Theories of Financial Disturbance
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Theories of Financial Disturbance

An Examination of Critical Theories of Finance from Adam Smith to the Present Day

Jan Toporowski

Theories of Financial Disturbance examines how the operations of market-driven finance may initiate and transmit disturbances to the economy at large, by looking in detail at how various economists envisaged such disturbances occurring.
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Chapter 5: Ralph Hawtrey and the Monetary Business Cycle

Jan Toporowski


If thoughtful individuals, well read in contemporary economic theory in the 1920s, had been asked at that time which economist was most likely to revolutionise twentieth-century monetary economics (and indeed had already started doing so), it is likely that, without hesitation, they would have given the name Ralph Hawtrey, rather than that of his rival, which we would now give, John Maynard Keynes. J.C. Gilbert recalled studying monetary theory from Hawtrey’s Currency and Credit at the London School of Economics in the 1920s, and Hicks was told by Austin Robinson that this was the standard work used in the Cambridge Tripos at that time.1 Forty years later, his standing had been reduced to that of one of the ‘also-rans’ of monetary theory. For example in Roll’s standard textbook A History of Economic Thought, he merits only one mention as a theorist of credit policy.2 Schumpeter remarked that ‘Throughout the twenties, Hawtrey’s theory enjoyed a considerable vogue. In the United States, especially, it was the outstanding rationalization of the uncritical belief in the unlimited efficacy of the open-market operations of the Federal Reserve System that prevailed then.’3 But this was largely because Hawtrey’s ideas were taken up by Allyn Young at Harvard University, who was an occasional advisor to Benjamin Strong, the influential Governor of the Federal Reserve Bank of New York from 1922 to his untimely death in 1928. As late as 1947, Lawrence Klein referred to Hawtrey as Keynes’s ‘rival for the leadership of British monetary policy’.4 But Charles...

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