“Escaping” the Great Depression: monetary policy, financial crises and banking in Spain, 1921-1935

Abstract

This thesis contributes to the historiography of the Gold Standard and the Great Depression by addressing the performance of the Spanish financial sector during the period 1921-1935. Spanish policymakers' options were very limited to respond to the shocks that hit the country during that period. Spain experienced a severe economic contraction during the 1930s, especially during 1931, when depositors ran on banks and the exchange rate continued to deteriorate rapidly. My argument is in contrast with the traditional account that depicts Spain as having escaped the Great Depression because its currency was not convertible to gold and because it did not experience widespread or large bank failures. I argue that exchange rate depreciation did not add to banking stability, but actually transformed the 1931 banking crisis into a twin crisis, a common feature of both the Interwar Period and the more recent emerging market financial crises. Moreover, the sharp drop in asset prices added pressure to bank balance sheets, when liabilities were already under stress. The thesis has four substantive chapters. First, I document the conflicting goals that appeared between the monetization of public debt by the banking sector and the stabilization of the exchange rate between 1928 and 1931, when the Spanish peseta depreciated rapidly. Second, I show that this depreciation limited monetary policy options when depositors ran on banks in the spring of 1931. Bank loans contracted severely due to the limitations on how much emergency liquidity could be provided, thus helping to understand the collapse in private investment that the country experienced. Third, I analyse the reasons and the consequences of the allocation of emergency liquidity at the bank-level. In the last chapter I provide a novel explanation for why Spain did not see widespread bank failures during the Great Depression, in contrast to other countries