HAWTREY, AUSTERITY, AND THE "TREASURY VIEW," 1918-25 BY CLARA ELISABETTA MATTEI* Abstract R. G. Hawtrey was not a man of the backwaters. Through the parallel study of Treasury files and Hawtrey's scholarly publications, this work reveals his direct influence upon the most commanding minds of the Treasury and the Bank of England, the two institutions that, after WWI, shared primary responsibility over the British austerity agenda. After the war, Hawtrey advocated drastic budgetary and monetary rigor in the name of price stabilization. From 1922, Hawtrey admitted the need to decrease the bank rate; yet he remained an adamant supporter of the Gold Standard, insisting on its maintenance even if it required further monetary revaluation. Hawtrey's policy prescriptions stemmed directly from his economic model. The "crowding out argument," the centrality of credit and of savings, together with the operational priority of technocratic institutions, were essential theoretical underpinnings of Hawtrey's agenda: implementing the so- called "Treasury view." *Department of Economics, The New School of Social Research, New York, United States. Email: [email protected]. This “preprint” is the peer-reviewed and accepted typescript of an article that is forthcoming in revised form, after minor editorial changes, in the Journal of the History of Economic Thought (ISSN: 1053-8372), volume 40 (2018), issue TBA. Copyright to the journal’s articles is held by the History of Economics Society (HES), whose exclusive licensee and publisher for the journal is Cambridge University Press (https://www.cambridge.org/core/journals/journal- of-the-history-of-economic-thought ). This preprint may be used only for private research and study and is not to be distributed further. The preprint may be cited as follows: Mattei, Clara Elisabetta. “Hawtrey, Austerity, and the ‘Treasury View,’ 1918-25.” Journal of the History of Economic Thought 40 (forthcoming). Preprint at SocArXiv, osf.io/preprints/socarxiv I. INTRODUCTION 2 In Great Britain the seven years following WWI were marked by rigorous austerity policies.1 From 1918 to 1925 the main objectives were budget cuts and monetary deflation. As the central department for financial policies, the British Treasury had critical authority in setting the economic agenda. In particular, the official who had the greatest influence with chancellors of the Exchequer was the Controller of Finance: first, Sir Basil P. Blackett (1917-1922), and then Sir Otto Niemeyer (1922-1927). Their papers in the Treasury files are virtually the only direct source of information we have about their economic outlook and policies. These documents reveal that economist Ralph Hawtrey was the primary source of economic knowledge for Blackett and, especially, for Niemeyer. At a moment of heightened historical interest in economists plying their expertise, for better or worse, not just to influence public policy but to really formulate it (Leonard 2016; Levy and Peart 2017), this paper provides a case study of one economist’s efforts to that end. Hawtrey's memoranda were thoroughly underlined, studied, exchanged and discussed. The close readers included not only Treasury officials, but also Montagu Norman, the powerful Governor of the Bank of England from 1920 to 1944. Archival evidence of their exchanges is a basis for challenging the conventional account of Hawtrey as a man of respected intellect who was yet “kept at a distance from the main process of policy formulation” (Deutscher1990, p. 3). The account caught on with Winston Churchill's claim that “the learned man be released from the dungeon is which we were said to have immured him” (cited in Black 1977, p. 379) and J. M. Keynes’s reference to “the Hawtrey backwater” (Howson and Winch 1977, p. 25). It has persisted despite R.D.C. Black’s (1977, p. 378) attempted correction. Susan Howson’s (1985, 143) observation that Hawtrey “was able on occasion to use his position in the Treasury to exert some influence on the attitudes of policy makers, if not on the policies actually adopted” does not go far enough in recognizing his influence not only on the minds of the commanding figures at the Treasury, but also on their deeds. 1 Blyth (2013) defines austerity in a clear and concise way: "Austerity is a form of voluntary deflation in which the economy adjusts through the reduction of wages, prices, and public spending to restore competitiveness, which is (supposedly) best achieved by cutting the State's budget, debts and deficits" (p. 2). For a more comprehensive definition see Mattei (forthcoming) 2 3 This paper evaluates Hawtrey's economic ideas in relation to the broader austerity policies the Treasury advocated and implemented. It serves as a gateway to a better understanding of the so- called "Treasury view," the doctrine that shaped British economic policy in the immediate aftermath of WWI (Skidelsky 1981, Peden 1993) and has been recognized as an important forerunner of contemporary austerity practice (Blyth 2013; Konzelmann 2014, 2016; Mattei 2016; Mattei 2017b).2 Was the Treasury view the upshot of economic theory or rather of practical knowledge?3 Were we to discover that Hawtrey did not support the austerity agenda, this would help confirm the weakness of economic theory vis-à-vis the institutionalized orthodoxy (Tomlinson 1981; Middleton 1985) in the thinking of senior Treasury officials like Blackett and Niemeyer, who best personified the Treasury view. In contrast, this essay will prove that Hawtrey's original economic theory did provide solid justification for austerity policies.4 Hawtrey’s theory differed in some crucial respects from orthodox economics and, as shown elsewhere (Mattei 2017b), was the one Niemeyer and Blackett were well acquainted with and, for the most part, agreed with. In fact, there are good reasons to argue that Hawtreyan economics refined and strengthened the economic stance of the senior officials of the British Treasury. This finding bolsters the positions of scholars such as Howson and 2 The "Treasury view" is often understood narrowly in both time and scope. With respect to time, its fame rests upon the 1929 White Paper in opposition to Lloyd George’s expansionary fiscal program (House of Commons, Cmd. 3331). Yet authorities in the field (Skidelsky 1981 and Peden 1993) attest that the Treasury view already prevailed at the beginning of the 1920s: to Peden (1993, p. 248), the 1929 White Paper presented merely the “latter version” of the same view that cemented economic orthodoxy at a pivotal moment in 1921. With respect to scope, the Treasury view refers principally to the opposition to public works (Clarke 1988; Middleton 1985, 1987; Peden 1984, 1996). Elsewhere (Mattei 2016) I reconstruct the full essence of the Treasury view to argue that it extended beyond a belief in crowding out, and included moral and political, as well as economic elements. In particular, Mattei 2017b emphasizes two central but neglected economic elements that are constitutive of the Treasury View: the central role of savings and the importance of independent central banks. 3 This debate also entails a different interpretation of the successive evolution of the Treasury view in the Thirties: Was the Treasury’s reluctance to accept Keynesian insights a matter of theoretical convictions or rather of institutional/administrative constraints? On this theme, see Middleton (1985, 1987) and Howson and Winch (1977). 4 I note that, after 1925 Hawtrey entertained apparent departures from austerity in exceptional circumstances, namely times of crisis, when very low bank rates were insufficient to boost the economy – circumstances he later called credit deadlocks (Hawtrey 1931, 30-33). His scholarship becomes increasingly critical of the perpetuation of dear money for long periods of time, especially during a depression (e.g. Hawtrey 1931, 29-30; 1937, 132-133; 1944, 97). As I will explain further on, these later prescriptions may be seen more appropriately as corroborating than as departing from Hawtrey’s austerity worldview. They are coherent with his monetary theory that is centered on the concept of credit instability and monetary stabilization, both in times of inflation and in times of deflation. They display accordingly a continuing aversion to public spending, even as a remedy for depression, and acceptance of wage cuts as a partial if not principal solution to depression. 3 4 Winch (1977), Clarke (1988), and Peden (1983, 1996, 2000, 2004), who, in varying degrees, recognized the importance of economic ideas, particularly of Hawtreyan economic theory, for the building up of the Treasury view. My essay shows the fundamental importance of Hawtrey's economic ideas - in justifying the economic policies of austerity.5 Hitherto no scholar has systematically investigated the basis of Hawtrey's support for such policies. I find the Hawtreyan worldview to be one of austerity, and that his theory and policy recommendations are profoundly coherent. This study draws on Hawtrey's most important scientific works together with his press articles and copious Treasury papers. Rather than giving a detailed exegesis of Hawtrey's theory,6 I will focus on certain conceptual building blocks in the theory and their manifestation in Hawtrey’s policy advice. These building blocks and their documentary appearance have been mostly overlooked but are crucial to grasp Hawtrey’s austerity worldview in theory and practice. Section II provides the relevant historical background. I show that from 1918-1925 Britain experienced severe austerity measures, and demonstrate Hawtrey's influence on the Treasury and the Court of the Bank of England, the two most influential decision making bodies. Section III presents the conceptual building blocks of Hawtrey’s practical advice, in particular the central role of saving and monetary management. Section IV constitutes the main body of the article. It examines archival documentation in order to unravel Hawtrey’s main policy prescriptions up to 1925, which I demonstrate to be an austerity agenda.