Hawtrey's Monetary Theory of the Business Cycle

I haven't had much access to the internet lately, but when I saw this I decided to float it here:

R.G. Hawtrey has perhaps the most famous "pure money" theory which he outlined in a barrage of articles and books (1913, 1926, 1928, 1933, 1937). His theory, as noted, is Wicksellian in many respects. But his chief characters are wholesalers and middlemen who rely unduly on bank credit and are thus highly sensitive to interest rates. Any slight injection of money which lowers the money rate of interest induces these middlemen to increase inventories. They do so by borrowing from banks increases and demanding increases in production from firms. But because increasing production takes time, the money supply of the economy is momentarily too large for the given amount of income (think of a Cambridge cash-balance theory). This "unspent margin" leads to higher demand for goods by consumers - but that extra demand will itself lower the inventories of these middlemen. Realizing their falling inventories, they will then call again upon firms to step up production and borrow money to do so. But again that leads to an excess supply of money, etc.

The turning points in the Hawtrey cycle arise when production (and thus income) finally catches up with the higher money supplies. They will catch up, Hawtrey tells us, because banks will begin to close off credit when they see their reserves being stretched too far. Then we jump into the recession: when banks stop lending to middlemen, these will reduce their demands on firms. Production will slow down and so will incomes - but with a lag again. The fall in money supply comes first and so consumers now have excess demand for money and will thus lower their demand for goods. That leads to inventory build up and a further demand by middlemen that production reduce further. The downturn continues until the banks are flushed with money once again and need to lend out. http://cepa.newschool.edu/het/essays...moneycycle.htm

I thought it was interesting to see a business cycle theory somewhat similar to the Austrian one. The major difference, as I see it, is that Hawtrey's explanation would call for some kind of regulatory central bank that would stabilize the reserves of subsidiary banks, while ABCT calls for overall low monetary expansion (usually coupled with decentralization) as to not distort the preferences of consumers.

Thoughts? Comments?

Every penny is created thru debt and because of that the money supply needs to be expanded perpetually to allow old debt to be repaid while maintaining an abundant supply of money.

The ups and downs of the economy (business cycle) are controlled by the amount of new credits granted. When the amount of new credits decreases as a result the money supply also decreases. On the contrary when enough new credits are granted the economy booms because there is enough money to pay for old loans while a plentiful money supply is maintained for economic growth.

This is clearly seen in the current economic situation. Banks are not giving out new loans and as a result the country goes immediately into a recession because the money in circulation is going to pay for old loans while no new money is being created.

The problem is not the business cycle but the imposed debt system that controls it.

I think Mises' theory is better still. Though, this seems like a plausible explanation for recession in non-central bank times.

Gutteck, I don't see how your opinion is really any different from Hawtrey's or the Austrian school's opinions.

Hawtrey explains how a sudden expansion of credit lowers interest rates and creates an unsustainable boom. The solution to Hawtrey's problem is a central bank that keeps stable reserves for banks.

The Austrian school "expands" on Hawtrey's position (in actuality ABCT came before Hawtrey, but that is irrelevant) in that they show how monetary expansion by arbitrarily setting interest rates low creates malinvestment. ABCT explains how a central bank cannot simply add to the reserves of subsidiary banks because those subsidiary banks will be forced to raise rates anyways due to inflation and malinvestments.

Both schools recognize monetary contraction as a bad thing for the economy.

Though, in Hawtrey's position, under the assumption of sound money, the amount of credit that could be produced would be limited by the savings kept at the lending bank.