Gustav Cassel’s Fear of a Gold Shortage and His Stabilization Views Led to the Gold Exchange Standard and Cooperation Between Central Banks

The second important factor which determined the development of ideas on monetary policy was that the above-mentioned facts were partly contributory to the extraordinary influence exercised by two particular representatives of the mechanistic Quantity Theory of Money and the concept of a systematic stabilization of the price level, Irving Fisher and Gustav Cassel. The fluctuations in the value of money mentioned above necessarily aroused wide interest in Fisher’s proposal for stabilizing the value of gold, which he had been advocating for a long time; and the lively propaganda which was being circulated, particularly by the Stable Money Association which he had founded, had succeeded in making the concept of price stabilization as the objective of monetary policy into a virtually unassailable dogma. Cassel, who deserved the greatest credit for the stabilization of European currencies, contributed a further, extraordinarily effective argument in favour of the policy of stabilization, the influence of which upon actual developments it is impossible to overestimate. 

This was his prediction that gold production was not adequate for the annual increase of 3 per cent in the world stock of monetary gold which, on his calculations, would be required to maintain stability in the price level. 

Fear of the imminent shortage of gold, and the desire to arrive at a systematic policy for stabilizing the value of money, gave rise to two further ideas which dominated the period, and were expressed particularly in the resolutions of the conference on international economic relations in Genoa in 1922; a preference for the gold exchange standard as the object of stabilization in individual countries, and the recommendation of “Cooperation between Central Banks.” Both desires were to become extremely significant for the development of monetary policy over the next few years. Perhaps it is therefore appropriate at this point to also name the man who acquired special influence as the propagator of the ideas expressed by the Genoa Conference—even if he were not, as one might suspect, its instigator: R. G. Hawtrey of the British Treasury. 

—F. A. Hayek, “The Fate of the Gold Standard,” in The Collected Works of F. A. Hayek, vol. 5, Good Money, Part I: The New World, ed. Stephen Kresge (Indianapolis: Liberty Fund, 1999), 154.