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Was the Great Deflation of 1929-33 inevitable?

Vol. 7, No 2, 2014


Marek A. Dąbrowski

Cracow University of Economics


Was the Great Deflation of

1929–33 inevitable?

Received: June, 2014

1st Revision: September, 2014

Accepted: October, 2014


ABSTRACT. This paper re-examines the recent and provocative hypothesis that the Great Deflation of 1929–33 was an inevitable consequence of the return to the gold convertibility of currencies at pre-war parities. An alternative hypothesis, that the relative prices of gold tended to gravitate to one another, is put forward in this paper. This hypothesis is derived from the conventional gold standard model and Cassel’s well known insights on purchasing power of currency. Empirical evidence lends support to the alternative hypothesis: even though the relative price of gold returned to its pre-war level by 1931, the adjustment process was mainly driven by differences between countries rather than the absolute deviation from the pre-war level.


DOI: 10.14254/2071-8330.2014/7-2/4

JEL Classification:  F31, F44, N10, E31

KeywordsGreat Deflation, international gold standard, purchasing power, real exchange rate