Hawtrey Reviews Cassel

While doing further research on Ralph Hawtrey, I recently came across a brief 1933 review written by Hawtrey in the Economic Journal of a short book by Gustav Cassel, The Crisis in the World Monetary System. Sound familiar? The review provides a wonderfully succinct summary of the views of both Cassel and Hawtrey of the causes of, and the cure for, the Great Depression. The review can still be read with pleasure and profit. It can also be read with wonder. It is amazing that something written 80 years ago about the problem of monetary disorder can have such relevance to the problems of today. Here is the review in full. And pay special attention to the last paragraph.

The delivery of a series of three lectures at Oxford last summer has given Professor Cassel an opportunity of fulfilling his function of instructing public opinion in the intricacies of economic theory, especially of monetary theory in their application to current events. This little book of just under 100 pages is the result. As admirers of Professor Cassel will expect, it is full of wisdom, expressed with an admirable clarity and simplicity.

He points out that so long as the policy of economising gold, recommended at the Genoa Conference, was carried out, it was possible to prevent any considerable rise in the value of gold. “The world reaped the fruits of this policy in an economic development in which most countries had their share and which for some countries meant a great deal of prosperity” (p. 27).

Progress up to 1928 was normally healthy; it was not more rapid than was usual in the pre-war period. It was interrupted in 1929 by the fall of prices, for which in Professor Cassel’s view the responsibility rests on the central banks. “The course of a ship is doubtless the combined result of wind, current and navigation, and each of these factors could be quoted as independent causes of the result that the ship arrives at a certain place.” But it is navigation that is within human control, and consequently the responsibility rests on the captain. So a central bank, which has the monopoly of supplying the community with currency, bears the responsibility for variations in the value of the currency (pp. 46-7).

Under a gold standard the responsibility becomes international, but “if some important central banks follow a policy which must lead, say, to a violent increase in the value of gold, the behaviour of such banks must be regarded as the cause of this movement” (p. 48).

Professor Cassel further apportions a heavy share of the responsibility for the breakdown to war debts and reparations. “The payment of war debts in conjunction with the unwillingness to receive payment in the normal form of goods led to unreasonable demands on the world’s monetary stocks; and the claimants failed to use in a proper way the gold that they had accumulated” (pp. 71-2).

Just as a reminder, if you have made it this far, don’t stop without reading the next and final paragraph.

Finally, for a remedy, “the best thing that the gold standard countries could do for a rapid economic recovery would be immediately to start an inflation of their currencies. If this inflation were the outcome of a deliberate and well-conceived policy it could be controlled, and the consequent rise of the general level of commodity prices could be kept within such limits as were deemed desirable for the restoration of a necessary equilibrium between different groups of prices, wages, and commercial debts” (p. 94).

Let’s read that again:

If inflation were the outcome of a deliberate and well-conceived policy, it could be controlled, and the consequent rise of the general level of commodity prices could be kept within such limits as were deemed desirable for the restoration of a necessary equilibrium between different groups of prices, wages, and commercial debts.


3 Responses to “Hawtrey Reviews Cassel”

  1. 1 Marcus Nunes May 6, 2013 at 4:40 pm

    David, and now with the NGDPLT proposal you don´t even have to mention the ‘satanic’ word INFLATION!
    I think that since Cassel did not spend time ‘debating’ Keynes (maybe I´m wrong here) he could at all times be cristal clear.


  2. 2 Diego Espinosa May 6, 2013 at 5:25 pm

    Cassel speaks of a “fall of prices” being the issue. Later, he cites the need to bring “commodity prices, wages and debts” into equilibrium. Clearly, the spike in real wages that occurred from ’29-’33 was an obvious cause of unemployment; just as the fall in commodity prices caused the corporate sector to lose money in aggregate. Further, debt in real terms ballooned. The cause of this “disequilibrium” was the outright fall in prices that Cassel cites.

    Fast forward to today: Inflation by some measures its on its pre-GFC trend. Real wages have fallen since the GFC. Corporate profits are at peak. Debt in real terms has fallen.

    Economic history is important, and so is historical context. 1932 is nothing like today, except perhaps in Greece, Portugal and Spain. The analogous solution for those countries is to leave the Euro forthwith. I’m not Cassel would have argued that the remaining G20 countries should generate above-trend inflation.


  3. 3 David Glasner May 9, 2013 at 2:16 pm

    Marcus, There’s a time and place for everything including inflation. I think that Cassel actually wrote a review of the General Theory, and did not like it. But in 1933, I am guessing that he didn’t think that Keynes was such a bad fellow.

    Diego, You are certainly right that we are not now suffering from outright deflation (though I don’t agree that inflation is back to its pre-GFC trend), so in that sense today’s situation is different from (and better than) the catastrophic situation in 1932. My view is nevertheless that because we are still in a situation in which real interest rates are below zero, recovery requires higher inflation than the norm. The danger point for an economy is when the real interest rate is less than the the deflation rate. If the real interest is, let us say, -2%, and the rate of deflation is now -1%, the return to holding money is still higher than the expected return on real assets. The rate of inflation has to be raised enough so that expected return to holding real assets is greater than the expected return from holding money. I realize that there are pieces of the picture (like high corporate profits) that don’t fit perfectly into the story that I am telling, but I think that the risks of the status quo are less than the risks of applying further stimulus.


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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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