Life
Karl Gustav Cassel was born into a merchant family in Stockholm in 1866. After taking a doctoral degree in mathematics in 1895, Cassel turned to studies in economics. In 1898 and 1899 he went to Germany to attend lectures of Gustav Schmoller, Adolph Wagner and other representatives of the historical school and Kathedersozialisten (socialists of the chair).
On visits to England in 1901 and 1902 he made the acquaintance of Alfred Marshall and Sidney and Beatrice Webb. The encounter with German Kathedersozialismus and British Fabianism left its traces in Cassel’s book on social policy (1902), in which he made a case for improvements in the living conditions of the working class, with the aim of increasing the productivity of labour. He argued that general economic progress would be fostered by workers’ education, by giving trade unions responsibility for wages and employment, and by using public works to counter unemployment (Boianovsky and Trautwein 2003). With regard to capital, Cassel published a treatise on The Nature and Necessity of Interest (1903), in which he rejected Bohm-Bawerk’s utility-based theory of interest and defined the rate of interest as the “price for waiting”. According to Cassel, this price - just as all other prices of factors and goods, relative and in terms of money - is governed by the “principle of scarcity”, which he expounded from his first “outline of an elementary theory of prices” (1899) to his last writings in the 1940s. His magnum opus was the Theory of Social Economy (Theoretische Sozialokonomie, 1918). This was a textbook originally designed for the German language area and completed by 1914. Owing to the war, the book was not published before 1918. Even though Cassel made few additions and no substantial changes in the many editions and translations to other languages that followed, the book advanced to a leading text in the interwar years (Sandelin and Trautwein 2010). This success is explained by Cassel’s clear, didactic writing style, and by his reputation as leading economist that he acquired in Sweden before the First World War, and on the international level shortly after.In 1901 Cassel had competed unsuccessfully with Knut Wicksell for a professor’s position at the University of Lund. From 1904 until retirement in 1933 Cassel was professor
of political economy and public finance at the University of Stockholm. Working as adviser to the government, lecturing and writing articles for newspapers (more than 1500 over the years), all on a wide range of political issues, he became a public authority in Sweden (Carlson and Jonung 2006).
After the First World War, Cassel rose to international prominence. On invitation of the League of Nations, he spoke at high-level conferences and wrote two important memoranda on The World’s Monetary Problems (Cassel 1921). He recommended a return to the gold standard as a means to restore international economic order, but warned against the risks of deflation and depression which would result from returning to prewar parities. Cassel (1921) proposed to fix exchange rates in terms of purchasing power parities, in line with his quantity-theoretical approach to exchange-rate determination that he had developed in his textbook (1918: ch. 12). Throughout the 1920s and 1930s, Cassel published and lectured intensively about the monetary policy issues of the day. Together with John Maynard Keynes, he criticized the Versailles treaty on German war reparations as a threat to the international economic order. The zenith of his career was reached in 1928, when he was invited to speak to the US House of Representatives, where he was introduced as “the world’s foremost economist” (Cassel 1940: 315).
In September 1931 the Great Depression had reached the point at which Britain abandoned the gold standard. Cassel “saw the event as a worldwide economic disaster and stressed that Sweden must mobilize all resources to defend the connection between the krona and gold” (Carlson 2011: 33).
A few days later, however, when Sweden was forced to let exchange rates float, it was Cassel who drafted the finance minister’s statement that the aim was now “to defend the internal purchasing power of the Swedish krona with all means at hand” (ibid.: 34). Together with Erik Lindahl, Cassel was a driving force behind the experiment of price-level targeting, carried out successfully by the Swedish central bank between 1931 and 1937 - long before this strategy became popular in the 1970s.In social matters, however, Cassel had turned from a social liberal, who hailed trade unions as promoters of economic progress, to a conservative, who gave them much of the blame for mass unemployment. He argued that the depression could not be cured by public works or other fiscal policies, which would only crowd out private investment. Instead Cassel advocated monetary policies that stop deflation, plus downward adjustments of money wages to lowered price levels - a policy resisted by the unions. Already in 1926, when German unemployment had risen strongly within a short time, Cassel had run a widely debated article campaign in German newspapers and journals, in which he denounced public works and unemployment benefits as measures that distort the price system and increase unemployment (Sandelin and Trautwein 2009: 84). In his critique of Keynes’s diagnosis of unemployment as an effective demand failure, Cassel (1937) insisted on the general validity of Say’s law. He argued that the Great Depression was caused by flawed monetary policies, state interventionism and irresponsible behaviour of the unions. He found himself increasingly isolated, as the tides of academic views and public opinion had changed in favour of a more active role for the state. Cassel’s voluminous memoirs, which carry the self-confident title In the Service of Reason (1940: 315, 1941: 195), end with some bitterness and the following words: “It fell to my lot to work in the service of reason... He who fights for reason must give himself to the struggle, sticking it out though he finds himself standing alone” (quoted after Carlson and Jonung 2006: 522). Cassel died in January 1945. It is reported that his last words were: “A world currency!” (Gustafsson 1987: 377).