Breaking the Fetters: Why Did Countries Exit the Interwar Gold Standard?

Abstract

The slow demise of the interwar gold standard figures prominently in explanations of the spread and depth of the Great Depression. The reluctance of some countries to shed their golden fetters is puzzling in the face of the visible gains enjoyed by early quitters. We explore four hypotheses explaining these divergent choices by countries, focusing on different economic shocks, differences in the perceived credibility costs of exiting, different domestic political considerations and mentality and network effects. In a panel dataset comprising both core and periphery countries, we find support for all four explanations.

Keywords: Great Depression, Interwar Gold Standard, Political Economy, Exchange Rate Regimes

JEL Classification: N10, F31, F33