The dynamics of consumption and investment in the late Victorian economy

"There is currently a revival of interest in the economic history of the interwar period, particularly in the Great Depression of the 1930s. When the economy is experiencing severe difficulties, there is a tendency for economists to re-evaluate previous episodes in an attempt to understand the working of the economy and to see if the policies undertaken in the past suggest potential solutions to the current situation. The last upsurge of interest occurred during the early 1980s, when unemployment emerged as a major problem facing most advanced economies. It is not surprising that the recent financial crisis and the resulting recession have aroused renewed interest in the 1930s. In this paper we examine the impact of the financial crisis of 1931, culminating in the suspension of the gold standard in September 1931. By doing so, we add to the existing literature by investigating the events leading up to the financial crisis and how the authorities undertook policies to avert a fully blown banking crisis. Secondly, we present some simulations using an econometric model designed to explore both the effects of the Great Depression on the British economy and the forces making for recovery in the later 1930s. The first part of the paper contains a review of the historical evidence on the course of the crisis, followed an attempt to match this account with the more recent literature on currency crises. In the second part of the paper the simulations are carried out using a previously published model, which has been updated in some respects."