Two broad approaches dominate the literature on macroeconomics of the Great Depression. One, associated mainly with studies of the United States, emphasizes misguided policy responses at the national level as an explanation for the Depression's singular depth and long duration. The other, with a long tradition but associated prominently with the work of Charles Kindleberger, emphasizes instead the malfunctioning of the international system. The strength of the first approach is the transparency of the propagation mechanism, usually taken to be deflationary monetary trends. The weakness of the second is precisely the opposite, that the propagation mechanism tends to be opaque. It is not clear what dimension of the international system malfunctioned after 1929, nor through what channels its malfunctioning contributed to the Depression.

A prime suspect is surely the gold-exchange standard of the interwar years. That system was a hybrid, neither a pure gold standard like that which prevailed in various countries prior to World War I nor a fiat money system like that which succeeded the breakdown of Bretton Woods. As under a gold standard, countries were required to maintain convertibility between domestic currency and gold and to leave international gold movements unfettered. But they were permitted – indeed encouraged – to hold international reserves in the form of foreign exchange. This introduced into the operation of the gold standard “a new psychological element never present before the war.”