Hawtrey on Competitive Devaluation: Bring It On

In a comment on my previous post about Ralph Hawtrey’s discussion of the explosive, but short-lived, recovery triggered by FDR’s 1933 suspension of the gold standard and devaluation of the dollar, Greg Ransom queried me as follows:

Is this supposed to be a lesson in international monetary economics . . . or a lesson in closed economy macroeconomics?

To which I responded:

I don’t understand your question. The two are not mutually exclusive; it could be a lesson in either.

To which Greg replied:

I’m pushing you David to make a clearer and cleaner claim about what sort of monetary disequilibrium you are asserting existed in the 1929-1933 period, is this a domestic disequilibrium or an international disequilibrium — or are these temprary effects any nation could achieve via competitive devaluations of the currency, i.e. improving the terms of international trade via unsustainable temporary monetary policy.

Or are a ping pong of competitive devaluations among nations a pure free lunch?

And if so, why?

You can read my response to Greg in the comment section of my post, but I also mentioned that Hawtrey had addressed the issue of competitive devaluation in Trade Depression and the Way Out, hinting that another post discussing Hawtrey’s views on the subject might be in the offing. So let me turn the floor over to Mr. R. G. Hawtrey.

When Great Britain left the gold standard, deflationary measure were everywhere resorted to. Not only did the Bank of England raise its rate, but the tremendous withdrawals of gold from the United States involved an increase of rediscounts and a rise of rates there, and the gold that reached Europe was immobilized or hoarded. . . .

The consequence was that the fall in the price level continued. The British price level rose in the first few weeks after the suspension of the gold standard, but then accompanied the gold price level in its downward trend. This fall of prices calls for no other explanation than the deflationary measures which had been imposed. Indeed what does demand explanation is the moderation of the fall, which was on the whole not so steep after September 1931 as before.

Yet when the commercial and financial world saw that gold prices were falling rather than sterling prices rising, they evolved the purely empirical conclusion that a depreciation of the pound had no effect in raising the price level, but that it caused the price level in terms of gold and of those currencies in relation to which the pound depreciated to fall.

For any such conclusion there was no foundation. Whenever the gold price level tended to fall, the tendency would make itself felt in a fall in the pound concurrently with the fall in commodities. But it would be quite unwarrantable to infer that the fall in the pound was the cause of the fall in commodities.

On the other hand, there is no doubt that the depreciation of any currency, by reducing the cost of manufacture in the country concerned in terms of gold, tends to lower the gold prices of manufactured goods. . . .

But that is quite a different thing from lowering the price level. For the fall in manufacturing costs results in a greater demand for manufactured goods, and therefore the derivative demand for primary products is increased. While the prices of finished goods fall, the prices of primary products rise. Whether the price level as a whole would rise or fall it is not possible to say a priori, but the tendency is toward correcting the disparity between the price levels of finished products and primary products. That is a step towards equilibrium. And there is on the whole an increase of productive activity. The competition of the country which depreciates its currency will result in some reduction of output from the manufacturing industry of other countries. But this reduction will be less than the increase in the country’s output, for if there were no net increase in the world’s output there would be no fall of prices.

In consequence of the competitive advantage gained by a country’s manufacturers from a depreciation of its currency, any such depreciation is only too likely to meet with recriminations and even retaliation from its competitors. . . . Fears are even expressed that if one country starts depreciation, and others follow suit, there may result “a competitive depreciation” to which no end can be seen.

This competitive depreciation is an entirely imaginary danger. The benefit that a country derives from the depreciation of its currency is in the rise of its price level relative to its wage level, and does not depend on its competitive advantage. If other countries depreciate their currencies, its competitive advantage is destroyed, but the advantage of the price level remains both to it and to them. They in turn may carry the depreciation further, and gain a competitive advantage. But this race in depreciation reaches a natural limit when the fall in wages and in the prices of manufactured goods in terms of gold has gone so far in all the countries concerned as to regain the normal relation with the prices of primary products. When that occurs, the depression is over, and industry is everywhere remunerative and fully employed. Any countries that lag behind in the race will suffer from unemployment in their manufacturing industry. But the remedy lies in their own hands; all they have to do is to depreciate their currencies to the extent necessary to make the price level remunerative to their industry. Their tardiness does not benefit their competitors, once these latter are employed up to capacity. Indeed, if the countries that hang back are an important part of the world’s economic system, the result must be to leave the disparity of price levels partly uncorrected, with undesirable consequences to everybody. . . .

The picture of an endless competition in currency depreciation is completely misleading. The race of depreciation is towards a definite goal; it is a competitive return to equilibrium. The situation is like that of a fishing fleet threatened with a storm; no harm is done if their return to a harbor of refuge is “competitive.” Let them race; the sooner they get there the better. (pp. 154-57)

So yes, Greg, competitive devaluation is a free lunch. Bring it on.


18 Responses to “Hawtrey on Competitive Devaluation: Bring It On”

  1. 1 Benjamin Cole February 28, 2012 at 9:00 pm

    Oh hell yes, I hope ECB prints more money and the Bank of Japan prints more and the Fed prints more money, and Chins and India are already printing lots of money, so we have a global boom.

    A global boom! Prosperity!

    You know what might happen if we have a global boom? The worst—we might get some inflation. Oh, horrors! Some artificial nominal indices of prices might rise by more than 3 percent! Although that did not happen n the USA in the 1990s, when inflation remained calm and we grew like crabgrass.

    Nevertheless, if we had a global boom maybe people would be making so much money and doing so well we would have to try to cool things off. Maybe bring inflation back down to the 3 percent range for a while. Of course, Italy, Spain and Greece might be in better position to pay down their debts by then, and the USA also.

    Still, it would be a sin. The true noble calling is zero inflation. True, getting to zero inflation calls for large material sacrifices. But zero inflation worship is a higher calling. You see, when you keep inflation at zero you get a reward—psychic or even spiritual income, more than equal the lost real or material income.



  2. 2 Tas von Gleichen February 29, 2012 at 5:59 am

    I’m absolutely not for more printing. This is the last thing we need. Since 08 the money amount has gone out of control. The only way to protect yourself is by buying Gold or Silver. Real Money that doesn’t lose the purchasing power over time.


  3. 3 Rob February 29, 2012 at 8:42 am

    The article focuses on currency devaluation which leads to inflation that allows relatively prices to realign closer to equilibrium levels. This may or may not be followed by other countries doing the same thing.

    I have a question: What would be the difference between this and just increasing the money supply in order to shift the demand curve and/or reduce the real wage level. As this would also tend to devalue the currency am I right in thinking this is just a different way of looking at the same thing ?

    The reason for my question is that as soon as you talk about devaluation people immediately think about competitive advantage and trade wars etc which often confuses the discussion in a way that talking about the same thing in terms of relative prices and AD does not.


  4. 4 Benjamin Cole February 29, 2012 at 5:16 pm


    What puzzles me about posts such as yours, is what is motivating you. I say I want a bullish monetary policy to spur growth. I want higher real incomes, material success, prosperity. I will take some inflation to reach those goals. (Further, even measuring inflation is subjective, an artificial federal nominal index of the exchange value of dollars. We may overstate inflation with out CPI).

    You say we will get inflation with a bullish monetary policy, and therefore we cannot use a bullish monetary policy.

    Your premise is that any inflation, per se, is wrong, bad or evil.

    But of course, you can be “protected” from inflation by many means. TIPS bonds, or real estate, or equities. If you have faith in gold, then gold.

    Let’s look at deflation, the 20-year scourge of Japan. How does one protect oneself against inflation, the loss of employment, and shrinking economy? If you owned property in Japan, your value is down 80 percent. If you owned stock, your value is down 75 percent, Your wages are down 15 percent, and industrial production is down 20 percent. The yen soared, so I guess you could have had nice vacations.

    In Japan, you could have protected yourself only by buying bonds. And then joining all bondholders in militating against inflation.

    The economy would suffocate, but you would be protected.

    The price for zero inflation, or minor deflation, is simply too high (even conceding that measurements of inflation are accurate).

    Let’s instead concentrate on boosting economic growth, by any means necessary. Yes, tax cuts, reg cuts but also a bullish monetary policy.


  5. 5 David Pearson March 1, 2012 at 6:49 am

    Hawtrey’s “harbor of refuge” is the normal relationship between wages and manufactured goods prices to the prices of “primary goods”. In today’s term, trend NGDP levels, or NGDP-adjusted wages.

    Following the 1933 devaluation, the boats were hardly “back in the harbor”. They were on their way, and Hawtrey was lauding that movement.

    The same is true today: the economy is making progress in the sense that it has reacquired close-to-trend NGDP growth, inflation is normal, commodity prices are booming, etc. However, the issue that MM’s seem to have — the “disequilibrium” — is that our lack of progress towards to “dock” is holding back employment growth.

    So, to use Hawtrey’s analogy more precisely, which is the MM disequilibrium?
    -the speed of movement towards the harbor in relation to the distance away?
    -the speed of movement itself?
    -returning to the harbor?

    Presumably its the first. I wonder what Hawtrey wold have thought of that formulation.


  6. 6 Julian Janssen March 1, 2012 at 12:34 pm

    Mr. Pearson,

    From my perspective, the disequilibrium that is most important to resolve is in the labor market. SInce the crisis, employment has fallen off a cliff and the challenge is to (1) restore the labor market to full employment and to (2) ensure that the level of full employment is sustainable on the demand-side.

    And speaking of the first derivative, my concern is that so little progress has been made since the disequilibrium in the labor market began and today. Much of the time, the U.S. economy has grown just enough to keep unemployment the same, by historical estimation.


  7. 7 Greg Ransom March 1, 2012 at 9:49 pm

    “The benefit that a country derives from the depreciation of its currency is in the rise of its price level relative to its wage level .. ”

    Solving a uniquely _British_ problem of the 1925-1931 period, e.g a domesticallly and internationally over-priced union labor force with special government privileges and a declining productivity as compared with America.

    Keynes and Hawtrey developed non-general “theories” addressed to justifying special policies needed to aid a pathological Britain which desired to live a life well beyond its post-war means. What K and H wished to do was to finesse indirectly the problems of union power, massive war debt, the gold mistake of 1925, a growing government sector, and the problem of having consumed so much of its capital during the war.

    And they wanted to do this — like Germany had — through inflation and a depreciation of the currency. The strategy had worked for Germany — German borrowed far more from America after the war than it paid in reperations — and effectively inflated away its debt in the hyper inflation, will growing an expanded post-war government and public utility sector in the process (see Niall Ferguson, _The Pity of War_ chapter 15).

    The strategy was to get bond holder and other countries — especially America to pay for the war, and to take care of the finance problem of the expanding government sector and the price problem of uncompetitive union labor privilege at the same time.


  8. 8 Greg Ransom March 1, 2012 at 9:53 pm

    What is the supposed mechanism / theory behind this structural pathology?

    “the disparity between the price levels of finished products and primary products”


  9. 9 Greg Ransom March 2, 2012 at 9:07 am

    The key fact of the post-WWI period is that Britain and the world were NOT using a gold standard — they were using claims against either the Bank of England or the Federal Reserve _in place of gold_ in international settlements: George Selgin on the NON-gold standard created to benefit Britain after WWI:

    “This classical gold standard can have played no part in the Great Depression for the simple reason that it vanished during World War I, when most participating central banks suspended gold payments. (The US, which entered the war late, settled for a temporary embargo on gold exports.) Having cut their gold anchors, the belligerent nations’ central banks proceeded to run away, so that by the war’s end money stocks and price levels had risen substantially, if not dramatically, throughout the old gold standard zone.

    Postwar sentiments ran strongly in favour of restoring gold payments. Countries that had inflated, therefore, faced a stark choice. To make their gold reserves adequate to the task, they could either permanently devalue their currencies relative to gold and start new gold standards on that basis, or they could try to restore their currencies’ pre-war gold values, though doing so would require severe deflation. France and several other countries decided to devalue. America and Great Britain chose the second path.

    The decision taken by Winston Churchill, then Britain’s chancellor of the exchequer, to immediately restore the pre-war pound, prompted John Maynard Keynes to ask, “Why did he do such a silly thing?” The answer was two-fold: first, Churchill’s advisers considered a restored pound London’s best hope for regaining its former status – then already all but lost to New York – as the world’s financial capital.

    Second, Britain had other cards to play, aimed at making its limited gold holdings go further than usual. Primarily, it would convince other countries to take part in a gold-exchange standard, by _using claims against either the Bank of England or the Federal Reserve in place of gold in international settlements_. It would also ask the Fed to help improve Great Britain’s trade balance by pursuing an easy monetary policy.

    The hitch was that the gold-exchange standard was extremely fragile: if any major participant defected, the British-built house of cards would come tumbling down, turning the world financial system into one big smouldering ruin.

    In the event, the fatal huffing and puffing came then, as it has come several times since, from France, which decided in 1927 to cash in its then large pile of sterling chips. The Fed, in turn, decided that pulling back the reins on a runaway stock market was more important than propping-up the pound. Soon other central banks joined what became a mad scramble for gold, in which Britain was the principal loser. At long last, in September of 1931, the pound was devalued. But by then it was too late: the Great Depression, with its self-reinforcing rondos of failure and panic, was well under way.

    So the gold standard that failed so catastrophically in the 1930s wasn’t the gold standard that some Republicans admire: it was the cut-rate gold standard that Great Britain managed to cobble together in the 20s – a gold standard designed not to follow the rules of the classical gold standard but to allow Great Britain to break the old rules and get away with it.”


  10. 10 Greg Ransom March 2, 2012 at 9:21 am

    The “gold-exchange” system — a NON-gold standard, was set up to benefit Britain, the original gold standard world empire, i.e. to allow Britain to continue on as if it hadn’t consumed out its capital and gold reserves during the war, and as if it wasn’t keeping up in productivity with America, and as if it wouldn’t have to reduce its consumption patterns or the size of government or the expenses of Empire in order to pay for World War I.

    And this upside down pyramid set up to benefit Britain depended on against-their-interest and unsustainable monetary policies from America and France, required to prop up the benefit-Britain scheme.

    British economists like Keynes and Hawtrey were in the first instance patriots and chauvinists — they were looking for the easiest way out of the mess Britain was in, esp. the labor union privilege / relative uncompetitive productivity of British labor / high unemployment benefit pathologies of Britain, compounded by Churchill’s pathological program to once again make London the financial center of the world with his return to gold at the 1914 par policy.

    Inflation and devaluation were the ticket. Keynes came up with an ever changing “theoretical” rationale as needed to convince others of his policy priors, whatever would stick to the wall was Keynes “general theory”, as needed to get done what would benefit Britain (mostly paid for by America).

    You see Keynes doing the same thing after WII — coming up with whatever would work to convince America to pay for Britain’s war costs, growing government, and whatever was needed to maintain Britain’s standard of living, given its material sacrifices and pathological economic program.


  11. 11 Greg Ransom March 2, 2012 at 9:23 am

    Make that — as if it Britain _ was_managing to keep up with America’s dramatic productivity growth.


  12. 12 David Glasner March 3, 2012 at 9:07 pm

    Benjamin, I have been saying for two or three years that an increase in the price level in the range of 10 to 20 percent would be a good thing, because it would encourage spending by business and households and would improve the balance sheets of debtors by more than it would harm the balance sheets of debtors because more debtors would be able to pay back their loans at the elevated price level than could do so at the current price level. After a fairly sharp and rapid increase in prices, we could then return to a stable price regime, perhaps with even lower inflation on average than we are now shooting for. But I don’t think that there is a good case for trying to keep the rate of inflation constant over time. We should be targeting a time path for the price (or wage) level or NGDP. On the other hand, I don’t think we really know enough to pick the optimal time path for prices, wages, or NGDP. At least I don’t. That’s where we need some really good basic research from Market Monetarists.

    Tas, You say the money supply is out of control since 2008, but the rate of price increase since then is at a 50 year low. As Benjamin points out below, the purchasing power of money is not the problem.

    Rob, In principle, there need not be any difference between the two approaches. However, the devaluation approach may be more credible and help to alter expectations in a way that achieves the aims of the policy more efficiently than just increasing the quantity of money.

    Benjamin, Well said.

    More responses to come tomorrow (I hope).


  13. 13 David Glasner March 5, 2012 at 2:27 pm

    David, In 1933, Hawtrey was lauding not just the stabilization of prices, but reflation to bring prices back up to their levels before the downturn. Hawtrey cheered the roughly 15% increase in wholesale price between April and July 1933 and deplored their flattening out after July. So to take your analogy a step further, wouldn’t Hawtrey’s objective be to get the price level back on the 2-3% inflation trend it was on before the crash in September 2008? Now you may be right that the economy may finally be pulling itself up from the Little Depression that started in 2008, and we can just allow the forces of recovery to do the job without providing the added stimulus of a higher price level or NGDP target, at least in the absence of another oil shock triggered by events in the Persian gulf. But the depression was so deep and long lasting and the current pace of the recovery so slow that I think the risks of providing too little stimulus far outweigh the risks of providing too much.

    Julian, You sum it up rather well.

    Greg, The international problem associated with Great Depression had almost nothing to do with overvalued British pound and structural rigidities in the British labor market. The British economy actually grew fairly respectably from 1925 after the pre-war parity with the dollar was restored until the downturn started in the 3rd quarter of 1929. Unemployment fell somewhat dipping below 10% for the first time in the decade in 1929. The price level fell slightly in the US from 1925 to 1929 and fell by a more significant amount in Britain over the same period. So your anti-British tirade is totally misplaced. Also German borrowing from the US took place after the hyperinflation of 1923-24, by which time
    Germany was back on the gold standard.

    You said:

    “The key fact of the post-WWI period is that Britain and the world were NOT using a gold standard — they were using claims against either the Bank of England or the Federal Reserve _in place of gold_ in international settlements:”

    Sorry, but this makes no sense to me. A gold standard does not mean that debts must be paid in gold. If that’s what you think, there has never been a gold standard, because debts have always been routinely discharged using claims on gold, or even claims on claims on gold. You are falling for a completely misguided view of what the gold standard was and how it worked.

    Selgin’s description of what happened is defensible, but its emphasis on Britain is quite misleading, incorrectly implying that there were no international deflationary forces unleashed by the French and American monetary policies, and that only Britain suffered from those policies, and your version of it is a gross caricature.

    You said:

    “And this upside down pyramid set up to benefit Britain depended on against-their-interest and unsustainable monetary policies from America and France, required to prop up the benefit-Britain scheme.”

    That the monetary policies of the Fed and the insane Bank of France that replaced the prior “against-their-interest and unsustainable monetary policies” were utterly disastrous to themselves and to the world is so plain, so clear, so obvious, so transparent, so manifest, and so unmistakable that I can only register my utter bewilderment at your comment.


  1. 1 How Monetary Policy Works « Uneasy Money Trackback on June 7, 2012 at 10:05 am
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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. 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.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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