Hawtreyan Credit Deadlock or Keynesian Liquidity Trap? Lessons for Japan from the Great Depression
This paper outlines the ideas of Ralph Hawtrey and Lauchlin Currie on the need for monetised fiscal deficit spending in 1930s USA to combat the deep depression into which the economy had been allowed to sink. In such exceptional circumstances of Ã¢â‚¬Å“credit deadlockÃ¢â‚¬Â in which banks were afraid to lend and households and business afraid to borrow, the deadlock could best be broken through the spending of new money into circulation via large fiscal deficits. This complementarity of fiscal and monetary policy was shown to be essential, and as such indicates the potential power of monetary policy Ã¢â‚¬â€œ in contrast to the Keynesian Ã¢â‚¬Å“liquidity trapÃ¢â‚¬Â view that it is powerless This lesson was not learned by the Japanese authorities in their response to the asset price collapse of 1991-92, resulting in a lost decade as ballooning fiscal deficits were neutralised throughout the 1990s by unhelpfully tight monetary policy with the Bank of Japan refusing to monetise the deficits.
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- Mitsuhiro Fukao, 2005. "The Effects of 'Gesell' (Currency) Taxes in Promoting Japan's Economic Recovery," Hi-Stat Discussion Paper Series d05-94, Institute of Economic Research, Hitotsubashi University.
- David Laidler & Roger Sandilands, 2002. "An Early Harvard Memorandum on Anti-Depression Policies: An Introductory Note," History of Political Economy, Duke University Press, vol. 34(3), pages 515-532, Fall.
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- John Smithin, 2004. "Keynes, Chicago and Friedman: A review essay," Journal of Economic Studies, Emerald Group Publishing, vol. 31(1), pages 76-88, January.
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