The close, but not always cozy, relationship between Keynes and Hawtrey was summed up beautifully by Keynes in 1929 when, commenting on a paper by Hawtrey, “Money and Index Numbers,” presented to the Royal Statistical Society, Keynes began as follows.
The tension between these two friendly rivals was dramatically displayed in April 1930, when Hawtrey gave testimony before the Macmillan Committee (The Committee on Finance and Industry) established after the stock-market crash in 1929 to investigate the causes of depressed economic conditions and chronically high unemployment in Britain. The Committee, chaired by Hugh Pattison Macmillan, included an impressive roster of prominent economists, financiers, civil servants, and politicians, but its dominant figure was undoubtedly Keynes, who was a relentless interrogator of witnesses and principal author of the Committee’s final report. Keynes’s position was that, having mistakenly rejoined the gold standard at the prewar parity in 1925, Britain had no alternative but to follow a policy of high interest rates to protect the dollar-sterling exchange rate that had been so imprudently adopted. Under those circumstances, reducing unemployment required a different kind of policy intervention from reducing the bank rate, which is what Hawtrey had been advocating continuously since 1925.
Central bank governor Zhou Xiaochuan yesterday raised an alert about rising inflation and formally declared a shift to a tighter monetary policy this year.
The government may also roll out new measures to control the property market, he told a news conference on the sidelines of the National People's Congress.
Zhou's tough talk confirmed an observation made by many economists that the People's Bank of China has sought to curb credit from expanding too fast.
The remarks contrasted with Zhou's usual approach of treading delicately while speaking to the public on policy directions in order to avoid causing market jitters.
Some analysts said Zhou's comments were aimed at damping inflation expectations and highlighting concern about surging property prices fuelled by accommodative monetary policy in the past several quarters.
Last month, inflation rose unexpectedly to 3.2 per cent.
"Inflation merits high vigilance. We plan to stabilise consumer prices and inflation expectations through monetary policy and other tools," Zhou said, although he added that holiday effects may have distorted the number.
Central banks in Japan and the U.K. have turned to a new guard for a change of direction. But China's sticking with an old hand to address new policy challenges.
Zhou Xiaochuan's been China's central bank governor since 2002 and may stay longer. The defining feature of his first decade at the helm of monetary policy was a burgeoning current-account surplus—that peaked at 10.1% of gross domestic product in 2007.
The central bank's job was to soak up those inflows to prevent inflation and asset-price bubbles. Central bank liabilities swelled to 29.5 trillion yuan ($4.7 trillion) in 2012—equivalent to 56.7% of GDP and up from 5.1 trillion yuan in 2002. Fears of speculative inflows limited the scope for raising interest rates—the main tool of western monetary policy.
The situation has changed. China's current-account surplus shrank to 2.6% of GDP in 2012 and its financial account has swung into deficit as funds flow out of the country. The yuan's pronounced rise against the dollar—a central bank initiative—has been key.
Smaller inflows make mopping up liquidity less important. The central bank has more flexibility to shift interest rates and allow the yuan to float more freely.
China, Japan and South Korea agree on little these days. Yet they seem increasingly united in the belief that their economic sovereignty—their ability to control inflows and outflows of capital, and the consequences for their economies—is hostage to imprudent policy innovations coming from the U.S. Federal Reserve.
In December, Japanese Prime Minister Shinzo Abe observed critically that "Central banks around the world are printing money. . . . America is the prime example. If it goes on like this, the yen will inevitably strengthen. It's vital to resist this."
Speaking from Beijing in September, Bank of Korea Governor Kim Choong-soo said that "Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations," namely the United States.
The root of the problem, as People's Bank of China Governor Zhou Xiaochuan explained in a November 2010 speech, is that whereas U.S. monetary policy "may be optimal for the U.S. alone . . . it is not necessarily optimal for the world. There is a conflict between the U.S. dollar's domestic role and its international settlement role."
This conflict is a leftover defect of "the Bretton Woods system," he said, referring to the historic 1944 conference that anointed the dollar a unique surrogate for gold at the foundation of the global monetary system. By 1961, when the first nine European countries met the requirement that their currencies be convertible into dollars, this system was already coming under strain owing to a deteriorating U.S. balance of payments and corresponding loss of gold reserves. It collapsed 10 years later when President Nixon suspended the dollar's convertibility into gold in order to prevent the depletion of America's gold stock. But a lack of alternatives meant that the dollar remained the world's dominant reserve and trade currency, Mr. Zho noted, despite "the frequency and increasing intensity of financial crises" after 1971.
China needs to lean toward a tighter monetary-policy stance as the economy faces risks from excessive liquidity and credit, according to a research unit of the nation’s top economic-planning agency.
Authorities should drain more cash from the financial system to manage liquidity and regulators need to enhance oversight of banks’ off-balance-sheet business, the State Information Center, a research arm of the National Development and Reform Commission, said in a report published today in the official China Securities Journal.
The report adds to signs that the central bank and other agencies will step up efforts to counter risks from rising property prices and debt as the economy recovers from the weakest growth in 13 years. The People’s Bank of China withdrew a net 910 billion yuan ($146 billion) from the financial system last week, more than double the previous record in data compiled by Bloomberg going back to 2008.