Uncertainty as a Propagating Force in The Great Depression

This article argues that the banking crises and collapse of the international gold standard in the early 1930s contributed to the severity of the Great Depression by increasing interest-rate uncertainty. Two pieces of evidence support this conclusion. First, uncertainty (as measured by the risk prem...

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Bibliographic Details
Published in:The Journal of economic history 1994-12, Vol.54 (4), p.825-849
Main Authors: Ferderer, J. Peter, Zalewski, David A.
Format: Article
Language:English
Subjects:
Banking crises
Capital market
Economic crises
Economic depression
Economic history
Economic uncertainty
Financial crisis
Financial investments
Gold
Gold standard
Great Depression
History
Interest rates
Investment risk
Investment spending
Monetary policy
Risk premiums
U.S.A
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Summary:This article argues that the banking crises and collapse of the international gold standard in the early 1930s contributed to the severity of the Great Depression by increasing interest-rate uncertainty. Two pieces of evidence support this conclusion. First, uncertainty (as measured by the risk premium embedded in the term structure of interest rates) rises during the banking crises and is positively linked to financial-market volatility associated with the breakdown in the gold standard. Second, the risk premium explains a significant proportion of the variation in aggregate investment spending during the Great Depression.
ISSN:0022-0507
1471-6372
DOI:10.1017/S0022050700015503