Working Paper: NBER ID: w17597
Authors: Douglas A. Irwin
Abstract: The intellectual response to the Great Depression is often portrayed as a battle between the ideas of Friedrich Hayek and John Maynard Keynes. Yet both the Austrian and the Keynesian interpretations of the Depression were incomplete. Austrians could explain how a country might get into a depression (bust following an investment boom) but not how to get out of one (liquidation). Keynesians could explain how a country might get out of a depression (government spending on public works) but not how it got into one (animal spirits). By contrast, the monetary approach of economists such as Gustav Cassel has been ignored. As early as 1920, Cassel warned that mismanagement of the gold standard could lead to a severe depression. Cassel not only explained how this could occur, but his explanation anticipates the way that scholars today describe how the Great Depression actually occurred. Unlike Keynes or Hayek, Cassel explained both how a country could get into a depression (deflation due to tight monetary policies) and how it could get out of one (monetary expansion).
Keywords: Great Depression; Gustav Cassel; gold standard; monetary policy
JEL Codes: E5; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mismanagement of the gold standard (N13) | Great Depression (G01) |
| Mismanagement of the gold standard (N13) | deflation (E31) |
| deflation (E31) | Great Depression (G01) |
| Tight monetary policies (E52) | worldwide deflation (E31) |
| worldwide deflation (E31) | economic collapse (G01) |
| Ignored warnings (Y40) | severity of the Great Depression (N13) |
| Excessive gold accumulation (L72) | severity of the Great Depression (N13) |