Ralph Hawtrey Research Articles

Ralph Hawtrey: A forgotten pioneer of macroeconomics

Ralph Hawtrey: A forgotten pioneer of macroeconomics

Financial Instability and International-Lender-of-Last-Resort Theory from the Gold Standard to the Dollar System

Abstract We identify two approaches to financial crises in the history of political economy, namely, the exogenous approach whereby financial crises are sudden events, and the endogenous approach whereby they arise from a long process. In focusing on the endogenous approach, we study the contributions by Thomas Tooke, Ralph Hawtrey, Hyman Minsky and Charles Kindleberger to the lender-of-last-resort theory, especially in international contexts, under the gold standard and the dollar system. The function of the lender of last resort broadens institutionally (depending on the type of securities and on the institutions issuing or holding them) and internationally (depending on jurisdiction and on the type of institutions ultimately requiring international liquidity).

The evolution of Hayek's thought on gold and monetary standards

AbstractEarly in his career, Hayek viewed attempts to stabilize exchange rates by facilitating cooperation between central banks, with respect to their demand for gold, to be at odds with the fundamental mechanisms of the gold standard. He opposed proposals by Irving Fisher, Gustav Cassel, and Ralph Hawtrey that promoted stabilization of demand for gold and price levels as a next best option. Hayek viewed the nations that refused to devalue their currency after monetary expansion during wartime as complicit in degrading the international gold standard. In 1935 Hayek's emphasis began to change, his position sounding much like the arguments of Cassel and Hawtrey. Though he eventually gave up hope that the international gold standard would be reestablished, his later work on money provides theoretical underpinnings for systems that would promote the same sort of stability and predictability that the classical gold standard had provided.

On Harrod’s Deliberate Misrepresentation of Keynes’s Liquidity Preference Theory of the Rate of Interest After August 30th, 1935: Lying to Ralph Hawtrey in June, 1951 and in His Biography of Keynes in 1951

In his August 30th, 1935 letter to Keynes, Harrod not once, but twice, conceded that Keynes had radically reconstituted the classical and neoclassical theory of the rate of interest by pointing out that the standard theory was one equation short. However, by adding the missing Liquidity Preference equation, Keynes had shown how a quantitatively, determinate equilibrium position could be specified in Aggregate Income (Effective Demand)-interest rate space. However, from this date on, Harrod backtracked and worked feverously to undermine this admission on his part to Keynes, due to his own extreme petty and trite jealousy and envy of Keynes’s world renown recognition as the world’s greatest living economist. Harrod successfully carried out his subterfuge and sabotage in (a) his 1937 Econometrica paper, (b) his correspondence with Hawtrey in 1951, and (c) in his 1951 biography of Keynes. Harrod allied himself with the Pseudo Keynesians (Joan Robinson, Richard Kahn, Austin Robinson) on the issue of what determines the rate of interest by supporting the Joan Robinson claim that the rate of interest in Keynes’s theory was determined solely by the demand and supply of money. Hutchison had pointed this out in 1977 but was unaware of how closely Harrod was involved with the Pseudo Keynesians.

On the Role of Mathematical Illiteracy in the R. Hawtrey-D. Robertson-J. Robinson Critique of Keynes’s Liquidity Preference Theory of the Rate of Interest in the General Theory

Extreme mathematical illiteracy played a basic, fundamental role in the assessments made by Joan Robinson, Ralph Hawtrey and Dennis Robertson of Keynes’s Theory of Liquidity Preference, which Harrod described in an August 30 1935, letter to Keynes as a major reconstruction of interest rate theory. Harrod stated that the classical (neoclassical) theory of the rate of interest was “…either indeterminate or has to be determined by some new equation not provided for in the classical system. Thus the way is clear for a radical reconstruction. Your new equation is the liquidity preference schedule.” Of course, Harrod is talking about the equation on page 199 of the General Theory which had two independent variables, Y and r, M = M1 plus M2 = L1( Y) plus L2(r) [=L], and not the equation on page 168 of the General Theory, which had one independent variable, r, where M=L(r). Robertson, Hawtrey,and Robinson did not understand the mathematics involved in Keynes’s M = M1 plus M2 = L1( Y) plus L2(r) [=L]. (1) But Robertson, Hawtrey, and Robinson did understand how to work mathematically with M=L(r) (2) because it lends itself to the Marshallian, ceteris paribus, partial equilibrium approach, where only functions with one independent variable are analyzed. I will show that later economists, discussing Keynes’s pages 179-182 demonstration that the classical system was missing (1), for example, Boianovsky (2004), Besomi (2000), O’Donnell (1999), and Ahiakpor (1999), are using (2) and not (1). They also are only working with the Marshallian, ceteris paribus, partial equilibrium approach, where only functions with one independent variable are allowed to be specified. Other economists, who work with (2) and not (1), are, for a few examples, Hansen (1953, pp.140-141;147-148), Clower and Howitt (1998, p.8), and King (2002 ,pp.13-15,17-18,31-32).

J M Keynes's General, Multiple, Macro Equilibria Approach in 1936 Against the Marshallians (Harrod, Hawtrey, Henderson, Pigou, and Robertson) Ceteris Paribus, Partial Equilibrium, Approach to Macro

J M Keynes’s General Theory (1936) represented the culmination of his anti-Marshallian approach to both economic methodology and formal economic modeling in macroeconomics. Keynes rejected, at the marco economic level, the Marshallians’ emphasis on ceteris paribus analysis that concentrated on using an approach to analysis that relied on analyzing only one independent variable at a time. The Marshallians would then supplemented their one independent variable analysis by a prose or literary discussion, in which other variables, that had been held fixed, were discussed, but not analyzed in a rigorous, technical, mathematical manner. This type of analysis was published by Dennis Robertson, Ralph Hawtrey, A C Pigou, Hubert Henderson, and Roy Harrod in the early and mid 1930’s. This type of Marshallian, partial equilibrium, approach to analysis is on display in the correspondence of Robertson, Hawtrey, Henderson, and Harrod with Keynes over the General Theory as contained in Volumes 13,14, and 29 of the CWJMK. This kind of Marshallian approach reached its highest level, in the opinion of J M Keynes, in Pigou’s 1933 The Theory of Unemployment. All of Pigou’s technical analysis in Part II of The Theory of Unemployment is based on an analysis where only one independent variable is specified mathematically in his macro economic model, which is based directly on the underlying micro model, both of which were functions of only one single variable, the real wage.Pigou supplemented his Part II analysis with a verbal, prose, literary discussion that attempted to discuss other factors that would impact the macro economy. Unfortunately, Pigou had no multiplier function, consumption function, or Liquidity Preference function that would allow him to analyze total output or employment accurately. Neither did Hawtrey, Robertson, or Henderson. Harrod’s Marshallian defense of the neoclassical theory of the rate of interest, made in his August-September, 1935 exchanges with Keynes over Keynes’s new IS-LP(LM) theory, based on a system containing three simultaneous, mathematical equations, which Keynes explicitly specified in sections four of both chapters 15 and 21 of the General Theory, in Volume 13 of the CWJMK, makes no sense because his sets of shifting savings and investment functions can only specify a set of downward sloping IS curves. No Marshallian, especially Robertson, ever grasped that Keynes’s IS-LP(LM) model of chapters 15 and 21 of the General Theory has absolutely nothing to do with Keynes’s initial, introductory discussion using Keynes’s simplified, liquidity preference function in chapter 13 of the General Theory on page 167, where the demand and supply of money alone determined the interest rate. Keynes’s complete, simultaneous, three equation IS-LP(LM) model is provided on pages 298-299 of the General Theory. Keynes’s IS-LP(LM) is superior to the simultaneous three equation models of Hicks (1937), Harrod (1937), and Meade (1937), which have no D-Z model supporting them that incorporates expectations and uncertainty. Both Robertson and Hawtrey completely overlooked Keynes’s clear description of the vertical and horizontal ranges of the LP(LM) curve provided by Keynes on pages 207-208 of the General Theory. Keynes’s theory is not a partial equilibrium, Marshallian theory.

Hawtrey's Leap and Other Examples of Economists Suffering from Mathematical Confusion and Illiteracy When Reading the General Theory

Mathematical innumeracy, ineptness, illiteracy, and confusion has been endemic in the economics profession since 1936 when the specific case of economists attempting to read Keynes’s General Theory is examined. Three economists will be studied–Gottfried Haberler, Ralph Hawtrey, and Joan Robinson. The lack of a basic understanding of the mathematical model used to illustrate the theory and the difference between the use of the differential calculus as a model based on continuous functions and continuity, while the empirical application of the theory involves observations of discrete data, supports Samuelson’s construction of a bridge between continuous, mathematical models using the calculus and other mathematical techniques such as difference equations, that use empirical, discrete data, as illustrated by his correspondence principle in his 1941 dissertation.

The Evolution of Hayek's Thought on Gold and Monetary Standards

Hayek’s evolving thought on gold and the gold standard is complex and, at times, confusing. Hayek initially supported the gold standard and paid special attention to those nations whose central banking policies he viewed as relatively loose. Early on he viewed attempts at stabilization of exchange rates and price levels to be at odds with the fundamental mechanisms of the gold standard. Instead, he preferred a static measure of the broader money stock (White 1999). This put him at odds with economists such as Irving Fisher, Gustav Cassel, and Ralph Hawtrey who promoted stabilization policy as a second best option. This was due to the unwillingness of many nations to establish exchange rates that reflected the impact of money printing during World War I. Hayek viewed these nations as the culprits the gold standard’s degradation whereas nations whose monetary authorities sterilized incoming gold flows tended to receive praise from Hayek. In 1935 Hayek’s opinion began to change, reflecting sentiment that sounds much like the arguments of Cassel and Hawtrey. Hayek quickly abandoned the dream of reestablishing the gold standard. His later work on money provides theoretical underpinnings for systems that would promote the same sort of stability and predictability that the gold standard provided.

Treasury view and post-WWI British austerity: Basil Blackett, Otto Niemeyer and Ralph Hawtrey

Treasury view and post-WWI British austerity: Basil Blackett, Otto Niemeyer and Ralph Hawtrey

A Refutation of the Paul Davidson and Post Keynesian Claim that Paul Samuelson Was Never a Keynesian

A Refutation of the Paul Davidson and Post Keynesian Claim that Paul Samuelson Was Never a Keynesian

From the Treatise on Money to The General Theory: John Maynard Keynes's Departure from the Doctrine of Forced Saving

I examine John Maynard Keynes's struggle with the doctrine of forced saving during the period 1924–36, from when he worked on the Treatise on Money to the completion of his General Theory. I investigate what led Keynes to completely abolish ideas related to forced saving and how his new formulation was affected by this struggle. I argue that the forced saving thesis is inherently inconsistent with his Fundamental Equations, and the change in the equilibrating mechanism from price to output proposed by Ralph Hawtrey enabled Keynes to completely abolish this notion from his monetary theory.

Ethics, economics and power in the Cambridge Apostles’ internationalism between the two world wars

This article reviews the rich internationalist literature produced by a group of Cambridge Apostles in the interwar years, and evaluates it in the context of contemporary British idealist thought. John Maynard Keynes, Bertrand Russell, Ralph Hawtrey, Leonard Woolf, Gerald Shove, Hugh Meredith, Goldsworthy Lowes Dickinson, Julian Bell, Dennis Robertson and Hugh Dalton not only wrote extensively on international relations, but were widely read and politically influential. Although they never constituted a formal advocacy group or organization, their views on the First World War, the League of Nations, the British Empire and international trade were significantly similar. They also unanimously opposed conscription when it was introduced in Britain in 1916. Their approach appears original especially as far as its ethical foundation, based on Moore’s Principia Ethica, is concerned. The central role played by economic arguments in their reflections is also pointed out.

Hawtrey's Good and Bad Trade: A Centenary Retrospective

Ralph Hawtrey, one of the leading economists of the interwar period, published his first work in economics, Good and Bad Trade, in 1913. The book contains the key elements of the theoretical model developed and refined by Hawtrey over the next quarter century. Notwithstanding Pigou’s judgment that the book showed little originality, a number of new contributions can be identified. 1) Hawtrey introduced the term “effective demand” in the same sense in which Keynes used it in the General Theory. 2) Hawtrey derived the principle of purchasing power parity to explain the determination of exchange rates between fiat currencies. 3) Hawtrey offered a new explanation of how interest rates affect total spending: the sensitivity to the rate of interest of the desired holdings of inventories by middlemen and traders. 4) Hawtrey derived from this sensitivity a relationship between income and expenditure that would later be deployed by Keynes in the General Theory, which helps explain Hawtrey’s early discovery of the multiplier analysis, despite having famously argued (the Treasury view) that government spending could not increase total output or employment, an argument first made in Good and Bad Trade. 5) Hawtrey also provided a sophisticated analysis of financial crises, not as an isolated events caused solely by financial factors, but as the result of unforeseen reductions in aggregate demand when banks suddenly raise interest rates to protect their reserves. 6) Hawtrey also attended to the generally overlooked case in which expected deflation exceeds the real rate of interest, and 7) identified the correlation between price levels and interest rates that Keynes later called Gibson’s paradox in recognition of a paper published by A. H. Gibson ten years after Good and Bad Trade was published. Finally, it is noteworthy that although the international price adjustment mechanism presented in Good and Bad Trade is the Humean price-specie flow mechanism, Hawtrey later criticized the Humean analysis, because international arbitrage, operating without any gold shipments, would maintain a uniform international price level.

G.E. Moore's philosophy and Cambridge economics: Ralph Hawtrey on ethics and methodology

The paper discusses Ralph Hawtrey's critical approach to welfare economics. Hawtrey, one of the Cambridge Apostles, was deeply influenced by the ethical philosophy of G.E. Moore. First in The Economic Problem (1926), and then in several other writings, Hawtrey denounced contemporary economics as lacking in ethical foundations, and, accordingly, regarded the individualist economic system as morally unsatisfactory. Hawtrey's approach is compared to that of a contemporary Apostle and Cambridge economist, Gerald Shove. Hawtrey's and Shove's tentative applications of Moore's philosophy to economics and political science, respectively, provide intriguing evidence of a neglected Moorean undercurrent in Cambridge social sciences.

Pre-Keynesian Monetary Theories of the Great Depression: What Ever Happened to Hawtrey and Cassel?

A strictly monetary theory of the Great Depression is generally thought to have originated with Milton Friedman. Designed to counter the Keynesian notion that the Depression resulted from instabilities inherent in modern capitalist economies, Friedman’s explanation identified the culprit as an ill-conceived monetary policy pursued by an inept Federal Reserve Board. More recent work on the Depression suggests that the causes of the Depression, rooted in the attempt to restore an international gold standard that had been suspended after World War I started, were more international in scope than Friedman believed. We document that current views about the causes of the Depression were anticipated in the 1920s by Ralph Hawtrey and Gustav Cassel who independently warned that restoring the gold standard could cause a disastrous deflation unless the resulting increase in the international monetary demand for gold could be limited. Although their early warnings of potential disaster were validated, and their policy advice after the Depression started was consistently correct, their contributions were later ignored and forgotten. This paper explores the possible reasons for the remarkable disregard by later economists of the Hawtrey-Cassel monetary explanation of the Great Depression.

Where Keynes Went Wrong: An Unnecessary Revolution?

This paper discusses the development of Keynes's ideas about monetary theory in the context of the consequences of Britain's return to the gold standard (opposed by Keynes) in 1925 and his initial unsuccessful attempt to develop a comprehensive theory of macroeconomic fluctuations in his Treatise on Money. The paper suggests that Keynes, who had predicted that rejoining the gold standard at the prewar parity would lead to economic stagnation and high unemployment was shaken in his belief in a monetary explanation for the Great Depression by the failure of Britain's departure from the gold standard to cause a rapid recovery and reduce unemployment. This disappointment led him to undertake a more radical revision of his views in the Treatise than he at first contemplated. In this shift of approach he departed from the views of Ralph Hawtrey with whose monetary theory of the Great Depression he had previously been largely sympathetic.

The Background to Hawtrey's Ethics

The positive/normative distinction, in its modern form, was introduced into economics by Lionel Robbins. Robbins's discussion of the distinction was provoked in part by Ralph Hawtrey's prior claim that economics cannot be dissociated from ethics. Robbins's argument has been quite influential, but Hawtrey himself was not persuaded and later explicitly reaffirmed his view but did not sketch out its basis in any published writing. This article offers an interpretation of the philosophical underpinnings of Hawtrey's position. It argues that Hawtrey had a sophisticated, well-developed, and coherent position, with deep historical roots and based on the ethics of G. E. Moore and that rejected moral Robbins's moral skepticism. Hawtrey took the view that goodness is an objective property of the world and, as a result, he construed the relationship between ethics and economics in a manner quite different from that which prevails today.

The Money Interest and the Public Interest: American Monetary Thought, 1920-1970.

Journal Article The Money Interest and the Public Interest: American Monetary Thought, 1920–1970. By Perry G. Mehrling. (Cambridge: Harvard University Press, 1997. xvi, 283 pp. $45.00, ISBN 0-674-58430-9.) Get access Elmus Wicker Elmus Wicker Indiana University, Bloomington, Indiana Search for other works by this author on: Oxford Academic Google Scholar Journal of American History, Volume 86, Issue 1, June 1999, Pages 257–258, https://doi.org/10.2307/2567481 Published: 01 June 1999

More on Hawtrey, Harvard and Chicago

The similarities among the writings of Ralph Hawtrey, Lauchlin Currie and Milton Friedman are re‐affirmed, as is the influence of the former on what Friedman has called “the Chicago tradition” of the 1930s. The underconsumptionist analysis of Paul Douglas is not integral to that tradition.

Hawtrey, Harvard, and the Origins of the Chicago Tradition

Milton Friedman has claimed that his monetary economics derives from a Chicago Tradition that, in the 1930s, offered a monetary explanation of cyclical fluctuations in general and the Great Depression in particular, an optimistic view of the power of monetary policy, and a case for governing it by rules rather than discretion. It is argued that all the elements of this tradition except the last are to be found in earlier writings of Ralph Hawtrey, Allyn Young, and Lauchlin Currie and that there is much evidence to point to a direct influence running from Hawtrey, through Harvard to Chicago.