Uneasy Money

For the next few weeks, I am going to be writing a lot about the austere-looking gentleman whose visage adorns, and whose ideas inspire, this blog: the great, but underestimated, Ralph Hawtrey. I was asked last summer to write an entry on Ralph Hawtrey for the forthcoming Elgar Companion to Keynes, and, with the due date for my contribution fast approaching, I have decided to conscript readers of this blog as commentators and research assistants, as I try to pull together my scattered thoughts about the close, productive, and complicated relationship between these two luminaries of English economics in its heyday, during the first half of the last century. Obviously, more is known about the life of Keynes, by far the more famous of the two, than about Hawtrey’s, and my focus for this assignment is not so much Hawtrey in his own right, but Hawtrey as an important, but perhaps not quite central, figure in Keynes’s life, and in his career as an economist. But it is actually quite remarkable how similar were their backgrounds and how their lives and careers for a long time seemed to proceed on nearly parallel tracks.

Both Keynes and Hawtrey were born into families in the upper echelons of the English intelligentsia and educational systems. Keynes’s father, John Neville Keynes, was a Cambridge don, who lectured on Moral Science and wrote a well-regarded book on the methodology of economics, The Scope and Method of Political Economy. Hawtrey’s grandfather was Assistant Master of the Lower School at Eton, and a second cousin of a Headmaster, and later Provost, of Eton. The grandfather subsequently established a preparatory school, St. Michael’s, where Hawtrey’s father became assistant master. Before going to Cambridge, Hawtrey and Keynes both attended Eton. Born in 1879, four years before Keynes, Hawtrey graduated from Cambridge in 1901, the year of Keynes’s arrival. Both studied mathematics, not economics, at Cambridge. While Keynes, through his father, knew Marshall well, it does not appear that Hawtrey had any contact with Marshall while at Cambridge or thereafter. In any event, both Hawtrey and Keynes were largely autodidacts in economics. Besides concentrating on mathematics, both Hawtrey and Keynes studied philosophy under G. E. Moore, and were greatly influenced by his teachings. Moore’s influence on Hawtrey is perhaps most clearly visible in Hawtrey’s 1925 book, The Economic Problem, his only book on general economics, a book that bears the stamp of Moore’s ethical teachings. Moore’s teachings were also a major influence on the Bloomsbury group of which Keynes was a famous member, and to which Hawtrey was also connected, though not as closely as Keynes. Like most male members of the Bloomsbury group, Hawtrey was a Cambridge Apostle, serving as Keynes’s sponsor when Keynes was elected an Apostle in 1903. Keynes’s 1925 marriage to the Russian ballerina Lydia Lopokova led to his estrangement from the Bloomsbury group. After Hawtrey married the Hungarian concert pianist Emilia d’Aranyi (a great-niece of the famed Hungarian violinist Joseph Joachim) in 1915 she was described by Virginia Woolf in a letter to Duncan Grant as “a practically barbaric Pole . . . with ungoverned passions and the brain of a yellow cockatoo,” though she noted the Hawtreys affectionate manner towards each other.

Upon graduation, Hawtrey decided to enter the British civil service, and, in preparing for the entrance exam, began to study economics. Starting at the Admiralty in 1903, Hawtrey took a position in the Treasury in 1904 as a Clerk. Retaining his interest in mathematics, Hawtrey corresponded with his Cambridge friend Bertrand Russell about various proofs that Russell was puzzling over, proofs eventually published in the Principia Mathematica of Russell and Whitehead. In 1910 Hawtrey became the Principal Private Secretary of the Chancellor of the Exchequer, Lloyd George, assisting in the preparation of the 1910 Budget, and becoming a First Class Clerk in 1911. In 1919 he was appointed Director of Financial Enquiries Branch of the Treasury. While at the Treasury, Hawtrey undertook intensive studies into economics and the theory of money and business cycles, publishing his first book, Good and Bad Trade, in 1913, in which he presented a complete and purely monetary theory of the business cycle.

Keynes also started in the civil service, becoming clerk in the India Office in 1906, but, growing bored with his work, he returned to Cambridge in 1908 to write his Treatise on Probability (not published till 1921). In 1909, Keynes became a lecturer in economics, and, in 1911, was appointed editor of the Economic Journal. In 1913, Keynes published first book Indian Currency and Finance, which led to his appointment to the Royal Commission on Indian Currency and Finance. After World War I started, Keynes rejoined the Civil Service and worked in the Treasury, but at a much higher level of responsibility than Hawtrey. And in 1919 Keynes was appointed the official representative of the Treasury to the Versailles Peace Conference, which led directly to the 1919 publication of Keynes first great work, The Economic Consequences of the Peace, his excoriation of the Treaty of Versailles,which established his reputation as an economist and made him a public figure of immense influence.

During the war, Hawtrey worked in relative obscurity at the Treasury, publishing a few articles in the Economic Journal. But in 1919, Hawtrey, too, published his second book, Currency and Credit, which quickly became one of the most influential books on monetary economics in the world, becoming over the following decade the standard text in monetary economics in Great Britain and in much of the English-speaking world. As Director of the Financial Services Branch, Hawtrey could work more or less independently on whatever he wanted to while responding to the queries about monetary and financial policy put to him by higher-ups in the Treasury, or writing memos on whatever topics he thought his superiors needed to hear about. In this period, Hawtrey achieved his greatest influence on policy, writing several influential papers on the reconstruction of the international monetary system after World War I. He was instrumental in organizing the Genoa International Monetary Conference and writing its recommendations for restoring the international gold standard in the form of what became known as a gold exchange standard, an idea that Keynes had proposed in his Indian Currency and Finance. The goal was to stabilize the purchasing power of gold rather than allow it to rise prewar level, which would have entailed a massive deflation.

In his Tract on Monetary Reform, published in 1923, Keynes mildly criticized Hawtrey and the Genoa resolutions for seeking to stabilize the international price level by way of the gold standard, which Keynes believed would put Britain at the mercy of the US and the newly created Federal Reserve System, which then held approximately 40% of the world’s monetary reserves of gold. Under those circumstances, Keynes felt it was better for Britain not to rejoin the gold standard, and certainly not at the prewar parity, but rather follow a policy aimed at stabilizing the internal British price level, while letting the dollar-sterling exchange rate take care of itself. This was the background for the more serious dispute between Keynes and Hawtrey in 1925 over the British decision to rejoin the gold standard at the prewar dollar parity of $4.86 per pound. While Keynes was totally opposed to restoring the gold standard at the prewar dollar-sterling parity, Hawtrey favored the move, because he was confident that the Federal Reserve would follow an accommodative policy allowing Britain to avoid significant deflationary pressure even with the pound back at prewar parity. The performance of the British economy after Britain returned to the gold standard was probably not as good as Hawtrey had hoped, but neither was it as bad as Keynes had feared. Unemployment, though high by historical standards, gradually declined to less than 10% by 1929, and British output and income growth was quite respectable.

However, in 1928-29 when the Fed drastically tightened its policy in response to supposedly excessive stock-market speculation, Keynes’s fears that Britain would be vulnerable to the effects of policies taken by the Federal Reserve proved only too accurate. Of course, Hawtrey was sharply critical of the Fed tightening, especially given the insane policy of the Bank of France, starting in 1928, to convert its foreign exchange reserves into gold. Precisely the danger about which Hawtrey had been warning since 1919 was coming to pass, the combined result of the policies of the Bank of France and the Federal Reserve. Despite their disagreements about a number of details about how to implement policy, it does not seem that Keynes and Hawtrey had any fundamental disagreements about monetary theory or about the big picture of what was happening at the outset of the Great Depression.

In the next installment, I’ll have something to say about the Keynes-Hawtrey relationship as it evolved while Keynes was writing the Treatise on Money and later the General Theory; Hawtrey was deeply involved in the process of writing and revising both works, reading and commenting on early drafts of both works, though, especially in the latter case, not without causing severe strains in the relationship. And as an added treat, I may also have a bit to say in a future post about Hawtrey and Hayek.