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)
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.