Currency Versus Banking in the Financial Crisis of 1931

Abstract

During the 1920s, Germany was the world's largest capital importer, financing reparations through U.S. credits. We examine financial channels in crisis transmission between these two countries around the German financial crisis of 1931. We specify a structural dynamic factor model to identify financial and monetary factors separately for each of the two economies. We find substantial crisis transmission from Germany to the United States via the financial channel, while monetary or financial crisis transmission from the United States to Germany was weak. We also find major real effects of the 1931 crisis on both economies, again transmitted via the financial channel.

Liquidating Bankers’ Acceptances: International Crisis, Doctrinal Conflict and American Exceptionalism in the Federal Reserve 1913-1932

“…Future research would do well in collecting information on the amount of frozen continental European acceptances held by banks outside New York. Although Ritschl and Sarferaz (2014) have provided empirical evidence on financial factors in the transmission of the international financial crisis from Europe to the United States in 1931, this banking channel has largely been rejected in favor of the monetary "golden fetters" transmission channel (Richardson andVan Horn, 2009, 2018). However, this literature has so far only considered the effect on the New York money market, neglecting the fact that New York's accepting banks organized revolving syndicate credit lines, which extended all the way to institutions such as the Fidelity Trust Bank in Kansas, the Guardian Trust Company in Cleveland or to Continental Illinois in Chicago.…”

“…Since acceptances were commercial credits, they fell under the transfer protection clause of the Dawes Plan, which made them senior to reparations in the event of a foreign debt crisis. This provided an incentive to foreign lenders, as the risk of default decreased with the transfer protection clause (Ritschl, 2002). 19 Competing with London, the U.S. was hoping that Germany would hold at 15 These different categories are acceptances based on (1) U.S. imports, (2) U.S. exports, (3) shipment within the U.S., (4) storage in U.S. warehouses, (5) furnishing dollar exchange and (6) storage in and shipment between foreign countries.…”

“…Moreover,Ritschl (2002) has argued that the Dawes Plan provided an incentives for German policy makers to undermine reparations payments and when seniority was reversed under the Young Plan, foreign lending halted. Although short-term credits based on acceptances increased until early 1931, this does not refuteRitschl's (2002) argument, since since short-term credits could have compensated for the decline in long-term lending.…”

Reparations, Deficits, and Debt Default: The Great Depression in Germany

“…Given that her debt was gold denominated, Germany opted for capital controls instead of open devaluation, a decision largely due to creditor pressure: U.S. negotiators signalled to the Germans during 1931 that imposing capital controls would be more acceptable than open devaluation and default on the gold clauses in the loan contracts (Ritschl, 2002). Last, the German crisis provides lessons about the international repercussions of a large economy defaulting, including transatlantic feedbacks on the U.S. economy (Ritschl and Sarferaz, 2010), the breakup of fixed exchange rate arrangements (Accominotti 2011) and the increase of protectionism.…”

Zum Versagen der Marktdisziplinierung in der Finanzkrise

“…Allerdings sind solche Ergebnisse nicht robust gegenüber Strukturbrüchen und Vorzeichenfehlern. Ritschl und Sarferaz (2010) finden deutliche Evidenz für negative Effekte der US‐Geldpolitik erst in der Spätphase der Rezession ab September 1931.…”