But Now You Know

The search for truth in human action

Hayek’s 1932 Letter on the Great Depression

In 1932, Hayek took on Keynes on stimulus spending,
but AGREED with him about deflation and added savings: 

“It is agreed that hording money,
whether in cash or in idle balances,
is deflationary in its effects.
No one thinks that deflation is in itself desirable.”

In 1932, Austrian economist Friedrich von Hayek wrote an open letter debating John Meynard Keynes’ similar letter proposing a solution to the depression.

In Hayek’s letter, it’s clear that he opposed what would someday be Rothbard’s faux-Austrian claim that you must have an equal amount of deflation and extra savings, to compensate for any period of inflation and borrowing.

Hayek clearly states that deflation and compensatory savings are bad:


Sir, the question whether to save or whether to spend which has been raised in your columns, is not unambiguous. It involves three separate issues:

  1. Whether to use money or whether to hoard it;
  2. whether to spend money or whether to invest it;
  3. whether Government investment is on all fours with investment by private individuals.

While we do not wish to over-stress the nature of our differences with those of our professional colleagues who have already written to you on these subjects, yet on certain points that difference is sufficiently great to make the expression of an alternative view desirable.

  1. On the first issue — whether to use one’s money or whether to hoard it — there is no important difference between us. It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable.
  2. On the question whether to spend or whether to invest our position is different from that of the signatories [Pigou, Keynes et al] of the letter which appeared in your columns on Monday. They appear to hold that it is a matter of indifference as regards the prospects of revival whether money is spent on consumption or on real investment. We, on the contrary, believe that one of the main difficulties of the world today is a deficiency of investment — a depression of the industries making for capital extension, etc., rather than of the industries making directly for consumption. Hence we regard a revival of investment as peculiarly desirable. The signatories of the letter referred to, however, appear to deprecate the purchase of existing securities on the ground that there is no guarantee that the money will find its way into real investment. We cannot endorse this view. Under modern conditions the security markets are an indispensable part of the mechanism of investment. A rise in the value of old securities is an indispensable preliminary to the flotation of new issues. The existence of a lag between the revival in old securities and revival elsewhere is not questioned. But we should regard it as little short of a disaster if the public should infer from what has been said that the purchase of existing securities and the placing of deposits in building societies, etc., were at the present time contrary to public interest or that the sale of securities or the withdrawal of such deposits would assist the coming recovery. It is perilous in the extreme to say anything which may still further weaken the habit of private saving.
  3. But it is perhaps on the third question — the question whether this is an appropriate time for State and municipal authorities to extend their expenditure — that our difference with the signatories of the letter is most acute. On this point we find ourselves in agreement with your leading article on Monday. We are of the opinion that many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities. We do not desire to see a renewal of such practices. At best they mortgage the Budgets of the future, and they tend to drive up the rate of interest — a process which is surely particularly undesirable at this juncture, when the revival of the supply of capital to private industry is an admitted urgent necessity. The depression has abundantly shown that the existence of public debt on a large scale imposes frictions and obstacles to readjustment very much greater than the frictions and obstacles imposed by the existence of private debt. Hence we cannot agree with the signatories of the letter that this is a time for new municipal swimming baths, etc., merely because people “feel they want” such amenities.

If the Government wish to help revival, the right way for them to proceed is, not to revert to their old habits of lavish expenditure, but to abolish those restrictions on trade and the free movement of capital (including restrictions on new issues) which are at present impeding even the beginning of recovery.

We are, Sir, your obedient servants,

T. E. Gregory, F. A. von Hayek, Arnold Plant, Lionel Robbins



  1. Why people still make use of to read news papers when in
    this technological world everything is accessible on web?

    Comment by children s place credit card | March 6, 2014 | Reply

  2. […] need to take White’s interpretation, though, here’s Hayek himself, agreeing with Keynes on the matter of deflation (though not the prescription of government […]

    Pingback by Frum and the Problem with Hayek «  Modeled Behavior | May 1, 2011 | Reply

  3. […] In effect, the Fed is causing what Friedrich Hayek called “hording”, and identified as something that NO economic school considers healthy. It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable. – Friedrich Hayek’s 1932 Letter on the Great Depression […]

    Pingback by Is the Fed Wagging the Dog? « But Now You Know | December 28, 2010 | Reply

  4. […] Hayek in an open letter to Keynes, 1932, regarding how to respond to the Great […]

    Pingback by What Bernanke Means: QE2 Will Not Boost Money Supply « But Now You Know | December 9, 2010 | Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: