Treasury view (Ofer Abarbanel online library)

In macroeconomics, particularly in the history of economic thought, the Treasury view is the assertion that fiscal policy has no effect on the total amount of economic activity and unemployment, even during times of economic recession. This view was most famously advanced in the 1930s (during the Great Depression) by the staff of the British Chancellor of the Exchequer. The position can be characterized as:[citation needed]

Any increase in government spending necessarily crowds out an equal amount of private spending or investment, and thus has no net impact on economic activity.

In his 1929 budget speech, Winston Churchill explained, “The orthodox Treasury view … is that when the Government borrow[s] in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process raises the rent of money to all who have need of it.”

Keynesian economics rebutted this once common view, and its proponents often use the term “Treasury view” when criticizing this policy and related arguments. The term is sometimes conflated with the related position that fiscal stimulus has negligible impact on economic activity, a view that is not incompatible with mainstream macroeconomic theory.


In the late 1920s and early 1930s, during the height of the Great Depression, many economists (most prominently John Maynard Keynes) demonstrated that increased public expenditure would mitigate the situation and reduce unemployment. In the United Kingdom, the staff of the Chancellor of the Exchequer, notably Ralph George Hawtrey and Frederick Leith-Ross, argued against increased spending by putting forward the “Treasury view”.[1][2] Simply put the Treasury view was the view that fiscal policy could only move resources from one use to another, and would not affect the total flow of economic activity. Therefore, neither government spending nor tax cuts could boost employment and economic activity. This view can historically be traced back to various statements of Say’s law.

Keynes argued convincingly against this position, and particularly in The General Theory of Employment, Interest, and Money, provided a theoretical foundation for how fiscal stimulus can increase economic activity during recessions.[3]

Opinions are currently sharply divided on the Treasury view, with different schools of economic thought holding contradicting views. Many in the “freshwater” Chicago school of economics advocate a form of the Treasury view, whereas economists from saltwater schools reject the view as incorrect.[4]

A number of prominent financial economists (including Eugene Fama) have recently advocated the strong form of this view – that of no possible impact. However, it is categorically rejected by Keynesian macroeconomics, which holds that economic activity depends on aggregate spending (at least in the short run). It is related to, and at times equated with, theories of Say’s law,[5] Ricardian equivalence, and the Policy Ineffectiveness Proposition.

Noted macroeconomists such as Milton Friedman and Robert Barro[6] have advocated a weak form of this view, that fiscal policy has temporary and limited effects.[citation needed]


  1. ^Hawtrey 1925
  2. ^W. Leith-Ross to Sir Richard Hopkins and P.J. Grigg, 3 April 1929, quoted in G.C. Peden (2004), Keynes and His Critics, p. 80
  3. ^DeLong, Brad. “Fama’s Fallacy”. Retrieved 2009-02-26.
  4. ^Waldmann, Robert. “Background on “fresh water” and “salt water” macroeconomics”. Retrieved 2009-02-26.
  5. ^Krugman, Paul (2009-01-30). “Saving, investment, Keynes, Evolution”. The New York Times. Retrieved 2011-08-18.
  6. ^Barro, Robert (2009-01-22). “Government Spending Is No Free Lunch”. Wall Street Journal. Retrieved 2009-02-26.
  7. ^Krugman, Paul (2008-12-24). “Keynes’s Difficult Idea”. The New York Times. Retrieved 2011-08-18.
  8. ^DeLong, Fama’s Fallacy I
  9. ^Krugman, Paul (2009-01-27). “A Dark Age of Macroeconomics”. The New York Times. Retrieved 2011-08-18.
  10. ^(Friedman 1972)
  11. ^ Jump up to:ab DeLong, Fama’s Fallacy IV



  • Daniel Mitchell of the Cato Institute, a supply-side economist, quoted by Caroline Baum in Keynes Revival Makes Cato a Lonely Hearts Club
  • Obama’s Job-Creation Program Flunks Basic Math, Caroline Baum, Bloomberg
  • Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?, by John H. Cochrane, Myron S. Scholes Professor of Finance, University of Chicago Booth School of Business
  • Eugene Fama, Bailouts and Stimulus Plans
  • Friedman, Milton (1972), “Comment on the Critics”, Journal of Political Economy 80:5 (September–October), University of Chicago Press, 80(5), pp. 914–915, JSTOR 1830418
  • Hawtrey, R.G. (1925), “Public Expenditure and the Demand for Labour”, Economica, 5(13): 38–48, doi:10.2307/2548008, JSTOR 2548008


  • DeLong, Brad; Montagu Norman (2009-01-14), “Fama’s Fallacy, Take I: Eugene Fama Rederives the “Treasury View”: A Guestpost from Montagu Norman, former Governor of the Bank of England”, Grasping Reality with Both Hands, retrieved 2009-01-28
  • DeLong, Brad (2009-01-14), “Fama’s Fallacy II: Predecessors”, Grasping Reality with Both Hands, retrieved 2009-01-28
  • DeLong, Brad (2009-01-14), “Fama’s Fallacy, Take III”, Grasping Reality with Both Hands, retrieved 2009-01-28
  • DeLong, Brad (2009-01-15), “Fama’s Fallacy IV: The Decline of Chicago”, Grasping Reality with Both Hands, retrieved 2009-01-28
  • DeLong, Brad (2009-01-16), “Fama’s Fallacy V: Are There Ever Any Wrong Answers in Economics?”, Grasping Reality with Both Hands, retrieved 2009-01-28
  • DeLong, Brad (2009-01-29), “Time to Bang My Head Against the Wall Some More (Pre-Elementary Monetary Economics Department)”, Grasping Reality with Both Hands, retrieved 2009-01-28
  • Krugman, Paul (2008-12-24), “Keynes’s difficult idea”, The New York Times, retrieved 2009-01-28
  • Krugman, Paul (2009-01-27), “A Dark Age of macroeconomics (wonkish)”, The New York Times, retrieved 2009-01-28


  • Background on “fresh water” and “salt water” macroeconomics, by Robert Waldmann


Ofer Abarbanel online library