Substantively—in marked contrast to the inconclusive state of affairs that prevailed in the late 1970s—the new gold-standard research allows us to assert with considerable confidence that monetary factors played an important causal role, both in the worldwide decline in prices and output and in their eventual recovery. Two well-documented observations support this conclusion.
First, exhaustive analysis of the operation of the interwar gold standard has shown that much of the worldwide monetary contraction of the early 1930s was not a passive response to declining output, but instead the largely unintended result of an interaction of poorly designed institutions, shortsighted policy-making, and unfavorable political and economic preconditions. Hence the correlation of money and price declines with output declines that was observed in almost every country is most reasonably interpreted as reflecting primarily the influence of money on the real economy, rather than vice versa.
Second, for reasons that were largely historical, political, and philosophical rather than purely economic, some governments responded to the crises of the early 1930s by quickly abandoning the gold standard, while others chose to remain on gold despite adverse conditions. Countries that left gold were able to reflate their money supplies and price levels, and did so after some delay; countries remaining on gold were forced into further deflation. To an overwhelming degree, the evidence shows that countries that left the gold standard recovered from the Depression more quickly than countries that remained on gold. Indeed, no country exhibited significant economic recovery while remaining on the gold standard. The strong dependence of the rate of recovery on the choice of exchange-rate regime is further, powerful evidence for the importance of monetary factors.
