In Praise of Gustav Cassel

When I started this blog almost 5 months ago, I decided to highlight my intellectual debt to Ralph Hawtrey by emblazoning his picture (to the annoyance of some – sorry, but deal with it) on the border of the blog and giving the blog an alias ( to go along with its primary name. I came to realize Hawtrey’s importance when, sometime after being exposed as a graduate student to Earl Thompson’s monetary, but anti-Monetarist (in the Friedmanian sense), theory of the Great Depression, according to which the Depression was caused by a big increase in the world’s monetary demand for gold in the late 1920s when many countries, especially France, almost simultaneously rejoined the gold standard, driving down the international price level, causing ruinous deflation. Thompson developed his theory independently, and I assumed that his insight was unprecedented, so it was a surprise when (I can’t remember exactly how or when) I discovered that Ralph Hawtrey (by the 1970s a semi-forgotten fugure in the history of monetary thought) had developed Thompson’s theory years earlier. Not only that, but I found that Hawtrey had developed the theory before the fact, and had predicted almost immediately after World War I exactly what would happen if restoration of the gold standard (effectively suspended during World War I) was mismanaged, producing a large increase in the international monetary demand for gold.  It dawned on me that there was a major intellectual puzzle, how was it that Hawtrey’s theory of the Great Depression had been so thoroughly forgotten (or ignored) by the entire economics profession.

A few years later, in a conversation with my old graduate school buddy, Ron Batchelder, also a student of Thompson, I mentioned to him that Earl’s theory of the Great Depression had actually been anticipated right after World War I by Ralph Hawtrey. Batchelder then told me that he had discovered that Earl’s theory had also been anticipated by the great Swedish economist, Gustav Cassel, who also had been warning during the 1920s that a depression could result from an increased monetary demand for gold. That was the genesis of the paper that Ron and I wrote many years ago, “Pre-Keynesian Monetary Theories of the Great Depression: Whatever Happened to Hawtrey and Cassel?” Ron and I wrote the paper in 1991, but always planning to do one more revision, we have submitted it for publication. I am hoping finally to do another revision in the next month or so and then submit it. An early draft is still available as a UCLA working paper, and I will post the revised version on the SSRN website. Scott Sumner wrote a blog post about the paper almost two years ago.

At any rate, when I started the blog, I had a bit of a guilty conscience for not giving Cassel his due as well as Hawtrey. I suppose that I prefer Hawtrey’s theoretical formulations, emphasizing the law of one price rather than the price-specie-flow mechanism, and the endogeneity of the money supply to Cassel’s formulations which are closer to the standard quantity theory than I feel comfortable with. But the substantive differences between Hawtrey and Cassel were almost nil, and both of these estimable scholars and gentlemen are deserving of all the posthumous glory that can be bestowed on them, and then some.

So, with that lengthy introduction, I am happy to give a shout-out to Doug Irwin who has just written a paper “Anticipating the Great Depression? Gustav Cassel’s Analysis of the Interwar Gold Standard.” Doug provides detailed documentation of Cassel’s many warnings before the fact about the potentially disastrous consequences of not effectively controlling the international demand for gold during the 1920s as countries returned to the gold standard, of his identification as they were taking place of the misguided policies adopted by the Bank of France and the Federal Reserve Board that guaranteed that the world would be plunged into a catastrophic depression, and his brave and lonely battle to persuade the international community to abandon the gold standard as the indispensable prerequisite for recovery.

Here is a quotation from Cassel on p. 19 Doug’s paper:

All sorts of disturbances and maladjustments have contributed to the present crisis. But it is difficult to see why they should have brought about a fall of the general level of commodity prices. . . . A restriction of the means of payment has caused a fall of the general level of commodity prices – a deflation has taken place. But people shut their eyes to what is going on in the monetary sphere and pay attention only to the other disturbances.

Another quote from Cassel appears in footnote 21 (pp. 31-32). Here is the entire footnote:

Before accepting the view that monetary policy was impotent, Cassel insisted that “we should make sure that the necessary measures have been applied with sufficient resoluteness. A central bank ought not to stop its purchases of Government securities just at the moment when such purchases could be expected to exercise a direct influence on the volume of active purchasing power. If it is stated in advance that [the?]central bank intends to go on supplying means of payment until a certain rise in the general level of prices has been brought about, the result will doubtless be much easier to attain.”

On top of all that, the paper is a pleasure to read, providing many interesting bits of personal and historical information as well as a number of valuable observations on Cassel’s relationships with Keynes and Hayek. In other words, it’s a must read.


11 Responses to “In Praise of Gustav Cassel”

  1. 1 Kevin Donoghue November 29, 2011 at 4:48 am

    For those who (like me) prefer to get educated free of charge:

    Click to access Cassel.pdf


  2. 2 Richard A. November 29, 2011 at 10:35 am

    Another quotation from Cassel on p. 26 Irwin’s paper:

    “Those supposed to be in power proclaim themselves to be absolutely powerless in monetary matters and refuse to recognize any responsibility for the course of affairs.”


  3. 3 Eric Dennis November 29, 2011 at 4:11 pm

    I’m trying to understand your apparent animosity to the gold standard given the vulnerability to political manipulation of fiat alternatives through history. My object of interest is the classical gold standard, not the inter-war version that was much more a creature of government control. I notice that you don’t tend to differentiate the two, which suggests that you don’t like either of them.

    First off, supposing there were truly a tough problem of resuming the gold standard after its abandonment by spend-thrift governments during WWI, would the blame lie with the gold standard itself — or with the choice to finance war by inflation? But let’s take that as a sunk cost. Was resumption that tough a theoretical problem? It seems like the historical process of resumption was burdened by all kinds of economic misunderstandings at the time, but suppose each country had simply declared its intent to resume redeemability at a fixed but to-be-determined parity and at some specified time in the future, before which the market exchange rate would be allowed to fluctuate and stabilize, determining the legal parity. (I think Mises, among others perhaps, made this suggestion at some point.)

    Wouldn’t this have solved both the problem of the arbitrariness of government-chosen resumption parities and the general increase in gold demand that would proceed from resumption? It even has an NGDP futures ring to it! — although I would think much more plausible.​​


  4. 4 David Glasner November 30, 2011 at 9:48 am

    Kevin, Thanks for the added link, but I thought that the paper was downloadable for free from the SSRN website.

    Richard, Yeah the paper is full of great quotes.

    Eric, What you call my animosity to the gold standard is simply my describing the mechanism by which the world was plunged into a catastrophic depression by the operation of the gold standard as it was operating in the interwar period. You are right that the world could have avoided the catastrophe while staying on the gold standard. But to have done so, the world’s central bankers would have had to follow the advice of Hawtrey and Cassel. But it was the most dedicated and dogmatic supporters of the gold standard who rejected their advice as being contrary to the supposed rules of the game by which the gold standard was supposed to operate. Hawtrey and Cassel were dismissed as “stabilizers” and “money managers” who were advocating a watered down gold exchange standard not the real good old gold standard of the pre-war variety. The gold standard is not a natural feature of the universe. It did evolve fortuitously in the course the 18th and 19th centuries, but, having been lapsed, there is no reason to think that it can be recreated in a way that would function in the moderately tolerable way that it operated in the 30 or 40 years preceding World War I. It’s just not gonna happen.


  5. 5 Eric Dennis November 30, 2011 at 7:56 pm

    I realize that Hawtrey and Cassel may have been advocating a gold exchange standard as a means to reduce gold demand in a transition back to some form of gold-backed currency, but from a public choice perspective it seems like the main result of a gold exchange standard is just to cede more monetary control to spend-thrift governments and thus loosen the leash on their budgets, setting up greater pain down the line.

    Assuming a coordinated resumption along the lines I referenced (allowing the market ratio to fluctuate before a pre-announced parity fixing date), why would we have had to bother with a gold exchange standard, with its attendant public choice problems?

    I have no axiomatic attachment to the gold standard. Bitcoins would probably be better anyway if people could get comfortable with cryptographic rather than physical security. What’s essential is not the particular reserve asset, but the manner in which that asset is selected — whether it emerges naturally from people choosing to store their own wealth in it, or by government coercion against what people would otherwise choose. (A similar question arises regarding the banking system as a whole of course.)


  6. 6 David Glasner December 1, 2011 at 8:45 am

    Eric, You said:

    “from a public choice perspective it seems like the main result of a gold exchange standard is just to cede more monetary control to spend-thrift governments and thus loosen the leash on their budgets, setting up greater pain down the line.”

    That sounds to me like an assertion of personal preference than an inference from any well-articulated economic (including public-choice) model.

    “Assuming a coordinated resumption along the lines I referenced (allowing the market ratio to fluctuate before a pre-announced parity fixing date), why would we have had to bother with a gold exchange standard, with its attendant public choice problems?”

    The pound floated against the dollar from 1919 to 1925 when the pound was fixed against the dollar at the pre-war parity, probably 10% too high in terms of PPP. The franc floated against the dollar till 1928 when it was pegged against the dollar at about a fifth of its pre-war parity, probably at least 10% too low in terms of PPP. In the world of public choice, what set of institutions are you positing to give countries the incentive to choose parities corresponding to their PPP levels? And in the world of public choice, please explain to me why it was desirable for France cash in all its foreign exchange reserves for gold after pegging the franc against the dollar at a parity at least 10% below the rate consistent with PPP?

    Asset choices are governed by network effects more than by government coercion, which means that they are governed by the historical path bringing us to the present, so it is just fanciful to imagine that there is some way of selecting an optimal standard in terms of which to denominate assets by leaving the choice of the standard up to the free choice of individuals, and let it go at that.


  7. 7 Eric Dennis December 4, 2011 at 8:29 am

    It’s not a model but a simple observation. To spell it out: governments with greater control over currencies tend to use that control over time to transfer wealth to politically connected constituents (e.g., big banks). The gold exchange standard grants them extra control above what they had under the classical gold standard to borrow-and-spend more by monetizing debt, without as immediate a check on monetary expansion as provided by redemption of small coinage to the public.

    The UK’s floating of the pound and pegging in 1925 has little connection to Mises’ float-and-peg strategy because the pound was pegged arbitrarily at the pre-war parity, not a market-determined one, as you know. And the problem with France’s behavior appears to be not the peg itself but their choice to accumulate many more reserves (and increase their cover ratio) after the peg was already in place.

    I’m not trying to propose a precise legislative strategy for getting politicians to do X. My point is that the replacement of the classical gold standard by other variants represented a worsening of the situation by a public choice criterion, and that it was *economically* possible to get the classical standard back. If your response is that it doesn’t matter because it was politically impossible, then fine. But it’s important to make clear the argument is political, not economic.

    And I don’t get your point about network effects vs. coercion. Clearly the gold exchange standard did not emerge from voluntary interaction, but from gradually increasing government control over money. The real, voluntarily emerging system was free banking. Given your work in that area, what I’m trying to understand at root is your own apparent movement in the opposite direction.


  8. 8 David Glasner December 4, 2011 at 12:09 pm

    Eric, A country monetizing debt under the gold exchange standard was still subject to a demand for redemption of its notes in bullion or in terms of a foreign currency. Why do you think the constraint of individuals cashing in their dollar bills or 1 pound banknotes for gold coins would make a significant difference in the constraint on monetizing debt. Historically, foreign exchange speculators have done pretty well in identifying countries whose monetary policies were inconsistent with an exchange rate peg.

    It was not economically possible to get the classical gold standard back without a huge increase in the monetary demand for gold either to be used as gold coinage or as reserves. The French government claimed to be doing no more than rejecting the gold exchange standard in favor the classical standard.

    I am not saying that coercion has no role in the creation of network effects, but given the historical path to the choice of a standard, continuing coercion is not the obstacle to the recreation of a gold standard, but the fact that everyone is working with a dollar or pound or franc standard.

    As for free banking, when was it emerging? I advocated free banking in my book based on a reform of the monetary system by means of indirect convertibility to stabilize an index of real wages. I never supported free banking based on reversion to convertibility into gold under any circumstances. And my arguments about the role of gold in creating the Great Depression were fully spelled out. That said, I now view free banking in any form as utopian (at least within a time horizon of 20 years or less) and thus distraction from mitigating our current monetary problems.


  9. 9 Eric Dennis December 5, 2011 at 3:58 pm

    A government trying to disguise the monetization of its debt could much more easily afford to, in effect, pay off some currency speculators (selling them gold during the inflation) than it could afford to satisfy the gold demand of a public becoming suspicious of government paper money as commodity prices increase. Empirically, this is borne out by the dramatic shift to an inflationary regime after the creation of the Fed, as indicated by a change in the NGDP growth trend in the US around 1915.

    I don’t know enough about France’s monetary policy in the 1920’s to say for sure, but just because the French government indicated it was trying to resume the classical gold standard doesn’t imply that its means of doing so had any likeness to what I was suggesting. They started really ramping up their reserves only after the official peg in 1928, which itself just codified what was already a de facto peg by 1926. The point of the plan I referred to was to equilibrate before enacting an (official or effective) peg.

    As to when free banking was emerging — anytime, I presume, the government hadn’t entangled itself into the banking industry, which was not many times or places of course, but through no defect of free banking. Network effects proceeding from extant monetary interventions are certainly important, but it’s not network effects that prevents me right now from having a non-fiat-backed checking account free from debilitating “capital gains” taxes reckoned in a depreciating fiat money.


  10. 10 Greg Ransom December 11, 2011 at 7:54 pm

    I think it is a disgrace that academics living off taxpayer subsidies and non-profit institutions with a legal requirement to provide for the public good block access via a pay wall to their goods using the police power of copyright, a legal privilege that is justified by the supposed that that this restriction on the flow of information will “advancing science & knowledge”.

    I notice that academics and non-profit folks never mention this.

    I doesn’t anyone complain about this outrage, which seems intolerable in the internet age.


  11. 11 David Glasner December 11, 2011 at 9:29 pm

    Greg, I am not a fan of copyright, but the paper can be downloaded for free from Doug Irwin’s page at Dartmouth, see Kevin Donoghue’s comment, so I don’t see what the fuss is about.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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