ECONOMISTS AT VARIANCE

Press, Volume LXXIV, Issue 22593, 24 December 1938, Page 14

ECONOMISTS AT VARIANCE

DEFENCE POLICY AND BORROWING CONTROVERSY ON MONETARY POLICY mou 6TB owa coaumsPOKDSVT.) LONDON, October 20. Economists have crossed swords in the correspondence columns of “The Times” recently on the subject of monetary policy and borrowing by governments. Mr R. F. Harrod, of Christ Church, Oxford, advocates expenditure on defence as a remedy for trade decline. “It so happens,” he says, “that the coincidence of two things evil in themselves, trade recession and the necessity of extra defence expenditure, may work together to make a good better employment and a higher level of production of useful things ‘than would otherwise occur in our imperfect world. “I suggest that the Chancellor of the Exchequer should get authority to inform the Minister for Co-ordination of Defence that provided that our equipment is increased beyond the present plan in full proportion to the increased expenditure, he would not in the least mind seeing our expenditure on defence in 1938-39 double that of 1937-38.

“I state this large figure advisedly. The more modest increase that has occurred during the last year nas been insufficient to remedy the depression, and this would be expected by me statistically minded. The Chancellor will need to have the courage to brush aside the advice of old-fashioned economists, into whose souls the facts of the trade cycle have not bitten. Referring to the "danger that comes from ‘‘the views _ concerning Government borrowing which still circulate in influential quarters,” Mr Harrod continues: — . .. “This being the recession phase, it is important that most of the new money should be found by loans. At a later stage, when recession turns to revival and revival to prosperity, higher taxation may be required to curb a general tendency to excess profits. J . . “Now the influential quarters just mentioned may deem the loans unhealthy, and by their influence weaken Government credit. It is desirable that this view should be combated by the propagation from the highest quarters to the two truths: “(1) That in a rich community, with insufficient opportunities for capital outla'y, it is healthy that the National Debt should grow, for otherwise the savings of the community, lacking vent, will cause deficient purchasing power and unemployment, and (2) that the increase in the National Debt should best be concentrated in those years, the present, when the trade cycle is in its descendant phase.” Practical Objections Mr John F. L. Bray, economic adviser to the United Kingdom Provident Institution, replying with “some diffidence” to Mr Harrod’s “attack on sound currency,” says;— “There are two serious practical objections to this plan. (1) The inflation that is proposed would impair our ability to compete in the world’s j markets. That is to say, the scheme would permanently injure the export trades which are the basic trades of the country and in which unemployment is greatest. The last state of the unemployed would be worse than the first. (It is notable that Germany has followed a non-inflationary policy.) “(2) The ultimate end of this policy, if persisted in, would be collapse of currency, in other words, stark ruin. (One is amazed to find Mr Harrod asserting that “it is healthy that the National Debt should grow”!) “So long as governments can borrow at long term to meet their deficits they are only too apt to avoid the unpleasant alternative of raising taxation. As this process continues, however, their deficits tend to become larger and larger until the ‘City’ becomes nervous. The Government finding itself eventually unable to borrow : either at long or short term, is driven to meet the deficit by the printing of notes —which leads in a very short time to currency collapse. “The present generation has seen this happen in Germany. It is fast happening in France. Let us be warned in time lest it happen in this country.”