Prosperity and Depression.pdf

Chap-, 2 The PurelY Monetary TheoryI'important features of the- business cycle which no adequate synthesiscan afford to neglect.§ 2.. THE THEORY OP MR. R. G. HAWTREY:GENERALCHARACTERISTICSThe purely monetary explanation of theIfllpor/ante business cycle has been most fully and mostof tonsl/fllers' uncompromisingly set out by Mr. R. G.outJay. HAWTREy.l For him the trade cycle is cc apurely monetary phenomenon" in the sense thatchanges in "the flow of money" are the sole and .sufficientcause ofchanges in economic activity, ofthe alternation ofprosperityand depression, of good and bad trade. When the demandfor goods in terms of money (that is, the flow of money) grows,'trade becomes brisk, production rises and prices go up. Whendemand .fal1~ off, trade slackens, production shrinks and pricessag. The flow of money-i.e., the demand for goods in termsof money-is proximately determined by "consumers' outlay",that is, by expenditure out of income. s Consumers' outlaycomprises, however, not only expenditure on consumers' goods,but also expenditure on new investment goods-that is to say,that part of consumers' income that is saved and invested.· (Forconsumers' outlay, one can substitute MV, if one defines" V"as "income velocity", in contradistinction to "transaction1 See Good and Bad Trade, London, 1913 ; M onetory Reconstruction,1923, 2nd ed., 1926; Currency _and Credit, 1919, 1923, 1928; Tradeand Credit, 1928 ; Trade Depression and the Way out, 1931, 1933 ; The Art01 Central Banking, 1932 ; The Gold Standard in Theory and Practice, 3rded., 1933 ; Capital and Employment, 1937.• See, especially, The Art 01 Central Banking, London, 1932, Chapter III.Independently, very similar ideas have been expressed by ProfessorAlbert Hahn in his earlier writings. See his Volkswirtschaltlicke Tkeofi6des Bankkredits, 1st ed., 1924 (3rd ed., 1930). Since then he has, howeverchanged his view considerably.Many of the propositions advanced by Mr. Hawtreyand reviewed inthe following pages, especially those on the relation between interest ratesand prices, have had, a long history and were given an early expression inA. Marshall's evidence before the Gold and Silver Commission, 1887.(See Official Papers of A. Marshall, 1926, pages 52 and 131, reproduced andelaborated in his ~loney, Credit and Commerce, pages 75-76 and 254-257.)