Hawtrey and the “Treasury View”

Mention the name Ralph Hawtrey to most economists, even, I daresay to most monetary economists, and you are unlikely to get much more than a blank stare. Some might recognize the name because of it is associated with Keynes, but few are likely to be able to cite any particular achievement or contribution for which he is remembered or worth remembering. Actually, your best chance of eliciting a response about Hawtrey might be to pose your query to an acolyte of Austrian Business Cycle theory, for whom Hawtrey frequently serves as a foil, because of his belief that central banks ought to implement a policy of price-level (actually wage-level) stabilization to dampen the business cycle, Murray Rothbard having described him as “one of the evil genius of the 1920s” (right up there, no doubt, with the likes of Lenin, Trotsky, Stalin and Mussolini). But if, despite the odds, you found someone who knew something about Hawtrey, there’s a good chance that it would be for his articulation of what has come to be known as the “Treasury View.”

The Treasury View was a position articulated in 1929 by Winston Churchill, then Chancellor of the Exchequer in the Conservative government headed by Stanley Baldwin, in a speech to the House of Commons opposing proposals by Lloyd George and the Liberals, supported notably by Keynes, to increase government spending on public-works projects as a way of re-employing the unemployed. Churchill invoked the “orthodox Treasury View” that spending on public works would simply divert an equal amount of private spending on other investment projects or consumption. Spending on public-works projects was justified if and only if the rate of return over cost from those projects was judged to be greater than the rate of return over cost from alternative private spending; public works spending could not be justified as a means by which to put the unemployed back to work. The theoretical basis for this position was an article published by Hawtrey in 1925 “Public Expenditure and the Demand for Labour.”

Exactly how Hawtrey’s position first articulated in a professional economics journal four years earlier became the orthodox Treasury View in March 1929 is far from clear. Alan Gaukroger in his doctoral dissertation on Hawtrey’s career at the Treasury provides much helpful background information. Apparently, Hawtrey’s position was elevated into the “orthodox Treasury View” because Churchill required some authority on which to rely in opposing Liberal agitation for public-works spending which the Conservative government and Churchill’s top Treasury advisers and the Bank of England did not want to adopt for a variety of reason. The “orthodox Treasury View” provided a convenient and respectable doctrinal cover with which to clothe their largely political opposition to public-works spending. This is not to say that Churchill and his advisers were insincere in taking the position that they did, merely that Churchill’s position emerged from on-the-spot political improvisation in the course of which Hawtrey’s paper was dredged up from obscurity rather than from applying any long-standing, well-established, Treasury doctrine. For an illuminating discussion of all this, see chapter 5 (pp. 234-75) of Gaukroger’s dissertation.

I have seen references to the Treasury View for a very long time, probably no later than my first year in graduate school, but until a week or two ago, I had never actually read Hawtrey’s 1925 paper. Brad Delong, who has waged a bit of a campaign against the Treasury View on his blog as part of his larger war against opponents of President Obama’s stimulus program, once left a comment on a post of mine about Hawtrey’s explanation of the Great Depression, asking whether I would defend Hawtrey’s position that public-works spending would not increase employment. I think I responded by pleading ignorance of what Hawtrey had actually said in his 1925 article, but that Hawtrey’s explanation of the Great Depression was theoretically independent of his position about whether public-works spending could increase employment. So in a sense, this post is partly belated reply to Delong’s query.

The first thing to say about Hawtrey’s paper is that it’s hard to understand. Hawtrey is usually a very clear expositor of his ideas, but sometimes I just can’t figure out what he means. His introductory discussion of A. C. Pigou’s position on the wisdom of concentrating spending on public works in years of trade depression was largely incomprehensible to me, but it is worth reading, nevertheless, for the following commentary on a passage from Pigou’s Wealth and Welfare in which Pigou proposed to “pass behind the distorting veil of money.”

Perhaps if Professsor Pigou had carried the argument so far, he would have become convinced that the distorting veil of money cannot be put aside. As well might he play lawn tennis without the distorting veil of the net. All the skill and all the energy emanate from the players and are transmitted through the racket to the balls. The net does nothing; it is a mere limiting condition. So is money.

Employment is given by producers. They produce in response to an effective demand for products. Effective demand means ultimately money, offered by consumers in the market.

A wonderful insight, marvelously phrased, but I can’t really tell, beyond Pigou’s desire to ignore the “distorting veil of money,” how it relates to anything Pigou wrote. At any rate, from here Hawtrey proceeds to his substantive argument, positing “a community in which there is unemployment.” In other words, “at the existing level of prices and wages, the consumers’ outlay [Hawtrey’s term for total spending] is sufficient only to employ a part of the productive resources of the country.” Beyond the bare statement that spending is insufficient to employ all resources at current prices, no deeper cause of unemployment is provided. The problem Hawtrey is going to address is what happens if the government borrows money to spend on new public works?

Hawtrey starts by assuming that the government borrows from private individuals (rather than from the central bank), allowing Hawtrey to take the quantity of money to be constant through the entire exercise, a crucial assumption. The funds that the government borrows therefore come either from that portion of consumer income that would have been saved, in which case they are not available to be spent on whatever private investment projects they would otherwise have financed, or they are taken from idle balances held by the public (the “unspent margin” in Hawtrey’s terminology). If the borrowed funds are obtained from cash held by the public, Hawtrey argues that the public will gradually reduce spending in order to restore their cash holdings to their normal level. Thus, either way, increased government spending financed by borrowing must be offset by a corresponding reduction in private spending. Nor does Hawtrey concede that there will necessarily be a temporary increase in spending, because the public may curtail expenditures to build up their cash balances in anticipation of lending to the government. Moreover, there is always an immediate effect on income from any form of spending (Hawtrey understood the idea of a multiplier effect, having relied on it in his explanation of how an increase in the stock of inventories held by traders in response to a cut in interest rates would produce a cumulative increase in total income and spending), so if government spending on public works reduces spending elsewhere, there is no necessary net increase in total spending even in the short run. Here is how Hawtrey sums up the crux of his argument.

To show why this does not happen, we must go back to consider the hypothesis with which we started. We assumed that no additional bank credits are created. It follows that there is no increase in the supply of the means of payment. As soon as the people employed on the new public works begin to receive payment, they will begin to accumulate cash balances and bank balances. Their balances can only be provided at the expense of the people already receiving incomes. These latter will therefore become short of ready cash and will curtail their expenditures with a view to restoring their balances. An individual can increase his balance by curtailing his expenditure, but if the unspent margin (that is to say, the total of all cash balances and bank balances) remains unchanged, he can only increase his balance at the expense of those of his neighbours. If all simultaneously try to increase their balances, they try in vain. The effect can only be that sales of goods are diminished, and the consumers’ income is reduced as much as the consumers’ outlay. In the end the normal proportion between the consumers’ income and the unspent margin is restored, not by an increase in balances, but by a decrease in incomes. It is this limitation of the unspent margin that really prevents the new Government expenditure from creating employment. (pp. 41-42)

Stated in these terms, the argument suggests another possible mechanism by which government expenditure could increase total income and employment: an increase in velocity. And Hawtrey explicitly recognized it.

There is, however, one possibility which would in certain conditions make the Government operations the means of a real increase in the rapidity of circulation. In a period of depression the rapidity of circulation is low, because people cannot find profitable outlets for their surplus funds and they accumulate idle balances. If the Government comes forward with an attractive gild-edged loan, it may raise money, not merely by taking the place of other possible capital issues, but by securing money that would otherwise have remained idle in balances. (pp. 42-43)

In other words, Hawtrey did indeed recognize the problem of a zero lower bound (in later works he called it a “credit deadlock”) in which the return to holding money exceeds the expected return from holding real capital assets, and that, in such circumstances, government spending could cause aggregate spending and income to increase.

Having established that, absent any increase in cash balances, government spending would have stimulative effects only at the zero lower bound, Hawtrey proceeded to analyze the case in which government spending increased along with an increase in cash balances.

In the simple case where the Government finances its operations by the creation of bank credits, there is no diminution in the consumers’ outlay to set against the new expenditure. It is not necessary for the whole of the expenditure to be so financed. All that is required is a sufficient increase in bank credits to supply balances of cash and credit for those engaged in the new enterprise, without diminishing the balances held by the rest of the community. . . . If the new works are financed by the creation of bank credits, they will give additional employment. (p. 43)

After making this concession, however, Hawtrey added a qualification, which has provoked the outrage of many Keynesians.

What has been shown is that expenditure on public works, if accompanied by a creation of credit, will give employment. But then the same reasoning shows that a creation of credit unaccompanied by any expenditure on public works would be equally effective in giving employment.

The public works are merely a piece of ritual, convenient to people who want to be able to say that they are doing something, but otherwise irrelevant. To stimulate an expansion of credit is usually only too easy. To resort for the purpose to the construction of expensive public works is to burn down the house for the sake of the roast pig.

That applies to the case where the works are financed by credit creation. In the practical application of the policy, however, this part of the programme is omitted. The works are started by the Government at the very moment when the central bank is doing all it can to prevent credit from expanding. The Chinaman burns down his house in emulation of his neighbour’s meal of roast pork, but omits the pig.

Keynesians are no doubt offended by the dismissive reference to public-works spending as “a piece of ritual.” But it is worth recalling the context in which Hawtrey published his paper in 1925 (read to the Economics Club on February 10). Britain was then in the final stages of restoring the prewar dollar-sterling parity in anticipation of formally reestablishing gold convertibility and the gold standard. In order to accomplish this goal, the Bank of England raised its bank rate to 5%, even though unemployment was still over 10%. Indeed, Hawtrey did favor going back on the gold standard, but not at any cost. His view was that the central position of London in international trade meant that the Bank of England had leeway to set its bank rate, and other central banks would adjust their rates to the bank rate in London. Hawtrey may or may not have been correct in assessing the extent of the discretionary power of the Bank of England to set its bank rate. But given his expansive view of the power of the Bank of England, it made no sense to Hawtrey that the Bank of England was setting its bank rate at 5% (historically a rate characterizing periods of “dear money” as Hawtrey demonstrated subsequently in his Century of Bank Rate) in order to reduce total spending, thereby inducing an inflow of gold, while the Government simultaneously initiated public-works spending to reduce unemployment. The unemployment was attributable to the restriction of spending caused by the high bank rate, so the obvious, and most effective, remedy for unemployment was a reduced bank rate, thereby inducing an automatic increase in spending. Given his view of the powers of the Bank of England, Hawtrey felt that the gold standard would take care of itself. But even if he was wrong, he did not feel that restoring the gold standard was worth the required contraction of spending and employment.

From the standpoint of pure monetary analysis, notwithstanding all the bad press that the “Treasury View” has received, there is very little on which to fault the paper that gave birth to the “Treasury View.”


25 Responses to “Hawtrey and the “Treasury View””

  1. 1 Philo April 10, 2013 at 3:17 pm

    You write: “. . . the consumers’ outlay [Hawtrey’s term for total spending] . . . .” Then why does Hawtrey call the spenders “consumers”? *Total spending* would include spending on *capital*–i.e., it would include *investment*.


  2. 2 Julian Janssen April 10, 2013 at 4:09 pm

    I believe the idea is that we are still looking at the normal components of y = c + i + g (+ x), but that all forms of expenditure are considered “consumption”… because output is being consumed, even if investment does leave goods that will depreciate over time (and presumably add to future output).


  3. 3 Ritwik April 10, 2013 at 4:58 pm


    Again, public service from you!

    Noticed something :

    ” Hawtrey did indeed recognize the problem of a zero lower bound (in later works he called it a “credit deadlock”) in which the return to holding money exceeds the expected return from holding real capital assets”

    It has always amused me how economists have talked about interest rates for ages without discovering risk & uncertainty. That sentence really needed a *risk-neutral* inserted before the *expected return* bit. I would have thought that just as Newton invented calculus to talk legibly about mechanics, talking about interest rates would have compelled economists to develop a theory of risk. Sad that the job was left to financiers and is still treated as a sub-field, to be added back on top.

    Had Hawtery and Keynes engaged with each other deeply to discuss precisely what they meant by credit deadlock and liquidity traps, I have a feeling we would have gotten a very different view of the LM curve, possibly in terms of the dynamic between money and risky capital, from John Hicks, who anyway obsessed in the second half of his career about capital theory, time and uncertainty.


  4. 4 J. Bradford DeLong (@delong) April 10, 2013 at 5:56 pm

    ?!?!?! I think John Hicks would say the absence of any interest elasticity to money demand is a significant fault…


  5. 5 David Glasner April 10, 2013 at 6:54 pm

    Philo, I can’t explain Hawtrey’s somewhat eccentric terminological innovations, but clearly he did not mean to exclude investment spending by business from consumers’ outlay.

    Julian, That seems like a plausible explanation to me, but I can’t claim to be informed on this point.

    Ritwik, As I explained when I started this series, these posts are my own way of doing research for the contribution on Hawtrey that I undertook to write for the forthcoming Elgar Companion to Keynes. I hope to use these posts and maybe two or three further posts to distill about 3000 words or so on the assigned topic. I am afraid it won’t be easy to boil it all down to 3000 words. At any rate, if I have performed a public service, don’t thank me; thank the Invisible Hand.

    Brad, I agree that not having an interest-elastic demand for money is a fault. But in the context of the argument that Hawtrey was making, in which unemployment was caused by a high bank rate, the interest-elasticity of the demand for money was irrelevant to Hawtrey’s argument. Increasing the rate of interest to reduce desired cash balances would not have increased spending and employment.


  6. 6 Benjamin Cole April 10, 2013 at 10:26 pm

    Like I always say, the upshot is that the Fed right now should print a lot more money….


  7. 7 Ritwik April 11, 2013 at 6:40 am


    Apropos your reply to Brad DeLong, if I re-frame it as Hawtrey implicitly saying

    “the shape of the LM curve is irrelevant when its position is wrong”

    Would that be a fair transcription?


  8. 8 nottrampis April 11, 2013 at 7:12 pm

    This series thus far has been very educational.

    Thank you for everything.


  9. 9 Rob Rawlings April 12, 2013 at 7:18 am

    I have a question.

    Hawtrey obviously believed that the only time borrowing money to spend on public works will be effective in increasing employment is at the ZLB. For this reason his own favored solutions was to increase “bank credits” via lowering the interest rates.

    At the time he wrote the paper this made sense because interest rates were non-zero and the policy would work. However at the ZLB creating more “bank credits” was not an option (though other forms of monetary expansion that would ultimately lead to increased credit would be).

    Did Hawtrey ever address the issue of “credit expansion” at the ZLB ? Did he recognize that the “lower interest-rates -> increased lending” mechanism was not the full story in regards to monetary stimulus ?


  10. 10 David Glasner April 12, 2013 at 8:57 am

    Benjamin, And you say it well.

    Ritwik, Yes unless its flat.

    nottrampis, And thank you for reading (and plugging).

    Rob, Yes, he did. In later writings he discussed the possibility of what he called a “credit deadlock” when entrepreneurial expectations are too pessimistic to enable a low interest rate to induce additional capital investment. He thought that such a situation might have existed in 1894-96 and in the early 1930s.


  11. 11 Rob Rawlings April 12, 2013 at 11:12 am

    Thanks David.

    Hawtrey’s views on “credit deadlock” would be a very interesting topic. for a future post. Sounds like he thinks monetary policy via fiscal means is the key to escape from this kind of deadlock

    (BTW: I found this interesting paper when googling on the topic http://strathprints.strath.ac.uk/7234/1/strathprints007234.pdf)


  12. 12 David Glasner April 12, 2013 at 11:33 am

    Rob,Good suggestion. I thought that I was about ready to conclude the series of Hawtrey/Keynes posts, but it seems that my work is not yet complete. I have to do another on the 1937 exchange in Economic Journal between Keynes and Hawtrey on the rate of interest, as well as one on credit deadlock vs. liquidity trap. I’ve also come across a number of book reviews that Hawtrey wrote that will be worth drawing attention to. Thanks so much for the link to Roger Sandiland’s paper. It looks like a must read.


  13. 13 Blue Aurora April 15, 2013 at 1:48 am

    David Glasner, I don’t think the relationship between Sir Ralph George Hawtrey and Baron John Maynard Keynes quite ends after Baron Keynes’s passing. There is something that I have told you before over e-mail, and it’s the issue of the aggregate supply function in The General Theory.

    In the 1950ies, Hawtrey was involved in a series of exchanges in The Economic Journal over this matter. I believe Dennis H. Robertson, Harry G. Johnson, and a Dutch economist named F. J. de Jong were also among the people involved in this matter.

    There is a 1999 article published in the Indian Journal of Applied Economics on this issue. The Indian Journal of Applied Economics was later succeeded by the International Journal of Applied Economics and EconometricsHere is the citation for it in APA style:

    Brady, M. E. (1999). A Study of the 1954-1956 Economic Journal Aggregate Supply Function Debate and the Post-Keynesian Theoretical Wrong Turn. Indian Journal of Applied Economics, 8, 57-74.

    Furthermore, there have been papers citing this article above. Please see the following links:



    Perhaps you ought to cover Hawtrey’s role in this controversy, David Glasner.


  14. 14 David Glasner April 15, 2013 at 6:06 pm

    Blue Aurora, Thanks for the information. I already have Hawtrey’s two contributions on the Keynesian supply curve, and I will now look up the other contributions that you mentioned. The topic seems slightly arcane, but who knows I may yet do a post on it.


  15. 15 Blue Aurora April 16, 2013 at 3:00 am

    Yes, the topic does seem arcane, but Hawtrey does have a role in that subject. The primary sources behind the subject, however, are Book V (Chapter 19, appendix to Chapter 19, Chapter 20, and Chapter 21) of The General Theory of Employment, Interest, and Money (1936) by J. M. Keynes and Section II of The Theory of Unemployment (1933) by A. C. Pigou.

    I know you like Hawtrey, but it seems that his knowledge of mathematics has rusted by the time he gets around to covering Keynes’s aggregate supply function and aggregate supply curve in the GT in the articles published in The Economic Journal. There have been other sources which cite the articles in The Economic Journal and then subsequent literature after that, but as far as I know, only Michael Emmett Brady’s 1999 article in the Indian Journal of Applied Economics focuses on it.

    Naturally, you ought to go back to the sections in Book V of the GT and to read A. C. Pigou’s 1933 book, before you can make an assessment. Be prepared to brush up on your differential and integral calculus *before* you attempt to understand Pigou’s model and then Keynes’s model, David Glasner!


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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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