Kuehn, Keynes and Hawtrey

Following up on Brad DeLong’s recent comment on his blog about my post from a while back in which I expounded on the superiority of Hawtrey and Cassel to Keynes and Hayek as explainers of the Great Depression, Daniel Kuehn had a comment on his blog cautioning against reading the General Theory either as an explanation of the Great Depression, which it certainly was not, or as a manual for how to recover from the Great Depression. Although Daniel is correct in characterizing the General Theory as primarily an exercise in monetary theory, I don’t think that it is wrong to say that the General Theory was meant to provide the theoretical basis from which one could provide an explanation of the Great Depression, or wrong to say that the General Theory was meant to provide a theoretical rationale for using fiscal policy as the instrument by which to achieve recovery. Certainly, it is hard to imagine that the General Theory would have been written if there had been no Great Depression. Why else would Keynes have been so intent on proving that an economy in which there was involuntary unemployment could nevertheless be in equilibrium, and on proving that money-wage cuts could not eliminate involuntary unemployment?

Daniel also maintains that Keynes actually was in agreement with Hawtrey on the disastrous effects of the monetary policy of the Bank of France, citing two letters that Keynes wrote on the subject of the Bank of France reprinted in his Essays in Persuasion. I don’t disagree with that, though I suspect that Keynes may have had a more complicated story in mind than Hawtrey did.   But it seems clear  that Hawtrey and Keynes, even though they were on opposite sides of the debate about restoring sterling to its prewar parity against the dollar, were actually very close in their views on monetary theory before 1931, Keynes, years later, calling Hawtrey his “grandparent in the paths of errancy.” They parted company, I think, mainly because Keynes in the General Theory argued, or at least was understood to argue, that monetary policy was ineffective in a liquidity trap, a position that Hawtrey, acknowledging the existence of what he called a credit deadlock, had some sympathy for, but did not accept categorically.  Hawtrey is often associated with the “Treasury view” that holds that fiscal policy is always ineffective, because it crowds out private spending, but I think that his main point was that fiscal policy requires an accommodative monetary policy to be effective. But not having studied Hawtrey’s views on fiscal policy in depth, I must admit that that opinion is just conjecture on my part.

So my praise for Hawtrey and dismissal of Keynes-Hayek hype was not intended to suggest that Keynes had nothing worthwhile to say. My point is simply to that to understand what caused the Great Depression, the place to start from is the writings of Hawtrey and Cassel. That doesn’t mean that there is not a lot to learn about how economies work (or don’t work) from Keynes, or from Hayek for that matter. The broader lesson is that we should be open to contributions from a diverse and eclectic range of sources. So despite superficial appearances, there really is not that much that Daniel and I are disagreeing about.

PS (8:58 AM EST):  I pressed a button by mistake and annihilated the original post.  This is my best (quick) attempt to recover the gist of what I originally posted last night.

PPS (11:07 AM EST):  Thanks to Daniel Kuehn for reminding me that Google Reader had protected my original post against annihilation.  I have now restored fully whatever it was that I wanted to restore.

5 Responses to “Kuehn, Keynes and Hawtrey”


  1. 1 Jon Finegold March 7, 2012 at 7:25 am

    From what I got from John Hick’s article “Hawtrey,” Hawtrey was under the belief that the monetary authorities could use monetary policy to change individuals’ long-term expectations. It reminds me of Krugman’s monetary solution to the liquidity trap, actually. If you vigorously target some rate of inflation, businessmen will come to expect it, and will act as if expecting that rate of inflation. Hicks talks about Hawtrey’s use of short-term interest rates, more than the rate of inflation, but I read Hicks’ piece correctly it’s basically the same idea. Hicks concludes that for Hawtrey the liquidity trap is not as constraining as Keynes makes it out to be.

  2. 2 David Glasner March 7, 2012 at 11:02 am

    Jon, I think that you and Hicks are exactly right about Hawtrey. He was very attuned to the expectational channel by which monetary policy would influence the economy. And that is why he did not accept that a liquidity trap would render monetary policy impotent.

  3. 3 Julian Janssen March 7, 2012 at 12:23 pm

    To me, it seems like the expectation channel of monetary policy has not been very successful in this depression. Do you think it is from lack of trying, lack of credibility or is it just not that effective as a policy tool? I think I can still see a method to make monetary policy effective, through intentional devaluation of the dollar, but I’m not sure if it’s good idea, especially if it weren’t done right the first time.

  4. 4 Tas von Gleichen March 7, 2012 at 9:24 pm

    Every great economist has left something for us to study. Most of them had some compelling theory that is worthwhile spending time on. Just like this blog is a wealth of information.


  1. 1 Skepticlawyer » About Austrian economics Trackback on April 24, 2012 at 12:54 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.

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