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description= Commentary on monetary policy in the spirit of R. G. Hawtrey;
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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 wartime and postwar gold inflows held almost half of the world s gold reserves its gold holdings empowered the fed to control the value of gold and thereby the price level not only for itself but for all the other countries rejoining the restored gold standard during the 1920s all of this was understood by hawtrey in 1919 when he first warned that restoring the gold standard after the war could cause catastrophic deflation unless the countries restoring the gold standard agreed to restrain their demands for gold the cooperation while informal and imperfect did moderate the increased demand for gold as over 30 countries rejoined the gold standard in the 1920s until the cooperation broke down in 1928 unlike most other monetarists especially milton friedman and his followers whose explanatory focus was almost entirely on the us quantity of money rather than on the international monetary conditions resulting from the fraught attempt to restore the international gold standard hetzel acknowledges hawtrey s contributions and his understanding of the confluence of forces that led to a downturn in the summer of 1929 followed by a stock market crash in october recounting events during the 1920s and the early stages of the great depression hetzel mentions or quotes hawtrey a number of times for example crediting p 100 both hawtrey and gustav cassel for predicting that a return to the gold standard as it existed prior to world war i would destabilize europe through deflation discussing the fed s exaggerated concerns about the inflationary consequences of stock market spectulation hetzel p 136 quotes hawtrey s remark that the fed s dear money policy aiming to curb stock market speculation stopped speculation by stopping prosperity hetzel p 142 also quotes hawtrey approvingly about the importance of keeping value of money stable and the futility of urging monetary authorities to stabilize the value of money if they believe themselves incapable of doing so later p 156 hetzel calling hawtrey a lone voice thereby ignoring cassel quotes hawtrey s scathing criticism of the monetary authorities for their slow response to the sudden onset of rapid deflation in late 1929 and early 1930 including his remark deflation may become so intense that it is difficult to induce traders to borrow on any terms and that in that event the only remedy is the purchase of securities by the central bank with a view to directly increase the supply of money in chapter 9 entitled the great contraction in a nod to the corresponding chapter in a monetary history of the united states by friedman and schwartz hetzel understandably focuses on federal reserve policy friedman insisted that the great contraction started as a normal business cycle downturn caused by fed tightening to quell stock market speculation that was needlessly exacerbated by the fed s failure to stop a collapse of the us money stock precipitated by a series of bank failures in 1930 and was then transmitted to the rest of the world through the fixed exchange rate regime of the restored gold standard unlike friedman hetzel acknowledges the essential role of the gold standard in not only propagating but in causing the great depression but hetzel leaves the seriously mistaken impression that the international causes and dimensions of the great depression as opposed to the us centered account advanced by friedman was neither known nor understood until the recent research undertaken by such economists as barry eichengreen peter temin douglas irwin clark johnson and scott sumner decades after publication of the monetary history what hetzel leaves unsaid is that the recent work he cites largely rediscoveed the contemporaneous work of hawtrey and cassel while recent research provides further and perhaps more sophisticated quantitative confirmation of the hawtrey cassel monetary explanation of the great depression it adds little if anything to their broad and deep analytical and historical account of the downward deflationary spiral from 1929 to 1933 and its causes in section 9 11 with the heading why did learning prove impossible hetzel p 187 actually quotes a lengthy passage from hawtrey 1932 pp 204 05 describing the widely held view that the stock market crash and subsequent downturn were the result of a bursting speculative bubble that had been encouraged and sustained by easy money policies of the fed and the loose lending practices of the banking system it was of course a view that hawtrey rejected but was quoted by hetzel to show that contemporary opinion during the great depression viewed easy monetary policy as both the cause of the crash and great depression and as powerless to prevent or reverse the downward spiral that followed the bust although hetzel is familiar enough with hawtrey s writings to know that he believed that the great depression had been caused by misguided monetary stringency hetzel is perplexed by the long failure to recognize that the great depression was caused by mistaken monetary policy hetzel p 189 quotes friedman s solution to the puzzle it was believed in the depression that monetary policy had been tried and had been found wanting in part that view reflected the natural tendency for the monetary authorities to blame other forces for the terrible economic events that were occurring the people who run monetary policy are human beings even as you and i and a common human characteristic is that if anything bad happens it is somebody else s fault friedman the counter revolution in monetary theory london institute for economic affairs p 12 to which hetzel as if totally unaware of hawtrey and cassel adds nevertheless no one even outside the fed my emphasis mounted a sustained effective attack on monetary policy as uniformly contractionary in the depression apparently further searching for a solution hetzel in chapter twelve contemporary critics in the depression provides a general overview of contemporary opinion about the causes of the depression focusing on 14 economists all americans except for joseph schumpeter arriving at harvard in 1932 gottfried haberler arriving at harvard in 1936 hawtrey and cassel although acknowledging the difficulty of applying the quantity theory to a gold standard monetary regime especially when international in scope hetzel classifies them either as proponents or opponents of the quantity theory remarkably hetzel includes hawtrey among those quantity theorists who lacked a theory attributing money to the behavior of the fed rather than to the commercial banking system and who lacked a monetary exp...
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