Hayek, Cassel, and the Origins of the Great Depression
30 Pages Posted: 5 Oct 2016
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Hayek, Cassel, and the Origins of the Great Depression
Hayek, Cassel, and the Origins of the Great Depression
Date Written: October 4, 2016
Abstract
The business cycle theory of Friedrich A. Hayek offers an explanation for the onset of the Great Depression that is more complete than those of his contemporaries, including Gustav Cassel. Hayek sought to explain why the boom of the 1920s ended in the bust of 1929. In the 1930s, Hayek’s theory indicated the Fed should act to prevent nominal income falling below its pre-boom level, but he hesitated (wisely or not) to recommend expansionary monetary policy in part due to his skepticism of the abilities of central bankers not to overdo it. Cassel, by contrast, feared that limited growth in the supply of monetary gold after the First World War would lead to worldwide deflation and depression. Cassel’s predictions of contraction were repeatedly proven false throughout the 1920s. Cassel’s policy prescription of monetary expansion in the 1930s appears wise in retrospect, but the mechanisms of Cassel’s theory played only a small role in causing the deflation or the depression.
Keywords: Hayek; Cassel; Great Depression; Federal Reserve; Gold standard
JEL Classification: B22; B31; E31; E32; E42; E58
Suggested Citation: Suggested Citation