Gustav Cassel on recessions

Swedish economist Gustav Cassel (1866-1945) had many views today is shared by Market Monetarism. I today was reminded by a Cassel quote that pretty much spells out the Market Monetarist view of the causes of recessions:

“(Recessions) are essentially a result of a supply of money that is too small, and to that extent are monetary phenomena…Complaints about excessive habits of saving are in such circumstances calculated to confuse the mind of the public and to distract attention from the shortcomings of monetary policy.”

- Gustav Cassel, Theory of Social Economy, 1918.

Cassel’s quote is an explanation for the Great Depression as well as for the Great Recession.

This is not the only area in which Market Monetarist can be inspired by and learn from Gustav Cassel. An obvious example is Gustav Cassel’s views on the Great Depression.

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  1. Alex Salter

     /  October 16, 2011

    Casse’s quote is nice from a MET perspective, but it claims too much. If there is a recession due to nominal factors, then chances are pretty darn good something’s wrong with the money market. But let’s not forget real factors, i.e. adverse supply shocks, matter as well. RBC still explains over 80% of the variance of business fluctuation data.

    Of course those who comment and post here are more interested in money -that’s what we like researching. Still, we need to be careful and make sure we don’t downplay real factors.

  2. Alex In the case of the US economy it has been found that RGDP follows a trend stationary process. In that case, the RBC view that you cannot separate growth from fluctuations is not compelling. In this case, ME i.e. keeping NGDP growing along a level path is the important stabilization tool.

  3. Alex Salter

     /  October 16, 2011

    Of course MET is important. But it’s just not true that recessions are always and everywhere monetary phenomena. “If recession, then money” is not a tautology. Yes, it’s true many recessions are explained by monetary disequilibrium. That doesn’t mean negative aggregate supply shocks don’t matter.

  4. Gustav is fun to read. He was cited by Robert Mundell in his Nobel speech as one of only a handful of economists who foresaw the GD (due to the mispriced nominal parity of gold, and forceful moves of BOF and Fed to enforce it in the late 1920s, after prior leadership had moved on). GC’s wrote a short book at the time on the world monetary system that is fascinating if you can find it. Unfortunately, his answer was to simply lower reserve requirements, rather than raise the nominal price of gold, which would have (and eventually did) provide a more durable (but still temporary) solution.

    On a vaguely related note, do market monetarists see the assumption lurking in the background for Cassell, that gold mines would continue to expand the money stock? Interest rate targeting, which does not do that, seems to get that whole dynamic backwards. You need optimal expansion (or contraction) of net financial assets, via fiscal policy, CB operations, or both, for NGDP targeting to work, imo.

  1. Gustav Cassel foresaw the Great Depression « The Market Monetarist
  2. Gustav Cassel on Hoover’s Mistake and monetary policy failure « The Market Monetarist
  3. “The Stock Exchange as Barometer” « The Market Monetarist
  4. ラルス・クリステンセン 「グスタフ・カッセル ~大恐慌の到来を見通していた経済学者~」 — 経済学101

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