Hostname: page-component-8448b6f56d-c4f8m Total loading time: 0 Render date: 2024-04-18T18:12:47.980Z Has data issue: false hasContentIssue false

London Merchant Banks, the Central European Panic, and the Sterling Crisis of 1931

Published online by Cambridge University Press:  12 March 2012

Lecturer, London School of Economics and Political Science, Houghton Street, London, WC2A 2AE, United Kingdom. E-mail:


The Central European panic of the spring 1931 is often presented as a cause of the sterling crisis of September. But what was the transmission channel? This article explores how the continent's financial troubles affected Britain's banking system. The freeze of Central European assets created a liquidity strain for London merchant banks because they had accepted (guaranteed) the commercial bills of German merchants. I use new balance sheet data to quantify this shock and explore how the liquidity crisis contributed to the sterling crisis. The evidence demonstrates that international contagion was crucial in transmitting the 1931 global financial crisis.

Copyright © The Economic History Association 2012

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)



Accominotti, Olivier. “The Sterling Trap: Foreign Reserves Management at the Bank of France, 1928–1936.” European Review of Economic History 13, no. 3 (2009): 349–76. DCrossRefGoogle Scholar
American International Group Inc. 2007 Annual Report. New York: AIG, 2007.Google Scholar
Archives, Bank of England, various years.Google Scholar
Archives, Bank of France, Cours des Changes, 1377200101/9. Weekly data, 1–9/1931 (Paris quotations).Google Scholar
Balogh, Thomas, Studies in Financial Organization. Cambridge: Cambridge University Press, 1947.Google Scholar
Bank for International Settlements. Second Annual Report. Basel: Bank for International Settlements, 1932.Google Scholar
Baster, A.S. J.“The International Acceptance Market.” American Economic Review 27, no. 2 (1937): 294304.Google Scholar
Billings, Mark, and Forrest, H. Capie. “Financial Crisis, Contagion, and the British Banking System Between the World Wars.” Business History 53, no. 2 (2011): 193215.CrossRefGoogle Scholar
Burk, Kathleen. Morgan Grenfell, 1838–1988: The Biography of a Merchant Bank. Oxford: Oxford University Press, 1989.Google Scholar
Cairncross, Alec, and Eichengreen, Barry. Sterling in Decline. 2nd Edition. Oxford: Basil Blackwell, 2003.CrossRefGoogle Scholar
Capie, Forrest H., Mills, Terence, and Geoffrey, E. Wood. “What Happened in 1931?” In Financial Crises and the World Banking System, edited by Capie, Forrest H. and Wood, Geoffrey E., 120–48. London: Macmillan, 1986.CrossRefGoogle Scholar
Chang, Roberto, and Velasco, Andrés. “Financial Fragility and the Exchange Rate Regime.” The Journal of Economic Theory 92, no. 1 (2000): 134.CrossRefGoogle Scholar
Chapman, Stanley. The Rise of Merchant Banking. Cambridge: Cambridge University Press, 1984.Google Scholar
Committee on Finance and Industry (Macmillan Committee). Report of the Committee on Finance and Industry. London: H. M. Stationery Office, 1931a.Google Scholar
Committee on Finance and Industry (Macmillan Committee). Minutes of Evidence. London: H. M. Stationery Office, 1931b.Google Scholar
Diaper, Stefanie. “Merchant Banking in the Interwar Period: The Case of Kleinwort, Sons & Co.” Business History 28, no. 4 (1986): 5576.CrossRefGoogle Scholar
Eichengreen, Barry. Golden Fetters: The Gold Standard and the Great Depression. Oxford: Oxford University Press, 1992.Google Scholar
Eichengreen, Barry, and Flandreau, Marc. “The Federal Reserve, the Bank of England, and the Rise of the Dollar as an International Currency, 1914–1939.” BIS Working Paper No. 328, 2010.CrossRefGoogle Scholar
Eichengreen, Barry, and Jeanne, Olivier. “Currency Crisis and Unemployment: Sterling in 1931.” In Currency Crises, edited by Krugman, Paul, 746. Chicago: Chicago University Press, 2000.Google Scholar
Eichengreen, Barry, and Jeffrey, D. Sachs. “Exchange Rates and Economic Recovery in the 1930s.” The Journal of Economic History 45, no. 4 (1985): 925–46.CrossRefGoogle Scholar
Eichengreen, Barry, and Jeffrey, D. Sachs. “Competitive Devaluation and the Great Depression: A Theoretical Reassessment.” Economics Letters 22, no. 1 (1986): 6771.CrossRefGoogle Scholar
Einzig, Paul. The Tragedy of the Pound. London: Kegan Paul, Trench, Trubner & Co., Ltd., 1932.Google Scholar
Ellis, Howard S.“Exchange Control in Austria and Hungary.” Quarterly Journal of Economics 54, no. 1 (1939): 1185.CrossRefGoogle Scholar
Ferderer, J. Peter. “Institutional Innovation and the Creation of Liquid Financial Markets: The Case of Bankers' Acceptances, 1914–1934.” The Journal of Economic History 63, no. 3 (2003): 666–94.CrossRefGoogle Scholar
Ferguson, Thomas, and Temin, Peter. “Made in Germany: The German Currency Crisis of July 1931.” Research in Economic History 21 (2003): 153.CrossRefGoogle Scholar
Forbes, Neil. “London Banks, the German Standstill Agreements, and ‘Economic Appeasement’ in the 1930s.” The Economic History Review 40, no. 4 (1987): 571–87.Google Scholar
Franéois-Marsal, Frédéric. Encyclopédie de Banque et de Bourse. Paris: Imprimerie Crété, 1930–1931.Google Scholar
Friedman, Milton, and Anna, J. Schwartz. A Monetary History of the United States, 1867–1960. Princeton, NJ: Princeton University Press, 1963.Google Scholar
Greengrass, H.W.The Discount Market in London: Its Organization and Recent Developments. London: Sir I. Pitman and Sons Ltd., 1930.Google Scholar
Guinnane, Timothy W. “Financial Vergangenheitsbewéltigung: The 1953 London Debt Agreement.” Yale University Economic Growth Center Discussion Paper No. 880, 2004.Google Scholar
Harris, Charles R.S.Germany's Foreign Indebtedness. Oxford: Oxford University Press, 1935.Google Scholar
Hawtrey, Ralph G.Currency and Credit. London: Longmans, Green & Co., 1930.Google Scholar
James, Harold. The End of Globalization: Lessons from the Great Depression. Cambridge, MA: Harvard University Press, 2001.Google Scholar
James, Harold. The Creation and Destruction of Value: The Globalization Cycle. Cambridge, MA: Harvard University Press, 2009.Google Scholar
Kaminsky, Graciela L., and Carmen, M. Reinhart. “The Twin Crises: The Causes of Banking and Balance of Payments Problems.” The American Economic Review 89, no. 3 (1999): 473500.CrossRefGoogle Scholar
Keynes, John M.“War and the Financial System, August, 1914.” The Economic Journal 24, no. 95 (1914): 460–86.CrossRefGoogle Scholar
Keynes, John M.The Economic Consequences of Mr. Churchill. London: L. and G. Woolf, 1925.Google Scholar
Kirkaldy, Adam W.British Finance During and After the War, 1914–1921. London: I. Pitman, 1921.Google Scholar
League of Nations. Statistical Year-Book of the League of Nations. Geneva: League of Nations, 1930–1932.Google Scholar
Maddison, Angus. Monitoring the World Economy, 1820–1992. Paris: OECD Development Centre Studies, 1995.Google Scholar
Matthews, Kent G.P.“Was Sterling Overvalued in 1925?” The Economic History Review 39, no. 4 (1986): 572–87.Google Scholar
Moggridge, Donald E.British Monetary Policy, 1924–1931: The Norman Conquest of $ 4.86. Cambridge: Cambridge University Press, 1972.Google Scholar
Morton, Walter A.British Finance, 1930–1940. Madison: The University of Wisconsin Press, 1943.Google Scholar
Orbell, John. Baring Brothers & Co., Limited: A History to 1939. London: Baring Brothers & Co., Limited, 1985.Google Scholar
Richardson, Gary, and Van Horn, Patrick. “Intensified Regulatory Scrutiny and Bank Distress in New York During the Great Depression.” The Journal of Economic History 69, no. 2 (2009): 446–65.CrossRefGoogle Scholar
Ritschl, Albrecht, and Sarferaz, Samad. “Crisis? What Crisis? Currency vs. Banking in the Financial Crisis of 1931.” Humboldt University SFB 649 Discussion Paper, no. 2010–014 (2010).CrossRefGoogle Scholar
Roberts, Richard. Schréders: Merchants and Bankers. London: Macmillan, 1992.CrossRefGoogle Scholar
Sayers, Richard S.The Bank of England, 1891–1944. Cambridge: Cambridge University Press, 1976.Google Scholar
Schnabel, Isabel. “The German Twin Crisis of 1931.” The Journal of Economic History 64, no. 3 (2003): 822–71.CrossRefGoogle Scholar
Schnabel, Isabel. “The Role of Liquidity and Implicit Guarantees in the German Twin Crisis of 1931.” Journal of International Money and Finance 28, no. 1 (2009): 125.CrossRefGoogle Scholar
Schnabel, Isabel, and Shin, Hyun Song. “Liquidity and Contagion: The Crisis of 1763.” Journal of the European Economic Association 2, no. 6 (2004): 929–68.CrossRefGoogle Scholar
Schubert, Aurel. The Credit-Anstalt Crisis of 1931. Cambridge: Cambridge University Press, 1991.Google Scholar
Steffenburg, E. “Merchant Banking in London.” In Current Financial Problems of the City of London: A Series of Lectures Delivered at the Institute of Bankers International Summer School, 60–78. London: Europa Publications, 1949.Google Scholar
Temin, Peter. “Transmission of the Great Depression.” The Journal of Economic Perspectives 7, no. 2 (1993): 87102.CrossRefGoogle Scholar
The Economist, various dates.Google Scholar
Truptil, Roger J.British Banks and the London Money Market. London: Jonathan Cape Ltd., 1936.Google Scholar
Vigreux, Pierre-Benjamin. Le Credit par acceptation: Paris centre financier. Paris: Marcel Riviére, 1932.Google Scholar
Wandschneider, Kirsten. “Central Bank Reaction Functions During the Interwar Gold Standard: A View from the Periphery.” In The Origins and Development of Financial Markets and Institutions from the Seventeenth Century to the Present, edited by Atack, Jeremy and Neal, Larry D., 388415. Cambridge: Cambridge University Press, 2009.CrossRefGoogle Scholar
Williams, David. “London and the 1931 Financial Crisis.” The Economic History Review 15, no. 3 (1963): 513–28.CrossRefGoogle Scholar
Williamson, Philip. “A ‘Bankers’ Ramp'? Financiers and the British Political Crisis of August 1931.” The English Historical Review 99, no. 393 (1984): 770806.CrossRefGoogle Scholar
Williamson, Philip. National Crisis and National Government: British Politics, the Economy, and Empire, 1926–1932. Cambridge: Cambridge University Press, 1992.Google Scholar