Knut Wicksell and Gustav Cassel on Secular Movements in Prices

Abstract

IN THE NINETEENTH CENTURY the price level in the United States, Great Britain, France, Germany, and the Scandinavian countries showed three secular trends. In the first half of the century, after the Napoleonic wars, the price level was falling secularly. Around 1850 prices started to rise and this trend continued for roughly twenty years until the early 1870s. This period of secular inflation was followed by twenty years of secular deflation. In the mid 1890s the trend in prices was reversed and a new period of inflation began that lasted to the end of the First World War. Within a period of about six years around the turn of the century, two Swedish economists, Knut Wicksell and Gustav Cassel, each offered a hypothesis to explain this picture of the secular behavior of prices in the nineteenth century. Wicksell suggested that it was due to real sector disturbances causing a divergence between the bank rate and the natural rate of interest. When the natural rate was above the bank rate, the money stock expanded and prices rose. In a similar way Wicksell explained the deflations as caused by a fall in the natural rate below the bank rate, which initiated a monetary contraction. Cassel regarded the secular trend of prices as the result of differential growth rates in the world demand and the world supply of

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