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description= Commentary on monetary policy in the spirit of R. G. Hawtrey;
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stility to democracy quoting from hawtrey s 1925 article currency and public administration which she suggests betrays a technocratic and anti democratic mindset that he shared with contemporary italian theoreticians of fascism mattei seizes on the following passage the central bank is free to follow the precept never explain never regret never apologize it need make no statement of policy critics may rage for nine days but in face of the silence imposed by tradition they do not keep it up hawtrey currency and public administration public administration 3 3 232 45 243 mattei subjects the elitist tone of hawtrey s defense of central bank independence to withering criticism a criticism echoed by her ideological opposite milton friedman but she neglects to quote an important explanatory passage the public interest in the broadest sense is profoundly affected by currency administration those who deprecate criticism fear an ill judged pressure at critical times experience shows that whenever an expansion of credit is developing to excess a formidable opposition arises in the trading world to an increase in bank rate when on the other hand business is in a state of depression no one minds what happens to bank rate the influence of outside pressure is therefore just the contrary to what is required perhaps that is so because criticism is confined to financial and trading circles when credits is expanding traders want to borrow and resent any measures which makes borrowing more difficult or more expensive when business is depressed they do not want to borrow in neither case are they impelled to look beyond their own affairs to the effect of credit on the public interest id it is interesting that hawtrey would have written as he did in 1925 given his own recent experience in criticizing the dear money policy generally followed by the bank of england since 1921 when the bank of england steadfastly refused to lower bank rate despite his own repeated pleas for rate reductions and criticisms of the bank s refusal to respond to those pleas in his lengthy and insightful doctoral dissertation about hawtrey s tenure at the treasury alan gaukroger relying far more intensively and extensively than mattei on the documentary record of hawtrey s tenure discusses a treasury memorandum written by hawtrey on december 5 1925 soon after bank of england raised bank rate back to 5 after briefly reducing it to 4 immediately after restoration of the prewar parity with dollar in april the raising of the bank rate to 5 is nothing less than a national disaster that dear money causes unemployment is a proposition which ought not to admit of dispute not only is it the generally accepted opinion of theoretical economists but it was well recognised by practical financiers and men of business before economists paid much attention to it gaukroger p 194 gaukroger p 193 also reports relying on a recorded interview of hawtrey conducted by alexander cairncross in 1965 that upon hearing the news that bank rate had been raised back to 5 hawtrey went directly to niemeyer s office to express his fury at the news he had just heard only to find after he had begun denouncing the increase that montagu norman himself had been seated in niemeyer s office behind the door he had just opened direct communication between hawtrey and norman never resumed gaukroger also reports that hawtrey s view was dismissed not only by the bank of england but by his superior otto niemeyer and by niemeyer s deputy sir frederick leith ross who invidiously compared hawtrey in opposing an increase in bank rate to rudolf havenstein president of the german reichsbank during the german hyperinflation of 1923 as already mentioned mattei accuses hawtrey of having harbored a deflationary bias owing to a belief that a credit economy is inherently predisposed toward inflation a tendency that must be counteracted by restrictive monetary policy mattei s accusation of deflationary bias rests on a misunderstanding of hawtrey s monetary theory in hawtrey s theory if banks create too much credit the result is inflation if they create too little the result is deflation no endogenous mechanism keeps credit creation by banks on a stable non inflationary non deflationary path once inflation or deflation sets in a cumulative process leads to continuing even accelerating inflation or deflation to achieve stability an exogenous stabilizing mechanism like a metallic standard or a central bank is needed to constrain or stimulate albeit imperfectly credit creation by the banking system it was only in the special conditions after world war i and the collapse of the prewar gold standard which had been centered in london that hawtrey believed a limited deflation would be useful in pursuing the generally accepted goal of restoring the prewar gold standard but the postwar deflation was far more extreme than the deflation contemplated much less endorsed by hawtrey mattei infers from hawtrey s support for deflation to reverse the postwar inflation that he regarded inflation as a greater and more dangerous threat than inflation without acknowledging that he regarded the 1920 22 deflation as excessive and unjustified she also cites his endorsement of restoring convertibility of the pound at the prewar 4 86 parity against the dollar despite the deflationary implications of that restoration as further evidence of hawtrey s approval of deflation but mattei ignores hawtrey s repeated arguments that given the high rate of unemployment in britain there was ample room even after restoration of the prewar parity for the bank of england to have reduced bank rate to promote increased output and employment the advance of bank rate to 5 in march 1925 supervened on a condition of things which promised to bring the pound sterling to par with the dollar without any effort at all credit was expanding and the price level in the united states which may be taken as indicating the price level in terms of gold was rising this expansive tendency came abruptly to an end the rediscount rate it is true was raised in new york but only to 3 5 and till 1928 the american federal reserve bank adhered to moderate rediscount rates and a policy of credit relaxation the deflationary tendency in the gold standard world was due to the continuance of dear money in london in british industry unemployment remained practically undiminished hawtrey a century of bank rate london longmans green and co 1938 pp 137 38 while mattei acknowledges that hawtrey favored easing monetary policy after the restoration of the prewar parity she minimizes its significance by citing hawtrey s recommendation to increase bank rate in 1939 from the 2 rate at which it had been pegged since july 1932 but by 1940 british inflation had risen above 10 substantiating hawtrey s fear with britain about to enter into world war ii of renewed inflation mattei even imputes a sinister motivation to hawtrey s opposition to inflation suggesting that he blamed inflation on the moral turpitude of workers lacking the self discipline to save any of their incomes rather than squander it all on wasteful purchases of alcohol and tobacco in contrast to the virtuous habits of the bourgeoisie and the upper classes who saved a substantial portion of their incomes in doing so mattei in yet another misunderstanding and mischaracterization mistakenly attributes an over consumption theory of inflation to hawtrey the consumption habits of the working class are irrelevant to hawtrey s theory of income and prices in which total income is determined solely by the amount of credit created by the banking system if substantial idle resources are available a reduced lending rate encourages retail and wholesale businesses and traders to increase their holdings of inventories by increasing orders to manufacturers who then increase output thereby generating increased income which in turn leads to increased purchases of consumer and capital goods the increase in output and income causes a further increase the desired holdings of inventories by businesses and traders initiating a further round of increases in orders to manufacturers so that further increases in output and income are constrained by the limits of capacity whereupon further reductions in lending rates would cause inflation rather than increased output while the composition of output between investment goods and consumption goods is governed in hawtrey s theory by the savings habits of households the level of total output and income and the rate of inflation or deflation are determined entirely by the availability of credit it was precisely on this theoretical basis that hawtrey denied that increased public spending would increase output and employment during a depression unless that spending was financed by credit expansion money creation if financed by taxation or by borrowing the public spending would simply reduce private spending by an equal amount mattei recognized the point in connection with public spending in her discussion of hawtrey s famous articulation of the treasury view see hawtrey public expenditure and the demand for labour but failed to recognize the same theoretical argument in the context of spending on consumption versus spending on investment i close this post with a quotation from hawtrey s trade depression and the way out 2nd edition a brilliant exposition of his monetary theory and its application to the problem of inadequate aggregate demand a problem as keynes himself admitted that he dealt with before keynes had addressed it i choose a passage from the last section entitled the fear of inflation of the penultimate chapter evidently mattei has not studied this book which she does not cite or refer to otherwise i cannot imagine how she could have written about hawtrey in her book in the way that she did the fears that efforts to expand credit will be defeated in one way or anotherby the pessimism of traders are not wholly irrational but that pessimism is no more than an obstacle to be overcome and the much more usual view is that inflationary measures take effect only too easily the real obstacle to measures of credit expansion is not the fear that they will not be effective but the fear that they will author s emphasis yet what can be more irrational that that fear the term inflation is very loosely used sometimes it means any expansion of the currency or of bank credit or any such expansion not covered by metallic reserves sometimes it means an issue of currency by way of advances to the government or else an issue backed by government securities but whatever the precise measures classed as inflationary may be their common characteristic and the sole source of danger attributed to them is that they tend to bring about an enlargement of demand and a consequent rise of prices and an enlargement of demand is the essential condition of recovery to warnthe world against inflation is to warn it against economic revival if the economic system of the world had adjusted itself to the existing price level there would be good reason to object to a renewed change inflation is rightly condemned because it means an arbitrary change in the value of money in terms of wealth but deflation equally means an arbitrary change in the value of money the reason why inflation is more condemned and feared is that it is apt to appear convenient and attractive to financiers in difficulties the consequences of deflation are so disastrous and the difficulties of carrying it out so great that no one thinks it necessary to attach any stigma to it and since from time to time deflation has to be applied as a corrective of inflation it is given the status of an austere and painful virtue but essentially it is not a virtue at all and when it is wantonly imposed on the world not as a corrective of inflation but as a departure from a pre existing state of equilibrium it ought to be regarded as a crime against humanity my emphasis just as deflation may be needed as a corrective to an inflation to which the economic system has not adjusted itself so at the present time inflation is needed as a corrective to deflation if the monetary affairs of the world were wisely governed both inflation and deflation would be avoided or at any rate quickly corrected in their initial stages perhaps the ideal of monetary stability will be achieved in the future but to start stereotyping conditions in which prices are utterly out of equilibrium with wages and debts and with one another would be to start the new polcy under impossible conditions the dread of inflation has been greatly accentuated by the experiences of the years following the war when so many countries found that the monetary situation got completely out of control the vicisous circle of inflation gained such power that it wrecked both the tax system and the investment market it cut off all the normal resources for meeting public expenditure and left governments to subsist on issues of paper money no country would willingly endure such a situation but that kind of monetary collapse does not come easily or suddenly there is i believe no case in history in which inflation has got out of hand in less that three years author s emphasis the fear that one slip from parity means a fall into the abyss is entirely without foundation especially is that so when deflation is raging the first impact of a monetary expansion is then felt rather in increased output than in higher prices it is only when industry has become fully employed that the vicious circle of inflation is joined and prices begin to rise hetzel withholds credit from hawtrey for his monetary explanation of the great depression published december 13 2023 bank of france gold standard great depression gustav cassel irving fisher milton friedman monetarism monetary policy r g hawtrey robert hetzel uncategorized 4 comments tags barry eichengreen douglas irwin h clark johnson peter temin scott sumner in my previous post i explained how the real bills doctrine originally espoused by adam smith was later misunderstood and misapplied as a policy guide for central banking not as smith understood it as a guide for individual fractional reserve banks in his recent book on the history of the federal reserve robert hetzel recounts how the federal reserve was founded and to a large extent guided in its early years by believers in the real bills doctrine on top of their misunderstanding of what the real bills doctrine really meant they also misunderstood the transformation of the international monetary system from the classical gold standard that had been in effect as an international system from the early 1870s to the outbreak of world war i before world war i no central bank even the bank of england dominant central bank at the time could determine the international price level shared by all countries on the gold standard but by the early 1920s the federal reserve system after huge w...
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