Temin, "Transmission of the Great Depression"


  • Gold standard was primary mode by which the Great Depression was transmitted through the international community.
  • National banks attempts to keep currency pegged to gold resulted in adjustments to domestic prices instead of currency prices.
  • Result was decreased demand both domestically and internationally.


  • 1st half of paper focuses on hwo the gold standard contributed to the great depression.
  • Second half of the paper is a model of how banking and currency crises are bad for national economies and how they spread


part 1: Gold Standard Contributions:

  • Gold standard defined for the "great depression":
    • free flow of gold between individuals and countries.
    • maintenance of fixed values of national currencies in terms of gold and therefore each other
    • absence of an international cooordinating or lending organization like the IMF
    • an asymmetry between coutnries experiencing balance of payments deficits and surpluses
    • Most important: countries chose to deflate prices rather than devalue currency - change in domestic prices vs. change in

exchange rate.

  • last bullet most important because deflating domestic prices caused
    • reduction of production in the affected country
    • reduction in imports in affected country - which then lead to reductions of production in other countries
    • overall effect was declining aggregate demand domestically and internationally
      • Declining aggregate demand moved countries down an upward-sloping aggregate supply curves.
  • gives examples of how various national banks did things that were detrimental to their national economies to maintain the fixed

values of national currencies under gold system (this is somewhat like Rogoff's tough central banker - except hates the gold

standard to shift vs. inflation)

  • gold standard mentality decreed that external balance was primary
  • Going off gold
    • was the only way to stop economic decline
    • severed connection between balance of payments and domestic prices
    • allowed countries to change interest rates or allow production to increase without creating a currency crisis
    • changes in exchange rate mediated differences between domestic and international demand without impact on domestic prices

Part 2: Models of Spread

Offers three models of the spread of financial crises:

1. Financial panic knows no boundaries. Example of Britain and Germany functioning as one economy, whereas US was separate

economy. But within US, Chicago was linked to NYC.

2. Banks in a panic sell assets abroad to raise cash. The neighbors are not infected by the panic; they get into trouble by

their attempts to help the ailing banking system.

3. Related to gold standard. Asymmetries between countries with large economies and countries with small economies. Capital

"outflows" in large countries resulted in changes in ownership of capital, but most of capital remained in the country. This was

opposed to small countries where capital flowed out. Banking systems in small countries were more vulnerable than those in large