A BRITISH ECONOMIST ON AMERICAN RECOVERY.

Star (Christchurch), Volume LXVI, Issue 20361, 19 July 1934, Page 8

A BRITISH ECONOMIST ON AMERICAN RECOVERY.

To-day’s Special Article

Business Confidence Still Lacking: Driven From Accustomed Moorings.

By

John Maynard Keynes.

Mr Keynes, the distinguished British economist who five months ago addressed to President Roosevelt an “open letter” in which he presented searching but friendly criticism of the Administration’s recovery programme, has now, on a visit to the United States, studied the results of this programme to date. His conclusions are presented in the article following. Mr Keynes is a member of. the British Economic Council, secretary of the Royal Economic Society and editor of the “Economic Journal.” He was the principal representative of the British Treasury at the Paris Peace Conference.

NEW YORK, June 9. JVfY PURPOSE is to consider the prospects rather than the past—taking the legislation of this Congress for granted and examining what might be done on the basis thus given. I am in sympathy with most of the social and reforming aims of this legislation; and the principal subject of these notes is the problem of consolidating economic and business recovery. For this reason, 1 have not much to say about the National Recovery Act. I doubt if this measure is either such an advantage to recovery or such a handicap as its advocates and its critics suppose. It embodies some important improvements in labour conditions and for obtaining fair trade practices. But I agree with the widespread opinion that much of it is objectionable because of its restrictionist philosophy (which has a proper place in agricultural adjustment to-day but not in American industry) and because of its excessive complexity and regimentation. In particular, it would be advisable to discard most of the provisions to fix prices and to forbid sales below an alleged, but undefinable, cost basis. Nevertheless, its net effect on recovery can easily be over-estimated either way. I find most Americans divided between those who believe that higher wages are good because they increase purchasing power and those who believe that they are bad because they raise costs. But both are right and the net result of the two opposing influences is to cancel out. The important question is the proper adjustment of relative wage rates. Absolute wage-rates are not of primary importance in a country where their effect on foreign trade has been offset by exchange devaluation. The case for the Agricultural Adjustment Act, on the other hand, is itiuch stronger. £'or the farmer has had to shoulder more than his share of the trouble and also has more lasting difficulties ahead of him than industry has. A.A.A. is organising for the farmer the'“advisable measure of restriction which industry long ago organised for itself. Thus the task which A.A.A. is'attempting is necessary though difficult; whereas some part of what N.R.A. seems to be aiming at is not only impracticable but unnecessary. Towards Normal Business. I see the problem of recovery, accordingly, in the following light. How soon will normal business enterprise come to the rescue? What measures can be taken to hasten the return of normal enterprise? On what scale, by which expedients and for how long is abnormal Government expenditure advisable in the meantime? For this, I think, is how the Administration should view its task I see no likelihood that business, of its owr. initiative, will invest in durable goods on a sufficient scale for many months to come. There are several reasons for this. In the first place, the important but intangible state of mind, which we call business confidence, is signally lacking. It would be easy to mention specific causes of this, for some of which the Administration may be to blame. Probably the most important is the menace of possible labour troubles. But the real explanation, in my judgment, lies deeper than the specific causes. It is to be found in the perplexity and discomfort which the business world feels from being driven so far from its accustomed moorings into unknown and uncharted waters. The business man. who may be adaptable and quick on his feet in his own particular field, is usually con-

servative and .conventional in the larger aspects of social and economic policy. At the start, he was carried away, like other people, by the prevailing enthusiasm —without being converted at bottom or suffering a sea-change. Thus, he has easily reverted to .where he was. He is sulky and bothered; and, with the &lio:t memory characteristic of contemporary man, even begins to look back with longing to the good old days of 1932. This atmosphere of ' disappointment, disillusion and perplexity is nothing to wonder at. I doubt if it could have been avoided without undue concession to conventional ideas. Rut it is not incurable. The mere passage of time for business to work out* its new bearings and recover its Equanimity should do much. If the President could convince businessmen that they know the worst, so to speak, and can settle down to adjust themselves to a .known situation, that might hasten matters. Above all, the actual experience of gradually improving conditions might work wonders.

Some Serious Obstacles. In the second place, there are still serious obstacles in the way of re-opening the capital market to large-scale borrowing for new investment; particularly, the high cost of borrowing to those who need loans most and the attitude of the finance houses to the Securities Act. though I consider that they should accept the amended act as workable. Moreover, many types of durable goods are already in sufficient supply, so that business will not be inclined to repair or modernise plant until a stronger demand is being experienced than can be met with existing plant; to which be added the excessively high cost of building relatively to rents and incomes. ; Nbne of these obstacles can be overcome in a day or by a stroke of the pen. The notion that, if the Government would retire altogether from the economic field, business, left to itself, would soon work out its own salvation, is, to my min%, foolish; and, even if it were not, it is certain that public opinion would allow no such thing. This does not mean that the Administration should not be assiduousl}' preparing the way for tHe return of normal investment enterprise. But this will unavoidably take time. When it comes, it will intensify and maintain a recovery initiated by other means. But it belongs to the second chapter of the story and not to the first. I conclude, therefore, that, for six months at least, and probably a year, the measure of recovery to be achieved will mainly depend on the degree of the direct stimulus to production deliberately applied by the Administration. Since I have no belief in the efficacy for this purpose of the price and wage-raising activities of N.R.A., this must chiefly mean .the. pace and volume of the Government’s emergency expenditure. Up to last November, such expenditure, excluding re-financing and advances to banks, was relatively small—about 90,000,000 dollars a month. From November onwards, the figure rose sharply and, for the first four months of this year, the monthly average exceeded 300,000,000 dollars. The effect on business was excellent. But then came what seems to me to have been an unfortunate decision. The expenditure of the civil works administration was checked before the expenditure of the public works administration was ready to take its place. Thus, the aggregate emergency expenditure is now declining.