UNCERTAINTY AS A PROPAGATING FORCE IN THE GREAT-DEPRESSION

This article argues that the banking crises and collapse of the intern ational gold standard in the early 1930s contributed to the severity o f the Great Depression by increasing interest-rate uncertainty. Two pi eces of evidence support this conclusion. First, uncertainty (as measu red by the risk premium embedded in the term structure of interest rat es) rises during the banking crises and is positively linked to financ ial-market volatilty associated with the breakdown in the gold standar d. Second, the risk premium explains a significant proportion of the v ariation in aggregate investment spending during the Great Depression.