The Treasury View, Raw

From R. G. Hawtrey (1925), "Public Expenditure and the Demand for Labour," Economica 13 (March):

If, when the Government started new works, there were any circumstances which would tend to make people content with smaller balances, that would affect the problem. To put forward an increase in trade activity itself as having this effect would be to beg the question. If the increase in activity does occur, an increased rapidity of circulation would follow. But, except in cases of marked distrust of the currency, the increased cash requirements of a revival of trade activity are only partly, not wholly, met by increased rapidity of circulation. There must be some increase in the unspent margin, though not in full proportion to the turnover of cash. If a tight hold is kept on the unspent margin, in other words, if no expansion of credit at all is allowed, the conditions which produce increased rapidity of circulation cannot begin to develop.

There is, however, one possibility which would in certain conditions make the Government operations the means of a real increase in rapidity of circulation. In a period of depression the rapidity of circulation is low, because people cannot find profitable outlets for their surplus funds and they accumulate idle balances. If the Government comes forward with an attractive gilt-edged loan, it may raise money, not merely by taking the place of other possible capital issues, but by securing money that would otherwise have remained idle in balances. That could only occur in exceptional circumstances. The idle balances are not in general accumulated for want of attractive enough permanent investments; they are rather composed of unemployed circulating capital, often that of manufacturers who prefer not to be dependent on their bankers. But it is conceivable that the outlook for industry might be so extremely unfavourable that promoters of new enterprises do not come forward in sufficient numbers, along with public borrowers, to use up savings as they accrue. In that case additional public borrowing might not displace any trade issues. There would be a diminution of balances on one side without any diminution in the flow of money to set against the increase of Government expenditure on the other.

With our hypothesis, therefore, we have reached this conclusion, that additional public expenditure can only give additional employment if it increases the rapidity of circulation of money, and it is only likely to do so in the exceptional case described....

[...]

The original contention that the public works themselves give additional employment is radically fallacious. When employment is improved, this is the result of some reaction on credit, and the true remedy for unemployment is to be found in a direct regulation of credit on sound lines.

Interesting that Hawtrey assumes that there is no interest elasticity in the demand for money--and no interest elasticity in the money multiplier--except in pathological circumstances...

Here Olivier Blanchard (2000), "What Do we Know About Macroeconomics that Fisher and Wicksell Did Not?" seems to have something relevant to say, as he claims that these confusions were removed by:

the methodological contributions of [Keynes's] General Theory [1936] [which] made a crucial difference.

• Keynes explicitly thought in terms of three markets (the goods, the financial, and the labor markets), and of the implications of equilibrium in each.

• Using the goods market equilibrium condition, he showed how shifts in saving and in investment led to movements in output.

• Using equilibrium conditions in both the goods and the financial markets, he then showed how various factors affected the [Wicksellian] natural rate of interest (which he called the ‘‘marginal efficiency of capital’’), the money rate of interest, and output. An increase in the marginal efficiency of capital--coming, say, from more optimistic expectations about the future--or a decrease in the money rate--coming from expansionary monetary policy--both led to an increase in output.

A quote from Pigou’s Marshall lectures, Keynes’s General Theory: A Retrospective View’’ [1950], puts it well: ‘‘Nobody before him, so far as I know, had brought all the relevant factors, real and monetary at once, together in a single formal scheme, through which their interplay could be coherently investigated.’’ The stage was then set for the second epoch of macroeconomics, a phase of consolidation and enormous progress.