P23. Meeting a Trade Recession. Mr. Harrod's remedy. The Release of Long-term Forces

[Letter to The Times, 17 August 1938, p. 11]

17 August 1938

Sir,--In the early part of his interesting letter Dr. Bray is concerned to show that the present depression in this country was due to the fall in our export markets. [2] I do not disagree. But I do not feel the point to be relevant to my remedy. Whatever may set off the process of slump, and there have been causes of every sort and kind in the past, it develops, as it gathers momentum, a characteristic pattern; it is to check the posterior developments and repercussions, the downward spin, that my remedy is addressed.

In his remaining section Dr. Bray claims that there are long-term forces making for reflation owing to the expansion of gold production, and that we should dance attendance on the effects of these. I make three points in reply:--

(1) I am concerned with a slump which actually exists, has already lasted a year, and threatens, in conformity with the normal pattern, to become worse. (Dr. Bray does not want to "force the pace of revival"!) The operation of the long-term forces which Dr. Bray detects has recently been and remains in suspense. I want to release them.

(2) Dr. Bray's argument from the gold figures depends on there being some automatic relation between the quantity of gold mined and the quantity of money which is brought to bear on prices. But what if the authorities take the gold out of the monetary system and lock it away so that, for all the effect it can have on the economic scene, it might just as well never have been mined? Yet this is precisely what monetary authorities have been doing in this and other countries. I do not criticize their action, for which there are excellent reasons, but it spoils Dr. Bray's argument.

(3) Dr. Bray does not specify how in detail he expects a high gold output to exert its reflationary influence. Perhaps he has not considered this question. If he does so it will appear to him that in the world of to-day, with institutions as they now exist, the influence of more gold can only filter through to trade if the authorities take the kind of steps which I suggest in my article. I have given the detailed picture of the modus operandi of his reflationary force. It is not an automatic one. Recently the authorities have been, with good reason, deliberately insulating gold; now the phase of the trade cycle requires a measure of expansion. As Dr. Bray does not deal explicitly with either the trade cycle or the modus operandi of monetary expansion I feel that he has not tackled the problems to which my article was addressed.

Dr. Bray's only constructive proposal is that it would be wiser to "sit by and watch the growth of the United States inflation." (I am quite confident that this prediction of United States inflation will be belied again, as it has been so repeatedly in the last 10 years.) But may I, in conclusion, issue a protest against the notion, which is, I fear, not uncommonly held in high financial circles, that we are in some sense dependent on recovery happening first in America. This is not the lesson of 1931-32, when we led the United States in recovery by more than a year, to the great benefit of many foreign countries, including those now associated with us in the sterling group. Why should we not do so again? Our foreign trade account is of the same order of magnitude as that of the United States.

Confronted by this defeatist attitude, the academic economist cannot but feel some impatience. And I believe that in this matter at least his feeling is shared by the man in the street. Is it possible that these high experts are so bemused by pondering on the sacred mysteries of finance that their resolution is sicklied o'er and their power of leadership quite atrophied? Let them give a sign whereby our suspicion may be dispelled.

I am, &c.,

R. F. Harrod

Christ Church, Oxford, Aug. 15.

  1. 1. This letter belongs to an exchange stimulated by the replies to Harrod's article in The Times on "Meeting a Trade Recession" ( 1938:11 ). For a detailed list of the participants in the debate see note 1 to Harrod's original contribution (press item 22 ).

    2. J. F. L. Bray, "Meeting a Trade Recession. Depressed Exports. Monetary Policy in America", letter to The Times, 15 August 1938, p. 11. Bray referred to figures of unemployment in five export trades, which accounted for 18 per cent. of insured population but one-third of total unemployment, and concluded "that the present recession has its seat mainly in the export trades."


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