University of Huddersfield Repository Gaukroger, Alan The Director of Financial Enquiries A Study of the Treasury Career of R. G. Hawtrey, 1919-1939. Original Citation Gaukroger, Alan (2008) The Director of Financial Enquiries A Study of the Treasury Career of R. G. Hawtrey, 1919-1939. Doctoral thesis, University of Huddersfield. This version is available at http://eprints.hud.ac.uk/id/eprint/2980/ The University Repository is a digital collection of the research output of the University, available on Open Access. Copyright and Moral Rights for the items on this site are retained by the individual author and/or other copyright owners. 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January 2008 Contents Abstract page 3 Preface and Acknowledgements 4 Introduction 18 Prelude: Hawtrey’s Monetary Model of the Trade Cycle 42 Chapters: 1. Paving the Way for the Return of Gold, 1919-24 97 2. The Return to the Gold Standard, 1925 150 3. The Gold Standard and High interest Rates, 1925-31 184 4. Unemployment and the Liberal Plan, 1928-30 234 5. The Treasury before the Macmillan Committee, 1930 276 6. Leaving the Gold Standard, 1931-32 322 7. Currency Chaos, 1931-33 359 8. Rearmament and Preparation for War, 1935-39 411 9. Reorganisation, War and Retirement, 1937-39 440 Conclusions 463 Appendix: Interpreting Keynes to the Treasury; 1931, 1936 495 Bibliography 519 2 Abstract Alan Gaukroger The Director of Financial Enquiries. A Study of the Treasury Career of R. G. Hawtrey, 1919-39. In 1904 Ralph George Hawtrey, a Cambridge Mathematics graduate, entered the Treasury as Second Class Clerk. Apart from one year of secondment he was to remain employed by the Treasury until 1947. His career progress was modest. He never achieved a position of high administrative responsibility. Only in 1919, at the age of forty, did he achieve the grade of Assistant Secretary. In this position, as Director of Financial Enquiries within the Finance Division of the Treasury, he had no administrative responsibility, but was required to prepare reports on matters of his own choosing or as directed by his Treasury superiors. In his remaining 28 years at the Treasury he made no further career progress. As such, his was an unremarkable career. His career was only remarkable because, after entering the Treasury, he took up an interest in the subject of Economics – he became a self-taught economist. Having developed his economic understanding through his experiences within the Treasury, it owed little to any previously existing ‘school’. Thus, in 1913, in his first book Good and Bad Trade, he was able to produce the first complete monetary explanation of the trade cycle. His standing as an economist rose even as his civil service career halted. In 1919 he produced a book Currency and Credit which became a standard university text on monetary economics for over a decade. He was appointed visiting Professor of Economics at Harvard for 1928-9, was elected to a fellowship of the British Academy in 1935, appointed Professor of International Economics at the Royal Institute of International Affairs in 1947, knighted (for ‘services to Economics’) in 1956, and elected to an Honorary Fellowship of Trinity College, Cambridge in 1959. As an economist of standing he used his position in the Treasury to criticise the policy-making authorities. The Financial Enquiries Branch, for which Hawtrey was responsible, has commonly been described as a ‘backwater’ – removed from centre of economic decision-making. Likewise, within studies of the Treasury, there has been a tendency to deprecate Hawtrey as a figure of fun; partly on account of personal inefficiencies and eccentricities, and partly on account of a certain ‘unworldliness’, with his views being tied too closely to his economic theory and divorced from the traditional culture within which the Treasury and the Bank of England had been accustomed to operate. This thesis will examine the way in which, as an economist, Hawtrey used his position within the Treasury to criticise, and attempt to change, policy. It will concentrate on his differences with the advice of other economists and his differences with the policies of the Treasury and the Bank of England. The findings of this study are that while much of the criticism of Hawtrey’s career may be true, there were times when Hawtrey was both persuasive and influential. Much of his influence stemmed from his relationship with senior members of the Treasury administration, and whilst there were times when senior staff respected his judgement, there were times when his views ran contrary to the ethos of the Treasury and were ignored. However, even when he was ignored, as he often was, Hawtrey’s criticisms drew attention to the wider implications of policy in such a way that he can be seen as acting as the Treasury’s ‘conscience’. As such, his influence was often not directly on policy but, more subtly, upon the way in which the Treasury’s perception of its responsibilities changed. 3 Preface and Acknowledgments Prefaces are where writers make excuses for their words. This one cannot claim to be an exception. Thus it begins with a description of the unusually circuitous route by which this thesis came to be undertaken. A student presenting a Ph.D. thesis in Economic History might be expected to possess certain essential building blocks; the minimum foundation might be regarded as A-levels in History and Economics with a first degree in one or other of these subjects. This work is presented with no such underpinning. A degree in Physics, taken in the early 1960s, served as passport to a career, teaching physics and mathematics, in laboratories and classrooms in secondary schools and sixth-form colleges in the West Midlands, Cheshire and West Yorkshire. The intellectual giants bestriding this former life of mine were not Smith, Ricardo, Mill or Keynes, but Archimedes, Galileo, Newton and Einstein. Retirement offered the possibility of widening academic horizons. Initial steps in this venture were towards the Open University and a degree in English Literature. Attempting to follow this up I sought, in vain, for a specialist in colonial and post-colonial literatures at my local university, the University of Huddersfield, to supervise a research project on the work of the St. Lucian poet, Derek Walcott. Unable to find anybody there, or anywhere else, with time to share my enthusiasm for Walcott’s work, I re-directed my academic efforts by enrolling for the degree of M.A. in History at Huddersfield. 4 The context for the awakening of a new interest was a study, with Professor David Taylor, of poverty in Victorian London. In Henry Mayhew’s writings on poverty amongst nineteenth century silk-weavers in the London area of Spittlefields, he observed that the silk-workers who managed to survive, being underpaid, were being forced into excessively long hours of work in order to subsist, in the course of which they were driving other weavers out of work. Interviewing the silk-workers, he found that they blamed their condition on the repressive effects of ‘the free market in goods’, in particular the competition from goods made in France where, the workers believed, the tax regime was more lenient. Mayhew took up the cause of the silk-workers, increasingly directing his anger at the Political Economists whom he held responsible for the dominant free-market ideology, which he accepted as the cause of the poverty he was witnessing. He regarded the message of the Political Economists as grossly immoral: Do your neighbour as your neighbour would do you.1 [The underlining, but not the italics, are mine] Moreover, he believed their ideas were not founded upon observations of things happening in the real world. 1 H. Mayhew, ‘Answers to Correspondents’ [No. 20, 26 April 1851] in B.O.Taithe, The Essential Mayhew (London, Rivers Oram, 1996), p.136. 5 Economists from Adam Smith down . have shown the same aversion to collect facts as mad dogs have to touch water. It is so much easier to ensconce themselves in some smug corner and there remain all day, like big-bottomed spiders, spinning cobweb theories amid heaps of rubbish.2 As a physicist with a fascination for models and theories, it was inevitable that ‘cobweb theories’ would entice me into their trap, and there I have remained, entrapped, ever since. Early stages of this confinement were spent reading about the nineteenth century economists from Smith to Marshall. The smooth progress of self-tuition came to an end with the advent of Keynes, much as my understanding of physics had stumbled as the certainties of Newtonian processes gave way to the relativistic mechanics of Einstein. Both The General Theory of Employment Interest and Money, and The General Theory of Relativity, for me, had eel-like qualities; no sooner did I feel that I had intuitively grasped their ideas than some doubt would cause that tenuous grasp to fail - my sense of understanding would slither away, and the process of retrieval would have to begin all over again.