Pnt research has providel stron circntantial evidence for the prcçositici that sustainI deflation-the result of a mismanaged international gold starxard-was a major cause of the Great Depression of the 1930s. Less clear is the itcthanism by 'which deflation led to depression. In this paper cnsider several channels, I luflr effects cperatir thrcuh real wages anl thrgh interest rates. CXr foo.s, however, is on the disruptive effect of deflation on the financial system, partiQllarly the bankirq system. Thecry su3gests that fan ir prices, by reducixxj the net worth of banks arri borrowers, cn affect flows of credit ard thus real activity. Usir annual data for twenty-four cxxintries, we confirm that cxxmtries 'which (for historical or institutional reasons) were nre vulnerable to severe banJd.n panics also suffered iaidi worse depressions, as did intries which reained on the gold stardard. We also fird that there may have been a feedback locp thrh which bankIrx panics, partioularly those in the United States, intensified the worldwide deflation.

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At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w26300.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.