"MERELY AN OPIATE"

Evening Post, Volume CXXV, Issue 116, 19 May 1938, Page 12

"MERELY AN OPIATE"

INFLATION AND DEBT

CONDITIONS IN AMERICA

"Evening Post," May 19. Dealing specifically with the world's ti'ool market, H. Dawson, Sons, and Co., Bradford, remarked (as at March 30) that "the general economic situation in America is disturbing and there seems no immediate likelihood of recovery." Taking into consideration the immense influence exerted by the United States on the industry and trade of the world, this opinion of a great wool broking firm, with American as well as British and Continental interests, should not be ignored. After all, what H. Dawson, Sons, and Co., Say has been said recently by the heads of great British banking and business organisations. The Australian and New Zealand investment markets have not been insulated from American influences nor from sharp movements of stock and- share prices on the New York Stock Exchange and their reactions on the London Stock Exchange. But what is the feeling of American observers of conditions in the United States? This question is answered by considered comments of the Guaranty Trust Company of New York, one of the big banking institutions in the United States, in dealing with the Government's latest policy to stimulate recovery. Quoting from President Roosevelt's radio speech of April 14, the bank states that the President proposed three groups of measures: first, additional Government expenditures for the fiscal year beginning July 1 next; second, the mobilisation of additional bank resources; and third, a variety of measures designed to add to the purchasing power of the country by providing new work, the last measure being intended, as the President said, to "prevent men and women from being thrown out of work on July 1" and "will stop the spiral from continuing its downward course." In this same category of stopping the downward spiral is placed the authorisation Recently given for the lending of money to business enterprises by the Recon-! struction Finance Corporation. "PRIMING THE PUMP." Reduced to its essentials, explains the Guaranty Trust, the programme consists of two parts: a revival of Federal spending for "pump-priming" purpose and a reversal of the central i banking policies followed for the last two years. The first part rests upon the assumed analogy between the .priming of a pump and the expenditure of Government funds to give an initial impetus to the flow of private capital into industry. . The validity of the analogy, the bank points out, "has never been more than an unsupported! assumption, and the events of the last few years have certainly tended to make it more dubious.than ever. Thus I iar, the efforts of the Government to T>rime the pump' of business have rekl ? V g ? lnc rease in the Public Debt, but whatever stimulating influWrl y i" 13 / have had °n business were purely temporary. "Now, five years after the 'pumppnming' process began, the flow of »ti»standstill^ 1 industry is almost, EFFECT OF STIMULANT. V 'j "If it could be assumed"that Government expenditures of this type, would return to the people of the United states many times over in increased buying power, remarks the Guarantee ' "°. sa J!?., citiz en would question their desirability. But recent experience has tended to show that the ultimate effects of 'pump-priming' are to hinder, rather than stimulate, the flow of capital into industry by impairing the confidence in future credit artd monetary stability that is essential to -investment. If recent experience is repeated, the new programme will temporarily stimulate activity in certain branches of industry and trade but will contribute nothing permanent to the flow of private capital or to a sound ana lasting business recovery. Moreover, the stimulating effects of the practice may be expected to become progressively less strong and its pampering effects more so as the Public Pebt rises to more dangerous levels" It is also pointed out that the policy of broadening the credit case, operative a S from April 18 last, marked a I further step in "the reversal of the! restrictive policy, adopted by central banking authorities nearly two years ago.' From the long-term point of view, the bank points out, the programme is clearly inflationary in the sense that it removes some of the existing limitations on eventual of credit. It was for the avowed purpose of preventing such over-expansion that ttie reserve requirements were raised and the gold sterilisation plan was instituted. Now these restrictions are partly removed; and it is possible that the central banking authorities may, in view of the recent business recession be more reluctant to resort to similar measures in the future than they were in the past. "A DISPROVED THEORY." "Viewed as a whole, the programme Can Jj ari y expected to promote the confidence upon which any sound business recovery must rest. 'Pump-prim-ing is based on a disproveid theory. can produce a temporary upturn, but that will be merely an opiate. If the punitive attitude towards business were removed, there would be no need for wild spending; and unless it is removed, spending will not give sustained prosperity. "The theory underlying the programme j s based on the false economic premise that prosperity can by taking money in the form of taxes another" 6 grr ° np and givln * tt „ jP*e belief that, as the national in.sPendmg and debt can be reduced is disproved by events. More £(W? lng means '"ore taxes, and taxes affect everyone. Too much debt was a primary cause of the crash in 1929 and the ensuing depression. We are now tagmore debt." the depression creat-