DID MONETARY FORCES cause the Depression? To this question a partial answer may now be given: There is no evidence of any effective deflationary pressure from the banking system between the stock-market crash in October 1929 and the British abandonment of the gold standard in September 1931.
The evidence for this answer is in two parts. First, if there had been deflationary monetary pressure, it would have had to be visible in the financial markets. This is not to say that the monetary pressure would have had to work exclusively through financial interest rates, although it might have. It is only to say that the pressure could not have bypassed the financial markets entirely. And, as argued in Chapter IV, this pressure would have shown up sharply in short-term interest rates. At the time when the monetary pressure was applied to the economy, a temporary rise in these interest rates should have been visible. If the pressure was strong--strong enough to send the economy into its deepest depression--then the rise should have been dramatic and obvious.
Yet there was no rise in short-term interest rates in this two-year period. The path of short-term interest rates is perfectly clear. They declined steadily from the stock-market crash to the end of the gold standard in the fall of 1931. Other rates of return moved in other directions, but these contrary movements appear to have been related to the increase in risk that accompanied the Depression and a decrease in people's desire to hold risky assets. The presence of various kinds of risks in the markets for these other assets makes them poor vehicles to use in spotting a monetary contraction. The relevant record for the purpose of identifying a monetary restriction is the record of shortterm interest rates.