Although he was neither banker nor politician, neither academic nor university professor, Ralph George Hawtrey (1879-1975) was an influential British monetary economist during the interwar period.
According to Schumpeter (1954: 1121): “Throughout the twenties... [his theory] enjoyed a considerable vogue”. Hawtrey joined the British administration when he was 24 years of age, in 1903, then moved to the Treasury in 1904, where he was appointed Director of Financial Enquiries from 1919 until his retirement in 1947.
He played a leading role in the 1921 Genoa Conference and was invited to Harvard for the 1928-29 academic year, on Allyn Abbott Young’s initiative. He was seen as a representative of the so-called Treasury View concerning a return to the gold standard with an exchange rate at the level of pre-war parity and the denial that public expenditure could resolve unemployment. Nevertheless, Keynes (1937: 202) regarded him as his “grandparent... in the paths of errancy”. His approach was unorthodox.Hawtrey studied mathematics at Trinity College, Cambridge, from which he graduated in 1901. He was a member of the Apostles and the Bloomsbury group, and was close to George Edward Moore (see Donnini Maccio 2015). He first studied economics when applying for a Civil Service position. He then devoted most of his time to economics. However, he continued to regularly attend the Apostles’ meetings. He was working on two books on philosophy - Right Policy: the Place of Value Judgments in Politics and Thoughts and Things - when he died at the age of 96. He was a prolific writer in economics, publishing 12 books and 44 articles. His most important book is Currency and Credit; the first edition appeared in 1919 and the second in 1928. It is also important to mention Good and Bad Trade (1913), his first publication, in which some of his key original notions are already present; Gold Standard in Theory and Practice (1927), devoted to the restoration of the gold standard after WWI; The Art of Central Banking (1932), which focuses on the lender-of-last-resort function of central banks and presents his comments on Keynes’s Treatise on Money (1930); Capital and Employment (1937), devoted to the economics of depression, with comments on Keynes’s General Theory (1936), and A Century of Bank Rate (1938), in which he examined the history of British interest rate policy in the management of money.
Most of Hawtrey’s monetary ideas were already present in his 1919 book. Hawtrey was influential, but he was not open to the influence of others. He used his own terms - “unspent margin”, “consumers’ income and outlay”, “capital outlay”, and so on. He never integrated Marshall’s vocabulary or analysis of the demand for money into his theory, nor did he accept Pigou’s (1913, 1933) and Keynes’s (1936) public expenditure proposals, or Keynes’s ideas about the monetary determination of the long-term interest rate. Hawtrey developed a monetary theory of the credit cycle, but it differs markedly from those of Marshall, Wicksell or Fisher.According to Hawtrey, money is not derived from barter, but from credit. It does not provide a means for the circulation of goods, but for the payment of debts. Consequently, it is the regulator of credit. To that end, it must be managed. More precisely, money has to be issued by the central bank acting as a lender of last resort. At the same time, the central bank must modify its discount rate and actively intervene on the open market. According to this view, the gold standard system is not self-equilibrating; it has to be managed. Without monetary policy, economic activity would be unstable, resulting in cycles, crises and unemployment. Accurate monetary policy, not government spending,
is the solution, according to Hawtrey. This policy is not passive or neutral; it is an active and effective art, the art of central banking.
For Hawtrey, the key figures in the exchange economy are the trader and the banker, rather than the individual with initial endowments, the entrepreneur or the capitalist. The trader buys and sells goods and uses credit as a means of circulation. He trades according to two factors: his anticipations about the demand for goods, and the cost of financing his stock, that is, the short-term interest rate. When the interest rate falls, traders expand their debt and their stock. Therefore, their orders to industry increase, production increases, incomes increase, the demand for goods increases, the sales of dealers increase, and when full employment is reached, prices increase.
The process is cumulative. The reverse process holds in the case of a rise in the interest rate. Both processes show that credit is inherently unstable. According to Hawtrey, because it is the legal tender, money puts an end to this instability of credit. Credit inflation requires more means of payment and consequently encounters the problem of the limited quantity of legal tender money.Thanks to traders and commercial credit, the goods produced and supplied by industry are marketable. Thanks to banks, commercial credit is liquid. Banks are in fact the dealers of traders’ debts; they compensate these debts, and substitute their own debt for the traders’ debt. Furthermore, bank debt is payable at sight, whereas traders’ debt is payable at term. Households do not spend all their income (on purchases of consumer goods and financial assets) - therefore, they retain an “unspent margin” in legal tender (coins and Bank of England notes) and bank deposits. So, through the intermediation of the banking system, households finance the traders’ stocks. Because inflation leads households to increase their demand for coins and Bank of England notes, bank credit also faces the problem of the limited supply of legal tender money.
As long as the quantity of legal tender is strictly limited, the limit it applies to commercial and bank credit will give rise to sudden commercial and banking crises, which degenerate into recessions. This was the case with the gold specie standard without central bank lending in last resort. On the contrary, if there is a central bank that grants credit in order to issue bank notes that are legal tender, trade and bank crises can be limited or avoided. However, the central bank should not wait until the limit is reached, but intervene actively beforehand, by raising its interest rate in order to remedy the inherent instability of credit. Therefore, the gold standard establishes a limit to credit, but it can be destabilizing if it is not managed by a central bank that permanently issues debt and lends in last resort.
So Hawtrey stood outside British monetary orthodoxy. He improved Thornton’s and Bagehot’s analyses: on the one hand, the central bank demands commercial assets on the credit market, thus regulating credit through its interest rate policy; on the other hand, the central bank supplies money on the market for cash balances, thus ending the liquidity crisis.Furthermore, Hawtrey expressed the clear view that the international gold standard system before World War I was not symmetrical, but dominated by London. This permitted British banks to manage international commercial credit so that the Bank of England discount rate was the benchmark rate at the international level. According to Hawtrey, after World War I, the restoration of London’s leading financial role was a political priority, even if the role was to be shared with New York. This meant restoring the dollar-pound exchange rate to the level of pre-war parity, which meant a return to the gold standard at the pre-war fixed legal price of gold. For Hawtrey, the necessary 8-10 per cent deflation of prices was tolerable. In addition, he argued that the monetary uses of gold should be limited in order to avoid global deflation. To achieve this goal, he promoted the idea of an international gold exchange standard. Finally, attention should be drawn to Hawtrey’s 1932 plea for the establishment of an international lender of last resort in order to remedy twin (exchange and banking) crises.
Jerome de Boyer des Roches
See also:
Walter Bagehot (I); Balance of payments and exchange rates (III); Bullionist and anti-bullionist schools (II); John Maynard Keynes (I); Money and banking (III); Arthur Cecil Pigou (I); Joseph Alois Schumpeter (I); Henry Thornton (I).