Hawtrey
and Cassel correctly explained, and even predicted, the cause of the Great Depression,
but their explanation was
missed overshadowed as Keynes won over his
peers during the Great Depression. (If you need to get clued in on Hawtrey and
Cassel, see my
paper and
Doug Irwin’s
work).
David Glasner
and Ronald Batchelder explain,
However, the success of the General Theory was such that it eclipsed not only the Austrian
theory, whose meteoric rise was followed, even before the General Theory appeared in print, by an almost equally rapid
decline, but all other monetary theories. (41)
The account given by Hawtrey and Cassel, which had first
been overshadowed by the short-lived Austrian ascendancy, was pushed still
further into the background by the Keynesian Revolution. (42)
It is surprising that theories that emphasized central bank
demand for gold fell in the back ground, especially since
In the early 1930 Keynes was still general sympathetic to
Hawtrey’s belief that the Depression, the onset of which Keynes dated in 1925
with the restoration of prewar parity in England, had been caused by a
deflationary monetary policy. (41)
Instead of attributing high unemployment to monetary mismanagement,
as he and Hawtrey had previously, Keynes saw high unemployment as deeply rooted
in the structure of modern economic systems regardless of monetary policy or
the exchange rate. (42)
In the General Theory (I'll be referencing the 1964 edition), Keynes had moved to promoting a belief that markets were
inherently unstable, especially as they approached the top of the boom-bust
cycle and moved into depression. He wrote,
There is, however, another characteristic of what we call
the Trade Cycle which our explanation must cover if it is to be adequate;
namely, the phenomenon of crisis –
the fact that the substitution of a downward for an upward tendency often takes
place suddenly and violently, whereas there is, as a rule, no such sharp
turning-point when an upward is substituted for a downward tendency. (314)
Keynes believed that due to psychological factors led to
sudden changes in expectations and the desire of individuals to change their volume of cash holdings. In other words, the most significant cause of the
reversal is a decreased propensity of consumers to consume and of savers to
save in banks. He concludes that unregulated
markets are inherently unstable.
In conditions to laissez-faire
the avoidance of wide fluctuations in employment may, therefore, prove
impossible without a far-reaching change in the psychology of investment
markets such as there is no reason to expect. I conclude that the duty of ordering the current volume of investment
cannot safely be left in private hands. (320)
No longer was mismanagement of the gold standard a problem
for Keynes. It was simply that gold was too constraining to allow the policies
that Keynes thought necessary. If the occurrence of depressions and their
unnecessary deepening are a fundamental aspect of the market system, then one
need not look for a cause. Markets are themselves the cause of depression;
policies must seek to stabilize aggregate demand. David Glasner mentions this in his paper.
The model of the General Theory was the model of a world in depression, and makes the Depression seem almost normal. (40)
Glasner points to a needed avenue of research. It was not simply that Keynes won over the profession. Keynes pushed a search for particular causes of depression to the background as his theory became the foundation of a new research program. I'm curious to learn how this attitude toward particular causes of depression is reflected in the work of his contemporaries after they adopted his theory.
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