David Glasner has a typically excellent piece on Ralph Hawtrey and the “Treasury View.” It seems the Keynesians have been unfairly maligning Hawtrey for all these years. (Why am I not surprised, they don’t just adopt Keynes’s ideas, but also his smear tactics.)
Here’s Hawtrey:
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.
I’m sure my wife wouldn’t appreciate the Chinaman reference, but otherwise a great analysis. I’ve always liked Hawtrey, but now I appreciate him more than ever. And here’s David:
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.”
PS. To give you an idea of how far things have regressed since 1925, uber-Keynesian Ed Balls is proposing that Britain burn down the house without the pig inside. He wants fiscal stimulus, but also wants the BoE to keeps its 2% inflation target. And Ed Balls is the guy that people like Paul Krugman cite with approval.
PPS. Off topic, but I really respect people who keep an open mind. Here’s David Andolfatto:
Apart from all this, it will be interesting to see how the experiment in Japan plays out. Most of the massive purchases announced by the BOJ are for JGBs — I’m really skeptical what sort of effect this should have (since the operation constitutes swaps of two assets that are close to perfect substitutes–although some purchases will take the form of higher risk assets–seeNoah Smith on this). But what I think really does not matter–it is what market participants think–and the program does appear to be having some effect in financial markets.