Keynes v. Hawtrey on British Monetary Policy after Rejoining the Gold Standard

The close, but not always cozy, relationship between Keynes and Hawtrey was summed up beautifully by Keynes in 1929 when, commenting on a paper by Hawtrey, “Money and Index Numbers,” presented to the Royal Statistical Society, Keynes began as follows.

There are very few writers on monetary subjects from whom one receives more stimulus and useful suggestion . . . and I think there are few writers on these subjects with whom I personally feel more fundamental sympathy and agreement. The paradox is that in spite of that, I nearly always disagree in detail with what he says! Yet truly and sincerely he is one of the writers who seems to me to be most nearly on the right track!

The tension between these two friendly rivals was dramatically displayed in April 1930, when Hawtrey gave testimony before the Macmillan Committee (The Committee on Finance and Industry) established after the stock-market crash in 1929 to investigate the causes of depressed economic conditions and chronically high unemployment in Britain. The Committee, chaired by Hugh Pattison Macmillan, included an impressive roster of prominent economists, financiers, civil servants, and politicians, but its dominant figure was undoubtedly Keynes, who was a relentless interrogator of witnesses and principal author of the Committee’s final report. Keynes’s position was that, having mistakenly rejoined the gold standard at the prewar parity in 1925, Britain had no alternative but to follow a policy of high interest rates to protect the dollar-sterling exchange rate that had been so imprudently adopted. Under those circumstances, reducing unemployment required a different kind of policy intervention from reducing the bank rate, which is what Hawtrey had been advocating continuously since 1925.

In chapter 5 of his outstanding doctoral dissertation on Hawtrey’s career at the Treasury, which for me has been a gold mine (no pun intended) of information, Alan Gaukroger discusses the work of the Macmillan Committee, focusing particularly on Hawtrey’s testimony in April 1930 and the reaction to that testimony by the Committee. Especially interesting are the excerpts from Hawtrey’s responses to questions asked by the Committee, mostly by Keynes. Hawtrey’s argument was that despite the overvaluation of sterling, the Bank of England could have reduced British unemployment had it dared to cut the bank rate rather than raise it to 5% in 1925 before rejoining the gold standard and keeping it there, with only very brief reductions to 4 or 4.5% subsequently. Although reducing bank rate would likely have caused an outflow of gold, Hawtrey believed that the gold standard was not worth the game if it could only be sustained at the cost of the chronically high unemployment that was the necessary consequence of dear money. But more than that, Hawtrey believed that, because of London’s importance as the principal center for financing international trade, cutting interest rates in London would have led to a fall in interest rates in the rest of the world, thereby moderating the loss of gold and reducing the risk of being forced off the gold standard. It was on that point that Hawtrey faced the toughest questioning.

After Hawtrey’s first day of his testimony, in which he argued to a skeptical committee that the Bank of England, if it were willing to take the lead in reducing interest rates, could induce a world-wide reduction in interest rates, Hawtrey was confronted by the chairman of the Committee, Hugh Macmillan. Summarizing Hawtrey’s position, Macmillan entered into the following exchange with Hawtrey

MACMILLAN. Suppose . . . without restricting credit . . . that gold had gone out to a very considerable extent, would that not have had very serious consequences on the international position of London?

HAWTREY. I do not think the credit of London depends on any particular figure of gold holding. . . . The harm began to be done in March and April of 1925 [when] the fall in American prices started. There was no reason why the Bank of England should have taken ny action at that time so far as the question of loss of gold is concerned. . . . I believed at the time and I still think that the right treatment would have been to restore the gold standard de facto before it was restored de jure. That is what all the other countries have done. . . . I would have suggested that we should have adopted the practice of always selling gold to a sufficient extent to prevent the exchange depreciating. There would have been no legal obligation to continue convertibility into gold . . . If that course had been adopted, the Bank of England would never have been anxious about the gold holding, they would have been able to see it ebb away to quite a considerable extent with perfect equanimity, and might have continued with a 4 percent Bank Rate.

MACMILLAN. . . . the course you suggest would not have been consistent with what one may call orthodox Central Banking, would it?

HAWTREY. I do not know what orthodox Central Banking is.

MACMILLAN. . . . when gold ebbs away you must restrict credit as a general principle?

HAWTREY. . . . that kind of orthodoxy is like conventions at bridge; you have to break them when the circumstances call for it. I think that a gold reserve exists to be used. . . . Perhaps once in a century the time comes when you can use your gold reserve for the governing purpose, provided you have the courage to use practically all of it. I think it is possible that the situation arose in the interval between the return to the gold standard . . . and the early part of 1927 . . . That was the period at which the greater part of the fall in the [international] price level took place. [Gaukroger, p. 298]

Somewhat later, Keynes began his questioning.

KEYNES. When we returned to the gold standard we tried to restore equilibrium by trying to lower prices here, whereas we could have used our influence much more effectively by trying to raise prices elsewhere?

HAWTREY. Yes.

KEYNES . . . I should like to take the argument a little further . . . . the reason the method adopted has not been successful, as I understand you, is partly . . . the intrinsic difficulty of . . . [reducing] wages?

HAWTREY. Yes.

KEYNES. . . . and partly the fact that the effort to reduce [prices] causes a sympathetic movement abroad . . .?

HAWTREY. Yes.

KEYNES. . . . you assume a low Bank Rate [here] would have raised prices elsewhere?

HAWTREY. Yes.

KEYNES. But it would also, presumably, have raised [prices] here?

HAWTREY. . . . what I have been saying . . . is aimed primarily at avoiding the fall in prices both here and abroad. . . .it is possible there might have been an actual rise in prices here . . .

KEYNES. One would have expected our Bank Rate to have more effect on our own price level than on the price level of the rest of the world?

HAWTREY. Yes.

KEYNES. So, in that case . . . wouldn’t dear money have been more efficacious . . . in restoring equilibrium between home and foreign price . . .?

HAWTREY. . . .the export of gold itself would have tended to produce equilibrium. It depends very much at what stage you suppose the process to be applied.

KEYNES. . . . so cheap money here affects the outside world more than it affects us, but dear money here affects us more than it affects the outside world.

HAWTREY. No. My suggestion is that through cheap money here, the export of gold encourages credit expansion elsewhere, but the loss of gold tends to have some restrictive effect on credit here.

KEYNES. But this can only happen if the loss of gold causes a reversal of the cheap money policy?

HAWTREY. No, I think that the export of gold has some effect consistent with cheap money.

In his questioning, Keynes focused on an apparent asymmetry in Hawtrey’s argument. Hawtrey had argued that allowing an efflux of gold would encourage credit expansion in the rest of the world, which would make it easier for British prices to adjust to a rising international price level rather than having to fall all the way to a stable or declining international price level. Keynes countered that, even if the rest of the world adjusted its policy to the easier British policy, it was not plausible to assume that the effect of British policy would be greater on the international price level than on the internal British price level. Thus, for British monetary policy to facilitate the adjustment of the internal British price level to the international price level, cheap money would tend to be self-defeating, inasmuch as cheap money would tend to raise British prices faster than it raised the international price level. Thus, according to Keynes, for monetary policy to close the gap between the elevated internal British price level and the international price level, a dear-money policy was necessary, because dear money would reduce British internal prices faster than it reduced international prices.

Hawtrey’s response was that the export of gold would induce a policy change by other central banks. What Keynes called a dear-money policy was the status quo policy in which the Bank of England was aiming to maintain its current gold reserve. Under Hawtrey’s implicit central-bank reaction function, dear money (i.e., holding Bank of England gold reserves constant) would induce no reaction by other central banks. However, an easy-money policy (i.e., exporting Bank of England gold reserves) would induce a “sympathetic” easing of policy by other central banks. Thus, the asymmetry in Hawtrey’s argument was not really an asymmetry, because, in the context of the exchange between Keynes and Hawtrey, dear money meant keeping Bank of England gold reserves constant, while easy money meant allowing the export of gold. Thus, only easy money would induce a sympathetic response from other central banks. Unfortunately, Hawtrey’s response did not explain that the asymmetry identified by Keynes was a property not of Hawtrey’s central-bank reaction function, but of Keynes’s implicit definitions of cheap and dear money. Instead, Hawtrey offered a cryptic response about “the loss of gold tend[ing] to have some restrictive effect on credit” in Britain.

The larger point is that, regardless of the validity of Hawtrey’s central-bank reaction function as a representation of the role of the Bank of England in the international monetary system under the interwar gold standard, Hawtrey’s model of how the gold standard operated was not called into question by this exchange. It is not clear from the exchange whether Keynes was actually trying to challenge Hawtrey on his model of the international monetary system or was just trying to cast doubt on Hawtrey’s position that monetary policy was, on its own, a powerful enough instrument to have eliminated unemployment in Britain without adopting any other remedial policies, especially Keynes’s preferred policy of public works. As the theoretical source of the Treasury View that public works were incapable of increasing employment without monetary expansion, it is entirely possible that that was Keynes’s ultimate objective. However, with the passage of time, Keynes drifted farther and farther away from the monetary model that, in large measure, he shared with Hawtrey in the 1920s and the early 1930s.

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30 Responses to “Keynes v. Hawtrey on British Monetary Policy after Rejoining the Gold Standard”


  1. 1 princess1960 March 21, 2013 at 3:54 am

    Keynes was right ..you know not allways we have to be open mind some special cases or thing.s needed close minde
    iam conservative but i like Keynes ..
    thank you very intristing

  2. 2 Greg Ransom March 21, 2013 at 9:16 am

    Note well — the debates between the Keynes/Cambridge economists and the Hayek-Robbins/LSE economists was all about exactly *this* situation created by the 1925 return to gold at parity — and it had *nothing* to do with the American economy.

    Hayek *explicitly* says that his policy judgments in the famous Times letter had everything to do with his believing that the 7-8 years *after* this 1925 gold parity move, the process of price adjustment within Britain and between Britain and the world was on the path to completion, and that after such a high cost had been expended it was foolish to detonate the gains with an abandonment of the policy just as it was being achieved.

    Hayek might have been completely wrong in his judgment — but it is far past time for historians of economic thought and economic history to put away their bad history and erroneous myths and finally tell this story truthfully.

  3. 3 Greg Ransom March 21, 2013 at 9:22 am

    Hayek consistently said that what Keynes was always doing was attempting to come up with whatever rationalization would get people to act fiscally and monetarily to fix the Britain’s internationally uncompetitive high wage problem caused by 1925 parity move & the power of its unions & associated pathologies of British policy.

    Ie Keynes never gave us ‘general theories’ he gave us ever changing theories of the time to change British opinion on how to solve its union power and labor price problem made utterly pathological by the 1925 gold parity move.

    That’s Hayek’s view of what was taking place with Keynes.

  4. 4 Greg Ransom March 21, 2013 at 9:34 am

    A simplified view of the situation.

    Returning the inflated pound to gold at parity in 1925 sent the relation of British prices to the world seriously out of whack — out of whack British wages combined with union power & expanding unemployment and welfare provision, lead to historically high unemployment.

    Keynes thought that unemployed labor should be utilized for productive purposes and he thought the way to do so is the way labor was utilized in the new centrally planned economies — put it to work in a large scale program of public works.

    Keynes also thought you could deal with the problem using a variety of other means, eg abandon free trade to protect British jobs & markets, use capital controls, etc.

    And on the money side detonate the pathological 1925 parity idea and actively manage the supply of money and credit to make prices do what you wanted them to do.

    And, finally, putting everything together, Keynes called for the euthanasia of the investors and the government central control of investment as a coordinated and planned united operation combining government investment in capital goods/public works, monetary policy, and chauvinistic Britain-centered capital controls/trade control policy.

  5. 5 David Glasner March 21, 2013 at 9:51 am

    Princess1960, I am not sure what point you are referring to when you say that Keynes was right. He was right about some things and not right about others.

    Greg, I say this with the utmost respect for Hayek as an economic theorist and for you as a Hayek scholar, but I have no idea what it means to say that the debate had nothing to do with the American economy inasmuch as in 1925 America in fact constituted the international gold standard and monetary equilibrium for Britain required a rough correspondence between the British and the American price levels. As for Hayek’s policy recommendation in 1932, in my view it was an unmitigated disaster and reflected his faulty understanding of how the international gold standard worked either in practice or in theory (which I have previously documented). Accordingly I am unable to make any sense out of you admonition to historians of economic thought and economic history “to put away their bad history and erroneous myths and finally tell this story truthfully.”

    Concerning Keynes, I agree that he gave himself too much credit for having constructed a general theory, but Hayek had an unfortunate tendency to belittle and dismiss Keynes’s theoretical achievements with remarks about Keynes simply wanting to pander to politicians and public opinion. That was a very Keynesian approach to debating about theoretical differences. I would therefore say that what you provide in your third comment is a greatly oversimplified view of the situation.

  6. 6 Greg Ransom March 21, 2013 at 10:35 am

    David, I’m sorry you misunderstood. Of course. The point is that Hayek-Robbins were talking about Britain and not the post-1929 domestic situation in America.

    “Greg, I say this with the utmost respect for Hayek as an economic theorist and for you as a Hayek scholar, but I have no idea what it means to say that the debate had nothing to do with the American economy inasmuch as in 1925 America in fact constituted the international gold standard and monetary equilibrium for Britain required a rough correspondence between the British and the American price levels.”

  7. 7 Greg Ransom March 21, 2013 at 10:40 am

    David — its bad history and erroneous myth making for Americans to pull out the Hayek-Robbins/LSE vs Keynes/Cambridge letters in the Times, and pretend the letters weren’t addressed to the unique British situation dating from 1925, and is somehow instead targeted at what was going on in America in the 1930s.

    And that is universally what you find happening.

    Americans writer as if they know nothing at all of the British background or how these letters fit in to this long running British discussion. Which is probably the case, re most America’s writing on this topic.

  8. 8 greghill1000 March 21, 2013 at 7:59 pm

    David,

    “However, an easy-money policy (i.e., exporting Bank of England gold reserves) would induce a “sympathetic” easing of policy by other central banks.”

    Why did Hawtrey think “other central banks” would ease, in sympathy, after the BOE eased?

  9. 9 David Glasner March 21, 2013 at 8:50 pm

    Greg Ransom, I could accept your representation that Hayek and Robbins were talking about the pre-1929 situation if it were not for the fact that their policy advice was being given in the 1931-34 period. Whatever the situation in Britain was until 1929, after 1930 the nature of the problem was completely transformed because catastrophic deflation had become an international problem in comparison with the chronic mild deflation that afflicted Britain in the 1920s.

    Greg Hill, I think there were two arguments. First by exporting gold, Britain would be increasing the gold reserves held by other central banks, thereby adding to their incentives to expand credit to avoid holding more gold than they really wanted. Of course, by 1930 that idea may not have taken proper account of the insane Bank of France. Second, Hawtrey believed that the interest rate in London was an international benchmark so that a reduction of the rate in London would tend to bring down rates elsewhere. I am not arguing that Hawtrey was necessarily right in his assertions about the ability of the Bank of England to alter the policies of other central banks, I am just observing that Keynes’s critique of him in his questioning at the Macmillan Committee missed an important distinction and that Hawtrey failed to correct him.

  10. 10 Greg Ransom March 22, 2013 at 7:21 am

    They were still talking about Britain and not America — and well into the *1980s* Hayek was still thinking of the whole situation in terms of the 1925 conditions. There are two or three YouTube videos where Hayek does exactly that in interviews. Just google “Hayek” and “Keynes”.

    Hayek never seems to think much or talk much about the American situation, and never seems to know what is going on there in the 1930s.

    Really. Into the *1980s* Hayek still thinks the whole issue with Keynes is 1925.

    Go witness it for yourself. YouTube. “Hayek” and “Keynes”.

    David,

    “Greg Ransom, I could accept your representation that Hayek and Robbins were talking about the pre-1929 situation if it were not for the fact that their policy advice was being given in the 1931-34 period. Whatever the situation in Britain was until 1929, after 1930 the nature of the problem was completely transformed because catastrophic deflation had become an international problem in comparison with the chronic mild deflation that afflicted Britain in the 1920s.”

  11. 11 David Glasner March 22, 2013 at 7:29 am

    Greg Ransom, OK, but that places the entire fault on Hayek, not on his critics. His misunderstanding of the situation that he was offering policy advice on was comprehensive and catastrophic.

  12. 12 Alan Gaukroger March 22, 2013 at 8:01 am

    In the extract from the Macmillam Committee there seems to be an assumption by Keynes that Hawtrey is seeking to cause an increase in the price of foreign-produced goods relative to comparable home-produced goods – and thereby conferring an advantage to home-produced goods in foreign markets. The low British interest rate would encourage investors to purchase (say) dollars with their gold, and (continuing with the example) the American banking system would use the influx of gold as reserves with which to lower their interest rates and expand credit – thus increasing the assets on which they could draw interest. The expansion of credit money would cause American prices to rise and in the process make their goods uncompetitive in world markets. Viewed in this way the lowering of domestic interst rates may be seen as a hostile act designed to gain advantage. If Keynes viewed Hawtrey’s proposal in this way then he may well have been right that low domestic rates would also bring about rises in British prices and no such advantage would accrue.

    But there may be more to it. Speaking to the Royal Statistical Society in 1933 (with Britain off gold, and hence a somewhat different transmission mechanism) Hawtrey argued for currency depreciation as the most satisfactory means of reviving trade. He dismissed arguments that depreciation was an unfriendly act merely designed to increase exports and reduce imports, and rejected the assumption that consumers simply swithched from imports to cheaper home-produced goods. Rather, with dearer imports, home-producers, whose prices had been held down to those of the cheaper imports, could now increase their prices to the level of the (now dearer) imports, therefore make profits and therefore expand production with a resulting overall increase in consumers’ incomes.

    It was generally agreed between members of the Macmillan Committee that the economic problem was that costs arising from the ‘stickiness’ of wages prevented employers from making profits at prevailing prices, and that this discouraged them from expanding production and employment. I suspect that Hawtrey’s low bank-rate policy was designed with the idea of generally lifting prices to allow profitability, thus leading to increased production and increased Consumers’ Income – rather than in gaining competitive advantage, as I think Keynes may have assumed.

  13. 13 Greg ransom March 22, 2013 at 11:05 pm

    My issue is getting the intellectual history right. We have to get the history right first, after we get that right, have at your fault finding.

    What appalls me me is when people invent false histories to serve their rhetorical ends — which is all to typical among professors and intellectuals — Paul Krugman & Brad DeLong for example.

    Get the damn ideas right and the damn hsitory right, then we can think about what the significance of that was.

    The key thing with Hayek is that he had no influence on anyone at a bank or in government that can think of. You can attack Hayek all day but you can’t blame him for any policy made anywhere in the 1930s.

    “Greg Ransom, OK, but that places the entire fault on Hayek, not on his critics. His misunderstanding of the situation that he was offering policy advice on was comprehensive and catastrophic.”

  14. 14 Julian Janssen March 25, 2013 at 6:55 am

    David,

    Ages ago when you had some post about the Gold Standard, I remember writing a comment, where I am quite sure I was confused about things. Now that I’m older and wiser, I thought I might engage myself where, to the best of my recollection, I was in error (or I at least now believe myself to have been). I hope that you do not mind that I direct this to your comment section on an unrelated post.

    I remember asserting that there was a gold bubble, but now I realize that is as wrong as saying there is/was a treasury bubble. My current perspective, however, is that the value of the dollar is not consistent with a rapid return to full employment (i.e., it is too high). At least that’s my feeling when I lean most monetarist. I am probably much more divided on my Keynesian and Monetarist proclivities, but I generally see that if monetary expasion is the main lever to bring about a recovery (which I now think is more realistic than fiscal policy, but purely on political economy reasons), then the gold price could quite easily rise even further than it has already (and probably would). To some extent gold holdings might be irrational, if they are caused by worries about an inflation take-off, but if the same reasons for holding gold prevail, whether rational or not, gold prices may still rise further. If monetary expansion will have any side-effects, I suppose one could expect higher prices for gold and higher costs for foreign currency (a weaker dollar). I’d appreciate any response from your well-informed commenters, whether agreeing or dissenting.

  15. 15 David Glasner March 25, 2013 at 7:22 am

    Alan, Thanks for bringing the question of competitive advantage into the discussion. I have written about Hawtrey’s advocacy of competitive devaluation and currency wars previously, but I did not connect it to this interaction between Keynes and Hawtrey. I will have go back reread it now with this nuance in mind.

    Greg, I agree that it’s important to get the history right, but I don’t think that the main narrative changes much by emphasizing that Hayek didn’t recognize that a narrow British disequilibrium had mushroomed into an international disaster. As for Hayek’s influence, I can’t evaluate how much he was being listened to. But certainly there were a lot of people who were of a similar persuasion and Hayek was providing them with theoretical aid and comfort.

    Julian, Good to hear from you again. I believe that there has been a gold bubble. I wrote a post about that a few months ago. Gold has recently staged a bit of a rally even as the dollar has been rising against the euro, but that is a reflection of unease about the Cyprus situation. My own view in general is that the price of gold has almost no significance for the macroeconomy.

  16. 16 Greg Ransom March 25, 2013 at 8:28 am

    Name me three people in the Bank of England or leading the British government who would be included among these “lots of people”.

    Then show me the evidence.

    David wrote,

    “certainly there were a lot of people who were of a similar persuasion and Hayek was providing them with theoretical aid and comfort.”

  17. 17 Greg Ransom March 25, 2013 at 8:31 am

    It’s easy to talk like this — look at Brad DeLong’s invented (and debunked) narratives — it’s harder to lay out the factual history substantiating it.

    Lawrence White have written a documented & peer reviewed paper challenging this kind of talk, I’ve never seen a rigorous and well documented peer reviewed paper substantively making the case.

    David writes,

    “But certainly there were a lot of people who were of a similar persuasion and Hayek was providing them with theoretical aid and comfort.

  18. 18 JP Koning March 25, 2013 at 10:22 am

    Very interesting. I wish I had more to add but I don’t know much about Hawtrey.

    I did notice that Hawtrey doesn’t reference Keynes much. I’ve got three Hawtrey books in electronic format: Good and Bad Trade, Monetary Reconstruction, and Currency & Credit. Keynes only gets the briefest of mentions in Monetary Reconstruction and a footnote in Currency & Credit. But I also recall that writers back then weren’t rigorous in crediting sources and influences.

  19. 19 David Glasner March 25, 2013 at 1:24 pm

    Greg, You wrote:

    “Name me three people in the Bank of England or leading the British government who would be included among these “lots of people”.

    Then show me the evidence.”

    Well here are two, Otto Niemeyer and Frederick Leith-Ross. Niemeyer was Churchill’s principal adviser at the Treasury advising returning to the gold standard at the prewar dollar-sterling parity. In 1927 he went to the Bank of England. He consistently favored deflationary policy. Leith Ross was his successor at the Treasury and was a consistent voice in favor of deflation. You can consult Alan Gaukroger’s dissertation. I don’t say that Niemeyer and Leith-Ross were following Hayek’s advice, but Hayek was wittingly or unwittingly providing intellectual support to those who in Hawtrey’s immortal words were crying “fire, fire in Noah’s flood.”

    I like White’s paper, but I think that it focuses on just one side of Hayek’s discussion of policy, the desirability of stabilizing nominal expenditure and income. Unfortunately, Hayek was unwilling to follow that criterion for policy when it contradicted staying on the gold standard.

    JP, Hawtrey published his review of the Treatise on Money in The Art of Central Banking and of the General Theory in Capital and Employment. His Century of Bank Rate does address Keynes extensively and is in many ways a massive response to Keynes’s argument that it is the long-term rate of interest that matters for economic policy, a view very much opposed to Hawtrey’s position that it is the short-term rate of interest (the bank rate) that is the key instrument of policy.

  20. 20 Julian Janssen March 25, 2013 at 2:19 pm

    David,

    I did not mean to imply that gold had any particular significance in the Macroeconomy, just that it is one more indicator of the weakness of the dollar, but that the dollar is not weak enough to bring a fast recovery from the lesser depression. I still think there may be some irrationality in the price of gold (a bubble), but such circumstances can endure for surprisingly long.

  21. 21 Greg Ransom March 26, 2013 at 9:03 am

    Hayek explicitly *opposed* the deflationary policy — please invest 3 minutes of your time watching Hayek discuss this on YouTube.

    Hayek’s argument was that British labor prices had essentially adjusedt by the time 7 years later of the 1932 London Times letter. That’s an empirical assessment which you can argue with. But it does not involve theoretical justification for a pathological deflationary policy.

    So this is *not* qualify as an example:

    “Niemeyer was Churchill’s principal adviser at the Treasury advising returning to the gold standard at the prewar dollar-sterling parity. In 1927 he went to the Bank of England. He consistently favored deflationary policy.”

  22. 22 Greg Ransom March 26, 2013 at 9:06 am

    Again, Hayek explicitly opposed deflation, see the YouTube video and Hayek’s remarks on countering pathological, bank induced deflation in his review of Keynes and in Prices and Production.

    Again, this is not a valid example.

    “Leith Ross was his successor at the Treasury and was a consistent voice in favor of deflation.”

    What you are showing me is that you simply don’t know Hayek’s theoretical views nor his empirical understanding of the period — something you have shown me repeatedly.

  23. 23 Greg Ransom March 26, 2013 at 9:18 am

    In 1932 Hayek included *praise* for Keynes’ new ideas for countering pathological deflation in his review of Keynes’ _Treatise_, he also advocated countering pathological deflation in _Prices and Production_, saying there was a real risk of pathological deflation — later Hayek says repeatedly that Friedman’s empirical work established that there was massive pathological deflation in the United State of just the kind Hayek recommended countering in his theoretical work of the 1930s.

    Hayek is on record opposing pathological deflation consistently and across his career.

    Hayek’s belief 7 years on beyond 1925 is that wages in Britain after 7 years had been adjusting and union power had been receding and public works spending projects weren’t going to make things better. He never endorsed the pathological deflation policy of the Treasury — and explained in interviews recalling the period that he would have advices *against* those policies and clue the British into the forgotten lessons of Ricardo on this topic.

  24. 24 Greg Ransom March 26, 2013 at 9:20 am

    How in the world was opposition to public works spending in 1932 any kind of “intellectual support” for the deflationary policy of 1925?

    “Hayek was wittingly or unwittingly providing intellectual support to those who in Hawtrey’s immortal words were crying “fire, fire in Noah’s flood.””

  25. 25 Greg Ransom March 26, 2013 at 9:38 am

    We need some letters or something showing that Otto Niemeyer and Frederick Leith-Ross read *Prices and Production* and somehow took that to justify their policies — causal claims require actual causal chains of events.

  26. 26 Greg Ransom March 28, 2013 at 1:16 am

    Here is what the economics ‘scientists’ have done since Keynes — they’ve mischaracterized Hayek & attacked him on false grounds, and blamed him for every policy mistake taken by policy makers under guidance of theories Hayek *rejected* — and they’ve done so because its the most effective cheat allowing them to remain incompetent in Hayek’s actual scientific work — that is certainly what Keynes did, and Krugman, and Friedman, and countless others. This incompetence is *easy* to document and has been documented.

    And these facts do not reflect well on the ‘scientific’ or rational pretensions of the economics profession,

  27. 27 David Glasner March 29, 2013 at 8:06 am

    Greg, For Hayek to say that British labor costs had adjusted by 1932 is incomprehensible, because it was irrelevant whether British labor costs were higher in 1932 than labor costs in other countries, when the entire world was in the grips of catastrophic deflation. Hayek’s whole point was that Britain did not have to leave the gold standard in 1931, but the gold standard was then not just Britain’s problem, it was the world’s problem. Your defense of Hayek only digs an even deeper whole for him. Hayek may have opposed deflation in the abstract, but he opposed every practical step that could have stopped the deflation, which is amply confirmed by his 1932 defense of the the gold standard as the insane Bank of France. In 1932 to favor the gold standard was to favor pathological deflation.

  28. 28 nottrampis March 31, 2013 at 12:27 am

    A bit late but please keep these pieces up.

    They are a gold mine of information.
    Not only the piece you write but also the comments as well.

  29. 29 David Glasner March 31, 2013 at 3:50 pm

    nottrampis, Just posted another. Glad that you are enjoying them.


  1. 1 Hawtrey v. Keynes on the Rate of Interest that Matters | Uneasy Money Trackback on March 31, 2013 at 2:24 pm

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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