The German crisis of 1931: evidence and tradition

The German currency was controlled and German banks closed in July 1931. Does it matter whether poor currency management or poor banking practice led to the crisis? This paper argues that it does—because the choice indicates which decisions led to the Great Depression. This issue is so emotional that evidence has been subordinated to tradition in recent academic discussion. Data and economic analysis indicate clearly that the crisis originated in the currency, not the banks. The most useful model for this crisis is Krugman’s first generation model of financial crises.