Journal of Economics and Management Volume 15, No. 2 August, 2019

Room for Maneuver and Alternatives: A Reinterpretation of the German Crisis of 1931

Kuo-chun Yeh

Institute of National Development, National Taiwan University, Taiwan.

Tai-kuang Ho

Department of Economics, National Taiwan University, Taiwan University, Taiwan.

Mengyuan Cai

School of Economics, Hefei University of Technology, China.

Abstract

This paper revisits the German crisis of 1931, emphasizing that the cause of the crisis was borrowing in a currency that a sovereign cannot control and the resulting high level of foreign currency-denominated debt. We suggest that the deflationist policy of Heinrich Brüning was not due to gold-standard mentality, but because in a sovereign default he was forced to adopt fiscal austerity and not the other, even though such a policy was deemed to be self-defeating amid the crisis. Moreover, the much stated trade-off between the maintenance of the gold standard and the Reichsbank’s role as lender of last resort or that the banking crisis could have been voided if the Reichsbank was not committed to the maintenance of the gold standard is nothing but an illusion.

Keywords：Lender of Last Resort, Sovereign Default, Incomplete Monetary Union, Gold-Standard Mentality.

JEL Classifications：E58, F32, G01, N14.

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