Making Sense of the 1931 Financial Crisis and the Great Depression

Abstract

For some sixty years, the dominant narrative of the financial crisis of 1931 and Great Depression has been one of failure of central banks to cooperate and act as lenders of last resort. This historical narrative has become dominant and led to a marginalization of understanding the Great Depression as a result of an inherent instability of capitalism. Rather than arguing that one or the other of these narratives is true, in this article I examine how contemporary actors made retrospective sense of the European financial crisis of 1931 and how they used that history to shape lessons for uncertain futures. My approach is based on the concepts of sensemaking and narrative emplotment under radical uncertainty. The article shows that most contemporaneous actors were positive in their assessment of central banks and that they focused mostly on short-term capital flows and the interconnectedness of the financial system as well as structural issues going back to the Versailles Treaty in making sense of the crisis.