflr effects cperatir thrcuh real wages anl thrgh interest rates. CXr foo.s, however, is on the disruptive effect of deflation on the financial system, partiQllarly the bankirq system. Thecry su3gests that fan ir prices, by reducixxj the net worth of banks arri borrowers, cn affect flows of credit ard thus real activity. Usir annual data for twenty-four cxxintries, we confirm that cxxmtries 'which (for historical or institutional reasons) were nre vulnerable to severe banJd.n panics also suffered iaidi worse depressions, as did intries which reained on the gold stardard. We also fird that there may have been a feedback locp thrh which bankIrx panics, partioularly those in the United States, intensified the worldwide deflation.