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http://ssrn.com/abstract=226690
 
 

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


Ben S. Bernanke


Federal Reserve Board

Harold James


Princeton University - Department of History; National Bureau of Economic Research (NBER)

October 1990

NBER Working Paper No. w3488

Abstract:     
Recent research has provided strong circumstantial evidence for the proposition that sustained deflation -- the result of a mismanaged international gold standard -- was a major cause of the Great Depression of the 1930s. Less clear is the mechanism by which deflation led to depression. In this paper we consider several channels, including effects operating through real wages and through interest rates. Our focus, however, is on the disruptive effect of deflation on the financial system, particularly the banking system. Theory suggests that falling prices, by reducing the net worth of banks and borrowers, can affect flows of credit and thus real activity. Using annual data for twenty-four countries, we confirm that countries which (for historical or institutional reasons) were more vulnerable to severe banking panics also suffered much worse depressions, as did countries which remained on the gold standard. We also find that there may have been a feedback loop through which banking panics, particularly those in the United States, intensified the worldwide deflation.

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Date posted: July 15, 2004  

Suggested Citation

Bernanke, Ben S. and James, Harold, The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison (October 1990). NBER Working Paper No. w3488. Available at SSRN: http://ssrn.com/abstract=226690

Contact Information

Ben S. Bernanke (Contact Author)
Federal Reserve Board
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Harold James
Princeton University - Department of History ( email )
Princeton, NJ 08544
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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