P24. Meeting a Trade Decline. The Argument for Self-Help. Perils of Inaction
[ Letter to The Times, 26 August 1938, p. 11]
26 August 1938
Sir,--Dr. Bray argues that a sufficient expansion of the credit base has already taken place.  He quotes figures for bankers' balances.  It is better to take the cash and balances in the hands of the clearing banks. Here we see a rise from the average of £233,000,000 for the first half of 1937 to one of £244,000,000 for the first half of 1938, making a rise of 4.7 per cent. This is not unreasonable for normal times, and I do not for a moment suggest that the recession and consequent deflation have been initiated by banking policy. But it does not represent any serious effort to stem the tide of depression, which is due to other causes.
It is instructive to look at the investment figures for the clearing banks. It is not denied that the banking system has kept short money cheap. The argument is that it might help the situation by operating directly upon the long-term market, as it did in 1932. The figure of investments has actually fallen from £663,000,000 to £634,000,000 during the last year. If we wait with Dr. Bray to see the reviving effects of this policy, I confidently predict that we shall wait for nothing.
For the rest Dr. Bray works by insinuating a general fear of inflation. Before we reach that situation, however, we shall have to have reversed the cumulative forces of recession. I attach more weight to those of my critics who fear that the proposed remedy will not have an appreciable effect.  To them I say that it is worth trying, since the issues at stake are tremendous, and, if it is ineffective, it can do no possible harm. The evils which Dr. Bray fears can only arise if it is over-successful. And to him I say that every one of the measures proposed is reversible. By all means let us moderate the inflation; but first we have to break loose from the downward spin of deflation.
Apart from the general insinuations, the only definite point that I find in Dr. Bray's letter is his fear of a "headlong flight" from sterling. (Since he thinks sterling over-valued, he should not object to a moderate flight.) Now, of course, it is quite true that any measures may affect the exchanges, quite apart from their other economic consequences, if they create unfounded psychological alarm. (I think that Dr. Bray and those who agree with him do disservice by their pronouncements of this kind, since they make unfounded alarm at the most reasonable measures of self-help more likely to occur.)
If a flight from sterling occurred, we should have, happily, ample resources to meet it, consisting of the gold in the Exchange Account, the unrealized profit on the gold in the Bank of England, in addition to the free and statutory reserves of the Bank of England, all of which could be used. This is precisely the sort of contingency against which they are held. Our financial stability in the 50 years before the War was in large part due to our authorities having accepted the excellent dictum of Bagehot that the only use of having a reserve is to use it on suitable occasions.  We should revert to this practice.
It might be objected that we should be weakened by the loss of gold. I do not think so. In so far as the sales of sterling were by foreigners now holding sterling assets, we should be rid not only of our gold assets but of the liabilities for which they serve as cover. In so far as they were by "bear" speculators, their operations would lead to a restoration of the gold at a later date. Furthermore, a more even distribution of gold holdings in the world at large might have favourable repercussions from which we should benefit.
I should add finally that, while I do not think that such movements, if they occurred, would give ground for anxiety, I do not anticipate them as a consequence of reflationary measures. On the contrary, a crisis of confidence is much more likely to be caused, as in 1931, by the consequences of a great depression, acute budgetary difficulties, widespread losses, and growing unemployment, than by a well-timed reconstructive effort.
There is no danger outside the imagination of muddled thinking. We must sympathize with Dr. Bray's caution induced by "the responsibility for the life savings of some thousands of small people."  He must learn, as we all have to, that there are times at which inaction is the greatest foolhardiness of all.
I am, &c.,
R. F. Harrod
The British Association, Cambridge, Aug. 23.
2. Bray cited the figures of the average over the first six months of 1936, 1937 and 1938 for the Bankers' Balances at the Bank of England, and the yearly averages from 1931, 1932, and 1933-37,
3. E. Corderoy, for instance, argued that monetary reflation on the lines suggested by Harrod would be likely to fail in its object because the most urgent need is not finance for producers but for consumers ("Trade Recession", letter to The Times, 20 August 1938). O. R. Hobson argued that Harrod's arguments disregards the importance of non-monetary factors in the current trade situation, and the fact that banks have adequate resources to meet the needs of trade and industry ("Sterling and the Demand for Credit Expansion", New Chronicle, 20 August 1938)
4. W. Bagehot, Lombard Street: A Description of the Money Market (1873), in The Collected Works of Walter Bagehot, vol. IX (London: The Economist, 1978), p. 142: "the Bank of England is bound, according to our system, not only to keep a good reserve against a time of panic, but to use that reserve effectually when that time of panic comes." The point was already noted by Harrod in his reading notes on Bagehot's book, e.g. when reporting of the criticism of the American compulsory reserve system: "the compulsory reserve = no reserve, for it cant be used" (in HP V-53).
5. "The responsibility for the life savings of some thousands of small people no doubt sharpens my apprehension of the risk of an uncontrolled inflation which would whittle away the purchasing power of those savings to nothing" (Bray, "Meeting a Trade Recession").
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