In 1933, Ralph Hawtrey wrote “
Public Expenditure and the Trade
Depression” in which he presented a thorough analysis of the effects of
fiscal policy. The reader should note that, in it, he refers to government
expenditures as “capital outlays”. Hawtrey did not meet Keynes proposal of
fiscal expansion with cheer. He notes that the complications inherent in fiscal
policy make it a vehicle ill-suited to alleviate economic stress.
A capital programme of the kind advocated cannot be started
till after a considerable preparatory interval. Secondly there is the question
of magnitude. There is no certainty that, even when it is started, the
programme will achieve its object. For it will have to meet precisely the same
obstacles as any alternative method of credit expansion. A programme of 100,000,000
a year sounds impressive, but it is only about 3 per cent. of the national income. A sudden increase of 3 per cent. might
quite possibly effect the vital transition, and restore the normal flow of
credit. A gradual increase of that amount spread over many months would be very
unlikely to do so. The programme might be very much greater. But then there arises
a very real difficulty in finding works ripe for execution which are really beneficial. There is a danger of vast sums of money being wasted. (452)
According to Hawtrey, the desired results might be accomplished in a simpler fashion.
In fact, if what is wanted is a momentary impulse to restart
economic activity, it would be more hopeful to look for it in a reduction of
taxation than in a programme of expenditure. (452)
In any case, the proposal of spending increases ignored the broader problem
of concern.
Then secondly there is the effect of a capital programme on
the balance of payments to be taken into account. A country on the gold
standard, faced with the prospect of an appreciation of gold and unable to
promote the international cooperation requisite to stop it, may be grateful for
anything which will relieve the depression without causing an adverse balance
of payments. But under those conditions the capital programme can be no more
than a palliative; it does not promise to be a turning point in the depression to
be followed by a progressive revival, for revival depends on international
conditions. (457)
The policies of the United States, to a lesser extent, and
France, to a far greater extent, depressed prices, thus leading to a fall in
aggregate demand. Even if fiscal policy temporarily compensated for this
problem, which it is unclear whether or not it would, this still did not serve
as a solution to the international problem. Even if it did, the primary impetus
appears to be monetary policy!
Hawtrey observed that the looming international problem complicated the effects of domestic monetary policy. In reflecting upon the effects of expansion from the Federal
Reserve, he argues that, though it was somewhat effective, it was not substantial nor long enough.
I do not think the degree of success attained by the open
market policy of the Federal Reserve Banks in the summer of 1932 has been
sufficiently appreciated. The policy was applied under serious disadvantages.
The Bank of France was liquidating its dollar holdings and withdrawing them in
gold and the United States lost over $500 millions of gold between February and
June. Hoarding also was a complication. … The improvement, it is true, was not
sustained. But nor was the policy. The open market purchases ceased in August
1932, and in January 1933 there were even some sales. (451)
Of course an analysis of monetary expansion must also take into account the banking crises that occured at the time, but I must defer that task. Its positive effects on growth also were at least offset in
part by France’s
insane
policy. To jump to the conclusion that monetary policy was ineffective was
unwarranted in the eyes of Hawtrey, especially since there was correlation between the program and resumption of growth. Policy suggestions that ignored the problems
created by the fouled operation of the international gold standard were a
poor second best solution, if they were solutions at all.
I am in the process of finding and interpreting Keynes's response, which I will hopefully get to later this week.
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