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.