Hawtrey's Good and Bad Trade : A Centenary Retrospective

Ralph Hawtrey, one of the leading economists of the interwar period, published his first work in economics, Good and Bad Trade, in 1913. The book contains the key elements of the theoretical model developed and refined by Hawtrey over the next quarter century. Notwithstanding Pigou's judgment that the book showed little originality, a number of new contributions can be identified. 1) Hawtrey introduced the term “effective demand” in the same sense in which Keynes used it in the General Theory. 2) Hawtrey derived the principle of purchasing power parity to explain the determination of exchange rates between fiat currencies. 3) Hawtrey offered a new explanation of how interest rates affect total spending: the sensitivity to the rate of interest of the desired holdings of inventories by middlemen and traders. 4) Hawtrey derived from this sensitivity a relationship between income and expenditure that would later be deployed by Keynes in the General Theory, which helps explain Hawtrey's early discovery of the multiplier analysis, despite having famously argued (the Treasury view) that government spending could not increase total output or employment, an argument first made in Good and Bad Trade. 5) Hawtrey also provided a sophisticated analysis of financial crises, not as an isolated events caused solely by financial factors, but as the result of unforeseen reductions in aggregate demand when banks suddenly raise interest rates to protect their reserves. 6) Hawtrey also attended to the generally overlooked case in which expected deflation exceeds the real rate of interest, and 7) identified the correlation between price levels and interest rates that Keynes later called Gibson's paradox in recognition of a paper published by A. H. Gibson ten years after Good and Bad Trade was published. Finally, it is noteworthy that although the international price adjustment mechanism presented in Good and Bad Trade is the Humean price-specie flow mechanism, Hawtrey later criticized the Humean analysis, because international arbitrage, operating without any gold shipments, would maintain a uniform international price level