Credibility of the Interwar Gold Standard, Uncertainty, and the Great Depression

Abstract

While the causes of the collapse of cooperation in maintaining the international gold standard are subject to debate (the lack of a dominant central bank to coordinate global monetary policy versus the nonreflection of disparate inflation rates in exchange rate parities, for example), there is general agreement over the transmission method that lead to the breakdown, namely, that contractionary monetary policies were enacted in order to maintain the standard, and that these policies were exported to other countries. This breakdown in cooperation resulted in the standard's loss of credibility, causing monetary authorities to shift policy priorities toward defending exchange rate parities, and thus injected massive interest rate uncertainty into the economy, which in turn, lead to a large reduction in aggregate spending. Ferderer proposes that interest rate uncertainty was an additional transmission mechanism leading to the collapse of the interwar gold standard. He supports this thesis first through the construction of a theoretical model and then with an empirical analysis.