Uneasy Money is a new blog about monetary policy, which means it is also about monetary theory and macroeconomics. The past three years have shown that we don’t know as much as we thought about any of those fields, and so I hope that this blog will contribute something to our cooperative effort to learn about the interaction between money and economic activity and about how monetary policy can help us achieve a more stable economic environment with less unemployment than we have had these past three years. My own view is that monetary policy has been too tight for the past three years, thereby creating the conditions for the September 2008 financial crisis after Lehman Brothers failed and then preventing the economy from staging a rapid recovery as it has often done previously after sharp downturns. It is more than coincidence that the last time that the US economy failed to recover strongly after a sharp downturn was during the Great Depression. Then, too, the underlying cause of the downturn was monetary, and then, too, the economy failed to recover because monetary policy remained too tight (owing to the perverse dynamics of a dysfunctional gold standard) to allow a recovery to gain any traction. A lot has been written about the Great Depression, but very little of what has been written has significantly added to or modified the account of its causes offered by the eminent English economist Ralph G. Hawtrey in several books and dozens of articles as events were unfolding towards their tragically catastrophic outcomes. For a variety of reasons, the writings of Hawtrey, perhaps one of the ten most influential economists of the 1920s and 1930s, were largely forgotten in the wake of Keynesian Revolution of the 1930s and 1940s and the Monetarist Counterrevolution of the 1950s and 1960s, even though he was an acknowledged influence on one and an unacknowledged influence on the other. Besides intending to use Hawtrey’s insights to illuminate many of the problems and challenges for monetary policy in our current difficulties, I also hope that this blog can help revive interest in Hawtrey’s work, perhaps serving as a catalyst for further research about him and as a clearinghouse for the exchange of information and ideas about him and about research relevant to his work. The title of the blog alludes to 1) our uncertain understanding of monetary policy, 2) to what Hawtrey called “the inherent instability of credit”, and 3) to the role of “tight” (the opposite of “easy”) money in causing both the Great Depression and our very own Little Depression.
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To help get readers up and running, what books written by Hawtrey do you recommend we read? What papers written on Hawtrey should we try and locate?
JP, Thanks for this request. I am actually not that much of an expert on Hawtrey’s writings. His first important work was Good and Bad Trade published in 1913. It was his first exposition of his basic model of business cycles. In 1919 he published another work of monetary theory, Currency and Credit which elaborated on the theory offered in Good and Bad Trade providing a lot of interesting historical material and more explicit policy analysis. In 1927 he published The Gold Standard in Theory and Practice whose subject was self-explanatory. It went through several editions. In later editions (1931, I think) he provided a very nice summary of his basic understanding of how the botched attempt to restore the international gold standard led to the Great Depression. Hawtrey covers a lot of the same ground, but in much more depth in The Art of Central Banking, a collection of essays including a very long essay by that title focusing on the Great Depression, as does an essay on French monetary policy. For my money, the discussions in these two books are still the best theoretical accounts of the causes of the Great Depression ever written, though Scott Sumner’s work (still unpublished, alas) on the Great Depression is right up there with them. In 1938, Hawtrey wrote another remarkable combination of history and theory, A Century of Bank Rate, reviewing the way in which the Bank of England had administered monetary policy from the 1830s to the 1930s, and providing a theoretical framework for understanding the effects of those policies. He also published another collection of essays Capital and Employment in 1937, which I have not read. It does contain, I believe, Hawtrey’s commentary on Keynes’s General Theory as well as on Hayek’s business cycle theory. Despite his advancing age, Hawtrey remained active in the post-war period. He was notable for remaining wedded to the basic business cycle model developed in Good and Bad Trade, which I think was held against him by the younger generation of Keynesians that disdained anybody who did not fall into step with the Keynesian program. He also argued forcefully, but without much effect, that the post-war devaluation of the pound had been a mistake and that the pound had been consistently undervalued despite chronic balance of payments difficulties that Hawtrey attributed to excessive aggregate demand caused by a chronically low Bank Rate. His last book, Incomes and Money, published in 1967, when he was 88, shows the signs of his advancing age. The argument was not always as clear and well-formulated as in his earlier writings and he was not as much in command of the facts as he had once been. Still, it offers a lot of worthwhile commentary on monetary policy as well as to me the very convincing explanation for poor US economic performance in the 1950s, which was that all the major US trading partners had pegged their currencies to the dollar at undervalued parities, making it difficult for US exports to compete without deflation. His work is the clearest anticipation of what would later be developed by Harry Johnson into the monetary approach to the balance of payments.
How do I ask for a password to read your password protected post on money?
I would really like to read your latest post about the flaws of EMH. How exactly can I do that? ( I tried my WordPress pw and that didn’t do it.)
Hello David, I’m very happy to see your posts and that you are also drawing attention to Hawtrey’s work. Your account of his ideas and suggestions on reading are very good. It has been quite a while since I turned to this material, but I think it’s safe to say the Currency and Credit was the work in which the core of his analysis was developed. Another book that might be fruitful given the current situation is Trade Depression and the Way Out published in 1933. Pat Deuscher
Interesting. I hadn’t heard of Hawtrey.
It is useful to see how non-gold people address inflation.
But all monetary debate should address cost for capital just as much as volume of the money supply.
One of the key issues is that interest is an important cause of inflation. Higher interest rates lead to more inflation in the long term, after the higher rates have subsided. Higher Interest rates temporarily slow the velocity of circulation, making the real money supply smaller. But cost for credit is higher and this raises prices.
But interest is a wealth transfer to the Plutocracy in even more important and direct ways.
Here’s some more about the basic problems of interest:
http://realcurrencies.wordpress.com/2009/11/26/on-interest/
Here’s how these discussions work out with some leading Austrian Economists.
Gary North: http://realcurrencies.wordpress.com/2011/12/23/gary-north-on-interest/
the Daily Bell: http://realcurrencies.wordpress.com/2012/01/01/daily-bell-wrapping-up/
Anthony, I’m glad that you are interested in Hawtrey and I hope that you will get a chance to read some of his work. Increasing interest rates increases, not, as you assert, reduces, the velocity of circulation. That implication of basic monetary theory is well supported empirically, so you might want to rethink you position. I wouldn’t call Gary North a leading Austrian economist. From what little I know about him, he seems to be a nut, and rather scary.
Thanks David.
I’d be interested in some backing up about that statement (re velocity)!
Well, North is close to Rockwell, who is one of Paul’s advisers.
Anthony, Is closeness to Rockwell, who is one of Paul’s adviser’s, evidence for or against being a nut?
Man, I love your blog. Its short and soft spoken but it’s one of the best out there. But I have a question: do you have any explanation for the widespread commentary claiming monetary policy is too loose? Like, look at Ed Harrison’s Credit Writedowns rants about cheated savers, et al. There is so much of that stuff; even pundits who used to worship at the knee of Friedman now rail against “re-blowing the bubble” and for “allowing deleveraging”. Then you have guys like Plosser wondering on TV today whether how more inflation could boost employment. Wouldn’t you say maybe they could try it and find out, considering the costs of not doing so?
Daniel, Thanks. I think there is a reflexive inflation-phobia, which I actually sympathize with and which I suspect Monetarists are especially susceptible to, Monetarism having its origins as an anti-inflation policy program. Thanks also for the reference to the Plosser interview, I will have to take a look at it.
what Hawtrey called “the inherent instability of credit”
you do not discuss the role of the level of private debt in either the Great Depression or the Lesser Depression, yet these words of Hawtrey are right to the point.
Hi David,
I am an Economics MA student at San Jose State University. I am taken by your argument that much of the monetary that occurred instability shortly before and during the Great Depression was due to gold demand shocks. It is a powerful alternative to the oversimplified Eichengreen/Temin “gold-fetters” argument.
Do you know of any research that uses regressions to elaborate on this point?
Any help is greatly appreciated.
Jim
Jim, Thanks. Scott Sumner has a lengthy unpublished manuscript in which he provides a historical narrative of the Great Depression as well as various regressions testing the gold demand hypothesis. He has discussed his results on his blog themoneyillusion.com on a number of occasions, so you could check the blog. You could also email him directly at Bentley University and ask him about his work and his econometric results.
Thanks for the timely response David. I will do exactly that.
Out of curiosity David Glasner, would you post reviews of Ralph Hawtrey’s book on Amazon.com? I think it would be a good way of informing the general public more about Ralph Hawtrey. In fact, I recently acquired a copy of Ralph Hawtrey’s The Art of Central Banking in part thanks to your influence!
David,
Thanks for the earlier suggestion. Scott let me see some of his current work and it has been of great help.
I am currently looking for data sets that show quarterly gold stocks/supplies and GDP of the U.S., Britain, France, and Germany during the depression of 1920-21 and also during the Great Depression. Again, any assistance is greatly appreciated. (I’ve already checked FRED, FRASER, NBER, and am still not finding the all of the data I need for my study.)
Thanks again,
Jim Caton
Blue Aurora, Good suggestion. I’ve never posted any book reviews on Amazon. I’m a little too busy to start writing reviews of Hawtrey just now, but I will keep it in mind. Thanks.
Jim, I am not sure that quarterly GDP measurements are even available that far back. Other than that I am afraid that I can’t give you any help on fining the data you need. Good luck and please let me know if you come up with any interesting results.
Hello I have a question about deflation. There was a study that I just read it concluded that during the Great depression period in the united states out of all countries examined only half had a depression and most of the episodes with deflation and no depression occurred under a gold standard
in the end they found that there were many more periods with deflation and growth than with depression and found virtually no link between depression and deflation I would like to know your opinion on this thank you
http://minneapolisfed.org/research/sr/sr331.pdf
Andrew, From a quick look at the study, I see that it is concerned with the effects of deflation over a long period of time, not just during the Great Depression. A fast growing economy, such as we and most of Europe had in the nineteenth century can perform well with deflation because the growth is reflected in falling prices. If deflation is generated by economic growth, there is no problem. There is a problem when deflation is produced not by a growing economy but by a monetary disorder such as a rising value of gold under a gold standard regime. That is what happened in the Great Depression. So I don’t see any inconsistency between my position and the results of the study that you are referring to.
“The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.”
Was Milton Friedman saying that if there was no central bank during the Great Depression than the money supply would not have contracted as much as it did?
David,
I want to express my gratitude to you for your considerable efforts in producing (and mediating) this blog, making it one of the most measured and edifying reads anywhere, and also extend my thanks to many of your thoughtful readers – making “Uneasy Money”an inspiring place to visit. I am truly grateful.
“Cassie”
While much of what I read here is a bit over my head, I have learned much. For example, I would love to hear more about the subject of this old post:
http://uneasymoney.com/2011/10/10/is-the-fed-breaking-the-law/
Is the Fed still paying 0.25% interest on reserves? Many other people to whom I’ve mentioned this tell me it’s a shame that more people don’t understand it, especially considering that the 3 month treasury is currently 0.10. You don’t have to be an economist to see something wrong with that.
Hello Mr Glasner
I’m writing regarding the debate about whether the medium of account or medium of exchange is the defining characteristic of money that Scott Sumner started a few weeks ago. You weighed in in that the debate in this post (http://uneasymoney.com/2012/11/25/its-the-endogeneity-redacted/)
I wanted to ask you which authors have developed a monetary theory along those lines (studying each of those characteristics). In other words, who are the intellectual parents of that debate? Who do you base your mental framework on?
Thanks!