While I was going through old Australian newspaper articles (don’t ask me why…) I came across a wonderful little article by Gustav Cassel published on February 17 1930. In the article Cassel spells out why fiscal policy would not be able to pull out the US of the Depression and why the Great Depression was caused by  monetary policy failure. The whole thing sounds very Market Monetarist.

I have reproduced the entire article below. Enjoy the wisdom of Gustav Cassel.

President Hoover’s Mistake

– By Professor Gustav Cassel, the Distinguished Swedish Economist

It has been an open question for many years as to what Governments can do to counteract an economic depression… It has above all been suggested that public works should be regulated according to the fluctuations caused from time to time by economic conditions. In other words, the Government should start comprehensive undertakings at the moment when private enterprise begins to lag. The United States are at present in such a condition. Under the energetic leadership of President Hoover it seems that the Government is to intervene promptly and effectively in order to prevent the Stock Exchange crisis from developing into an economic depression.

This case can provide a most useful lesson for the general treatment of this problem and deserves special attention because Europe is more or less bound to be affected by an American depression and will then have to face the same difficulties against which America is fighting today. President Hoover’s programme, which has been given the name of ‘Prosperity Maintenance’ mainly comprises the starting of big undertakings in order to prevent the threatened reduction of industrial employment. To this purpose the official departments are to co-operate with the private employers.

The President called together at the White House several groups representing the economic activity of the country, and the representatives of the railways at once assured him of their cooperation in the form of a comprehensive programme of extensions.

Apart from a certain psychological influence, the President’s programme, is, however, in every way a mistake. It rests not only on an incorrect conception of the actual conditions, but also on an over-estimate the Government’s power.

In the endeavours to create employment by extraordinary new enterprises, it must be remembered very clearly that the burden will fill on the nation’s savings and reduce the amount of money available for the increase of true capital. An intervention by the State in order to increase the existing works and their machinery equipment might possibly be a sensible policy if a surplus of savings were available. The Hoover programme seems to assume that it is the case. In his message to Congress the President has proclaimed to the whole world that hitherto American capital was invested to an extraordinarily large proportion in stock speculation. The crisis is now said to have set this capital free, and made it available for general economic enterprises.

The ‘Government therefore considered it to be their duty to find employment for the capital supply. Every link in this chain or argument is a fallacy. Speculation in stocks has never involved any capital and cannot involve any. Therefore no capital can flow back from the Stock Exchange to economic enterprise. After all, America has no more available capital requiring a special effort for its employment.

The American Stock Exchange crisis signifies no more than that exaggerated quotations have been reduced to their normal value. There is no crisis in the economic life, but only a certain reduction of capital available, mostly for the building of dwelling houses. This reduction is caused immediately by the fact that the current new savings were not sufficient to maintain the production of real capital in the enormous proportions of last year.

The outstanding feature of the present position is therefore undoubtedly a great scarcity of capital. This being the case, is it not foolish to undertake large new enterprises in the belief that they can be paid for with available capital? Any effort in this direction, especially if made by the Government, is bound to waste the already scarce reserves, and thus to weaken the entire political economy.

That scarcity of capital is the principal feature of the present situation is also shown by the fact that the export of American capital has decreased very considerably indeed. If more surplus money were offered America would increase its export of capital and thereby improve the purchasing power of the other countries for the American export products. This would free the Government from many cares concerning inner political economy and at the same time render superfluous its efforts to exert its political power in creating outlets for American exports.

Such a development would be most welcome to all the countries needing capital. Conditions, the whole world over have shaped themselves in such a way that the export of American capital is an indispensable condition for a prosperous world economy. The whole world must therefore view with grave concern a Government intervention which, on account of its uneconomic investments, is bound to render impossible the accumulation of American savings.

Government intervention is in this case obviously to the detriment of the economic organisation. It would be far better to leave that organisation to look after itself. If this were done, any available new surplus money would very quickly be put, to use, provided that no new hindering circumstances should arise. An important American journal has recently collected a number of views on this subject by industrial leaders.

The general impression to be gathered from this inquiry is that the industrialists intend to carry on, notwithstanding the Stock Exchange crisis. In most branches of industry there is an acute necessity to enlarge the buildings and to improve the equipment. On reading the inquiry made by this journal we certainly do not feel that there is any lack of opportunities to use any available American capital. In the present situation there is indeed only one single factor which can seriously hinder development and this one factor has its origin in a Government Department. I am referring to the bank rate policy or in a wider sense to the limitation of money supplies to the economic life by the Federal Reserve System. This limitation has of late been far too strict. The reason is the attempt to regulate the bank rate in such a way that it, would have a supreme influence on the Stock Exchange, limiting the speculative inflation of share prices.

There is no doubt that this attempt constitutes an improper transgression of the natural limits of the tasks evolving upon a central banking institution – an attempt which ultimately can be traced back to the ardent desire of the Government to usurp an ever growing share of influence upon the country’s political economy. It is true that after the Stock Exchange crisis the bank rate has been slightly reduced. But this measure was taken far too slowly and hesitatingly.

The Federal Reserve system has not kept pace with the development, but since the last summer has adhered to rates which were far too high, with the result of a collapse in prices which seriously endangered the whole political economy, and which, so long as it continues will naturally prevent any sensible persons from making new investments. If the fall in prices were to continue, this would unavoidably prevent American economy from continuing its recent wonderful developments.

The collapse in prices is bound to drag with it the whole of the rest of the world and to create a universal condition which must react on the economy of the United States. And all this entirely unnecessary collapse of prices is exclusively the result of the mishandling of the American dollar value which in its turn is the consequence of an uncalled for excursion of Government influence into the province of economic problems.

The whole matter is a blatant example of what happens if we yield to the modern tendency of permitting the Government to meddle unnecessarily with economics. The Government assumes a task which is not in its province; in consequence of this it is driven to mismanage one of its most pertinent tasks, i.e., the supervision of money resources, this causes a depression, which the same government seeks to remedy by measures which are again outside the sphere of its true activity and which can only make the whole position worse.

The particular case under review is really only an illustration of a phenomenon which at present is very general; while neglecting their proper functions, governments greedily seize every opportunity to usurp provinces which are not their concern, and by doing so place themselves – with or against their will – on a plane inclined towards a form of socialism, the aim of which is, in this respect, to risk everything to obtain the utmost.

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Other posts on Gustav Cassel:

Gustav Cassel foresaw the Great Depression
Hawtrey, Cassel and Glasner
“Our Monetary ills Laid to Puritanism”
Calvinist economics – the sin of our times
Gustav Cassel on recessions

And Steve Horwitz on why Hoover was an interventionist.