Abstract:
How did the 1931 financial crisis propagate internationally? This paper compares the effect of the Central European panic of the summer 1931 on the US and British banking systems. I rely on new archival data and document a key difference between the United States and Britain in how Central European credits were distributed across banks. In Britain, most of the lending to Central Europe was done by small banks with high levels of exposure relative to their capital. In the United States, most of the lending to Central Europe was done by big banks with low levels of exposure relative to their capital. The freeze of Central European assets therefore left many more British banks insolvent than US banks. The structure of informational asymmetries within the banking system accounts for the distribution of German credits in both countries. This explains why the Central European crisis propagated to London and not New York in the summer of 1931.