From chapter one of his essays (i'm still reading), he makes the point that monetery supply contractions were an obvious cause. Look whats happening now... hoarding of gold and oil in inducing an actual reduction of money supply in circulation. Sounds familiar? He's not such an idiot as every one claims... Read the last 3 paragraphs in particular ... Almost calling current events to a T... http://press.princeton.edu/chapters/s6817.html Here he writes throughout: As noted, a striking aspect of the short-lived interwar gold standard was the tendency of the nations that adhered to it to suffer sharp declines in inside money stocks. To understand in general terms why these declines happened, it is useful to consider a simple identity that relates the inside money stock (say, M1) of a country on the gold standard to its reserves of monetary gold: M1 = (M1/BASE) x (BASE/RES) x (RES/GOLD) x PGOLD x QGOLD (1) where M1 = M1 money supply (money and notes in circulation plus commercial bank deposits), BASE = monetary base (money and notes in circulation plus reserves of commercial banks), RES = international reserves of the central bank (foreign assets plus gold reserves), valued in domestic currency, GOLD = gold reserves of the central bank, valued in domestic currency = PGOLD x QGOLD, PGOLD = the official domestic-currency price of gold, and QGOLD = the physical quantity (for example, in metric tons) of gold reserves. However, in 1931 and subsequently, the large declines in the money-gold ratio that occurred around the world did not reflect anyone's consciously chosen policy. The proximate causes of these declines were the waves of banking panics and exchange-rate crises that followed the failure of the Kreditanstalt, the largest bank in Austria, in May 1931. These developments affected each of the components of the money-gold ratio: First, by leading to rises in aggregate currency-deposit and bank reserve-deposit ratios, banking panics typically led to sharp declines in the money multiplier, M1/BASE (Friedman and Schwartz 1963; Bernanke and James 1991). Second, exchange-rate crises and the associated fears of devaluation led central banks to substitute gold for foreign exchange reserves; this flight from foreign-exchange reserves reduced the ratio of total reserves to gold, RES/ GOLD. Finally, in the wake of these crises, central banks attempted to increase gold reserves and coverage ratios as security against future attacks on their currencies; in many countries, the resulting "scramble for gold" induced continuing declines in the ratio BASE/RES. A particularly destabilizing aspect of this process was the tendency of fears about the soundness of banks and expectations of exchange-rate devaluation to reinforce each other (Bernanke and James 1991; Temin 1993). An element that the two types of crises had in common was the so-called "hot money," short-term deposits held by foreigners in domestic banks. On one hand, expectations of devaluation induced outflows of the hot-money deposits (as well as flight by domestic depositors), which threatened to trigger general bank runs. On the other hand, a fall in confidence in a domestic banking system (arising, for example, from the failure of a major bank) often led to a flight of short-term capital from the country, draining international reserves and threatening convertibility. Other than abandoning the parity altogether, central banks could do little in the face of combined banking and exchange-rate crises, as the former seemed to demand easy money policies while the latter required monetary tightening. From a theoretical perspective, the sharp declines in the money-gold ratio during the early 1930s have an interesting implication: namely, that under the gold standard as it operated during this period, there appeared to be multiple potential equilibrium values of the money supply. Broadly speaking, when financial investors and other members of the public were "optimistic," believing that the banking system would remain stable and gold parities would be defended, the money-gold ratio and hence the money stock itself remained "high." More precisely, confidence in the banks allowed the ratio of inside money to base to remain high, while confidence in the exchange rate made central banks willing to hold foreign exchange reserves and to keep relatively low coverage ratios. In contrast, when investors and the general public became "pessimistic," anticipating bank runs and devaluation, these expectations were to some degree self-confirming and resulted in "low" values of the money-gold ratio and the money stock. In its vulnerability to self-confirming expectations, the gold standard appears to have borne a strong analogy to a fractional-reserve banking system in the absence of deposit insurance: For example, Diamond and Dybvig (1983) have shown that in such a system there may be two Nash equilibria, one in which depositor confidence ensures that there will be no run on the bank, the other in which the fears of a run (and the resulting liquidation of the bank) are self-confirming.