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Uncertainty as a Propagating Force in The Great Depression

Published online by Cambridge University Press:  03 March 2009

J. Peter Ferderer  and
David A. Zalewski
J. Peter Ferderer
Affiliation:
Assistant Professor of Economics, Clark University, Worcester, MA 01610, and Research Scholar, The Jerome Levy Economics Institute of Bard College, Annandale-On-Hudson, NY 12504.
David A. Zalewski
Affiliation:
Assistant Professor of Finance, Providence College, Providence, RI 02198.
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Abstract

This article argues that the banking crises and collapse of the international gold standard in the early 1930s contributed to the severity of the Great Depression by increasing interest-rate uncertainty. Two pieces of evidence support this conclusion. First, uncertainty (as measured by the risk premium embedded in the term structure of interest rates) rises during the banking crises and is positively linked to financial-market volatility associated with the breakdown in the gold standard. Second, the risk premium explains a significant proportion of the variation in aggregate investment spending during the Great Depression.

Type
Articles
Information
The Journal of Economic History , Volume 54 , Issue 4 , December 1994 , pp. 825 - 849
Copyright
Copyright © The Economic History Association 1994

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