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The twin crisis of 1931 hit the German economy with an unprecedented fierceness, at a time when the country was facing a deep recession with more than four million people being unemployed and increasing political tensions, both within the country and in the international sphere. German banks experienced several weeks of heavy deposit withdrawals, impairing their liquidity positions. At the same time, the Reichsbank suffered from reserve losses due to a run on the German currency. The crisis culminated in the breakdown of Danatbank, the second largest German bank, and a subsequent general banking panic, which was only stopped through the declaration of a bank holiday. A little later, the Reichsbank suspended the free convertibility of the Reichsmark into gold and set an end to the gold standard in Germany. For several weeks, the German payments system operated on a restricted scale. The largest banks were reconstructed, helped by public capital injections. Negotiations with foreign creditors resulted in a moratorium on part of the international debt. In 1932 reparations and interallied debts were canceled completely; shortly after, Germany defaulted on most of its foreign debt. The crisis gave rise to the creation of a national banking supervision and to a new banking law that turned the banking sector into one of the most regulated sectors in the German economy. Capital flows remained restricted for years, and the full convertibility of the currency was not reached until long after the war.
The simultaneous occurrence of disturbances in the banking sector and currency turmoil is one striking feature of the German crisis. Such phenomena have been referred to as "twin crises" since they gained some prominence in connection with the Scandinavian and Asian crises in the 1990s. The reasons for the lively interest in twin crises are their particular severity and their high incidence in recent years. Michael Bordo et al. show that there was only one period in the last 120 years with an even higher incidence of twin crises, namely the interwar years, with the German crisis of 1931 being one of the most prominent examples from that period. This article attempts to reinterpret the German crisis on the basis of the theoretical work on twin crises, which has grown explosively over the past few...