Crisis? What Crisis? Currency vs. Banking in the Financial Crisis of 1931∗ Albrecht Ritschl Samad Sarferaz LSE and CEPR ETH Zurich Dept. of Economic History KOF Swiss Economic Institute Houghton Street Weinbergstrasse 35 London WC2A 2AE, UK 8092 Zurich, Switzerland Phone: +44-20-7795-6482 Phone: +41-44-632-4683 E-mail:
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[email protected] December 2, 2010 Abstract This paper examines the role of currency and banking in the German financial crisis of 1931 for both Germany and the U.S. We specify a structural dynamic factor model to identify financial and monetary factors separately for each of the two economies. In contrast to conventional wisdom, we find only a minor role for monetary policy transmission, while financial distress was important. Monetary or financial crisis prop- agation from the U.S. to Germany was weak. Instead there is evidence of substantial crisis transmission from Germany to the U.S. via the banking channel. We also find major real effects of the 1931 crisis on both economies, again transmitted via the bank- ing channel. Financial distress itself responded more strongly to real than to monetary factors. Results confirm Bernanke's (1983) conjecture that a non-monetary financial channel of crisis propagation was operative in the Great Depression. JEL: N12, N13, E37, E47, C53 Keywords: Great Depression, banking channel, 1931 financial crisis, international business cycle transmission, factor analysis ∗This research was funded by Deutsche Forschungsgemeinschaft under Collaborative Research Project SFB 649. Samad Sarferaz acknowledges financial support by the European Science Foundation via the Globalizing Europe Economic History Network and the Marie Curie Research Training Networks, and thanks the University of Zurich and the European University Institute in Florence for their hospitality.