London merchant banks, the central European panic and the sterling crisis of 1931

The Central European panic of the spring 1931 is often presented as a cause of the sterling crisis of September. But what was the transmission channel? This article explores how the continent's financial troubles affected Britain's banking system. The freeze of Central European assets created a liquidity strain for London merchant banks because they had accepted (guaranteed) the commercial bills of German merchants. I use new balance sheet data to quantify this shock and explore how the liquidity crisis contributed to the sterling crisis. The evidence demonstrates that international contagion was crucial in transmitting the 1931 global financial crisis.