Friedrich August von Hayek: Review of Gustav Cassel’s Das Geldwesen nach 1914 (1926)

Hayek’s review of the German translation of Cassel’s study of post-1914 monetary conditions combines strong practical endorsement with a pointed criticism of its theoretical simplifications. It moves from the book’s reception and historical value to the quantity theory, purchasing-power parity, and the consequences of Cassel’s recommendations for monetary policy. Against the editor’s claim that the book had remained unknown in Germany, Hayek stresses the influence already exercised by its English edition and Cassel’s other writings. He values the work both as an intervention in contemporary policy and as a lasting account by an exceptionally informed participant.

The review’s governing distinction is between theoretical adequacy and practical usefulness:

Denn wenn auch der Theoretiker sich heute mit jener Einsicht in die Zusammenhänge, wie sie Cassel bietet, nicht mehr begnügen darf, so bietet sein Buch doch die beste Grundlage praktischer Politik, die wir heute besitzen.

English translation: For even if the theorist today may no longer content himself with that insight into the interconnections which Cassel offers, his book nevertheless provides the best foundation for practical policy that we possess today.

Hayek defends the orthodox quantity theory as an accessible weapon against seductive abuses of monetary policy, even while insisting that its account of economic relationships is insufficient for the theorist. Simplicity gives it public efficacy. He makes a similar assessment of Cassel’s purchasing-power-parity explanation of exchange rates: its importance lies in reformulating an older Ricardian insight so that essential relationships can gain traction in policy debate.

The central objection concerns the causal process hidden by aggregate relationships:

Der wichtigste und auch für die aus ihr gezogenen praktischen Folgerungen bedeutsamste Einwand gegen Cassels Geldlehre ist der, daß er einen allzu unmittelbaren Zusammenhang zwischen Geldmenge und allgemeinem Preisniveau herzustellen sucht und zumeist übersieht, daß der Einfluß des Geldes auf das Preisniveau sich stets nur durch sukzessive Veränderungen einzelner Preise auswirken kann.

English translation: The most important objection to Cassel's monetary doctrine, and the one most significant also for the practical conclusions drawn from it, is that he seeks to establish an all too immediate connection between the quantity of money and the general price level, and for the most part overlooks the fact that the influence of money upon the price level can always take effect only through successive changes in individual prices.

This insistence on successive changes in individual prices supplies the review’s core conceptual move. An apparently direct relationship between money and the general price level suppresses the mechanism through which monetary effects unfold. Hayek argues that this shortcut also enables Cassel to attribute every change in the average price level to monetary causes.

Cassel’s treatment of a reduction in goods supply makes the difficulty especially clear. By treating an unchanged supply of money as the cause of the resulting price increase, Cassel assumes that money should have contracted enough to preserve the price level. Hayek exposes the normative baseline embedded in that causal claim:

Die eigenartige passive Kausalität, die dem Gelde darin zugeschrieben wird, daß es Veränderungen der Preise dadurch verursachen soll, daß bei ihm selbst keine Änderung eintritt, ist entschieden merkwürdig.

English translation: The peculiar passive causality which is ascribed to money, in that it is supposed to cause changes in prices by the fact that no change occurs in money itself, is decidedly odd.

For Hayek, Cassel has not explained why changes on the goods side should automatically produce compensating monetary changes. Instead, price stability is presupposed as the normal condition and then used to establish the monetary origin of departures from it. This reasoning also encourages an insufficiently examined confidence that stabilizing the price level is both possible and desirable.

The same pattern—an effective primary remedy coupled with neglected secondary effects—organizes Hayek’s assessment of discount policy. He accepts that restricting capital demand through bank interest rates to what current saving can finance would prevent persistent monetary depreciation and crises. Yet he argues that suppressing all bank credit creation would retard economic development so sharply relative to its pace over the preceding century that the rule could not then be practically adopted. The objection is therefore not simply that Cassel’s recommendation would fail, but that its success would carry consequences his simplified theory leaves out.

Hayek closes by singling out Cassel’s criticism of American deflation in 1920–21 and praising Wolfgang Biermer’s translation. The review’s significance lies in its qualified endorsement: monetary doctrines can be indispensable guides to policy without adequately explaining price formation, and recommendations must be judged by their wider effects rather than their declared objective alone.