The German Twin Crisis of 1931
Using information on banks' balance sheets, we analyze the causal links between the banking and the currency problems in the German financial crisis of 1931. We find that the currency problems were caused by political shocks, while the problems in the banking sector were the result of excessive risk-taking by banks that were 'too big to fail'. Due to the high levels of foreign debt in the banking system, the run on the currency and the deposit withdrawals reinforced each other in a vicious circle and resulted in a banking panic and the abandonment of the gold standard.
|Date of creation:||11 Sep 2002|
|Note:||An earlier version of this paper circulated under my former surname Gödde. I would like to thank Martin Hellwig for his encouragement and advice. I also thank Michael Bordo, Christoph Buchheim, Timothy Guinnane, Gerd Hardach, Martin Summer, Peter Temin, seminar participants at the University of Mannheim, the International Monetary Fund, Deutsche Bundesbank, and Oesterreichische Nationalbank, and conference participants at the Verein für Socialpolitik for helpful comments and suggestions.|
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