P26. Credit, Growth and Trade. Mr. Harrod and Criticism
[Letter to the Financial Times, 12 September 1938, p. 7. © the Financial Times]
12 September 1938
To the Editor of The Financial Times
Sir,--Mr. Hartley Withers has in your columns recently criticised proposals of mine.  In doing so he used three arguments:--
1. He is sceptical of the potency of a low rate of interest. 
2. He challenges the view that my proposal could do no possible harm. 
3. He insinuates that proposals emanating from the cloisters of Oxford are not likely to be worth considering if they conflict with the opinion of practical business people.  I take each in turn.
(i) If he is sceptical of the power of low interest as a direct and immediate stimulus to capital outlay on a large scale, I fully share his scepticism. His suggestion that I hold interest reduction as a sort of article of faith may promptly be corrected by the inspection of any of my recent writings in the Press. I only claim that it might exert a small force. But in certain circumstances a small force may be highly valuable. When a car is on the first gentle reach of a long precipitous descent a quite small force may serve to arrest its motion. Not so at a later stage when it has gathered momentum. 
Your readers will appreciate the difficulty of naming firms which are held back from expansion by the conditions of the issue market. Their advisers prevent them from making issues which are not likely to succeed. In receipt of such advice the last thing they are willing to do is to make it public; they feel their prestige to be at stake. I do not deny that there are certain firms of a character which enables them to make an issue at the present time; and I do not deny that there are many firms too humble to aspire to raising money by public issue at any time. I think rather of sound middling firms which, contemplating an issue, are told--as they undoubtedly are being told now--that this is not the moment.
The new issue market is only a leading example of the repercussions of a low interest rate. Local authorities in considering schemes make careful calculations of the consequent burden on the rates. A difference of 1 per cent. in the cost of borrowing may make a scheme substantially more attractive. Every scheme has numerous pros and cons. It is against reason to suppose that a substantial reduction in the force of one con will not influence some bodies, whether local authorities or others, which are on the margin of doubt whether to proceed.
(ii) I must regretfully characterise Mr. Hartley Withers's argument under this head as feeble in the extreme. What it amounts to is that any action might lead to unforeseen psychological reactions of an unfortunate kind. They in turn might lead to a flight from the pound. But our enormous gold reserve is amply adequate to squeeze out bear operators. If some "hot" foreign money was withdrawn, we should indeed lose gold, but we should also be disencumbered of an equal quantity of liabilities and the net effect would be a good riddance. We might indeed enjoy favourable repercussions from a more sensible international distribution of gold holdings.
Of course, any action may produce hysterical alarm, especially if the seeds of alarm are carefully sown beforehand by--you must excuse me--financial journalists. The alarm will blow away soon enough, if it is groundless. What I have sought in vain for through a large file of correspondence, public and private,  is any reason for holding that my proposal gives ground for alarm.
The fallacy in the alarmist view is that its proponents imply that there is something right and proper or sacrosanct in the present level of bank holdings. That is not the case. Their present level is merely the cumulative and accidental result of a number of actions in the past, undertaken to suit the particular exigencies of the moment. There is no logic or reason about the present level. To maintain it as it is is just as arbitrary and artificial as to increase it.
Nor is there anything novel in the proposal for a sudden large increase. That was done in 1932.  But whereas then the slump had already worn a large part of its weary way through, now we may be in time to prevent its worst ravages. Let these measures be used to-day as a preventive instead of a belated cure.
The present level of bank holdings is entirely artificial and accidental. It will no doubt be expanded from time to time in the future, as it has been in the past. I propose to substitute system for accident. When, if not now, is the moment at which the level ought to be expanded? Let my critics tell me that. Surely they would not have the main expansion during the boom only serving to swell its excesses? If we are to be guided at all by reason in these operations, now is the moment.
(iii) I would not trouble to refer to Mr. Withers's personal shaft did it not point a moral. There is a difference in the point of view of the student and that of the practical person. The study of history and theory alike forcibly suggest that there are strong systematic forces at work in the trade cycle making the depression far worse than could be accounted for by the particular misfortunes which set it off. Consequently the student, when he passes in review the opinions of practical persons, is bound to feel that they are too much preoccupied with what seem to him superficial matters, events of ephemeral importance.
If it is true that the depression is caused by systematic forces bound up with the very nature of money and exchange, it can only be cured by a remedy applied systematically and with some understanding of what the forces are.
There is room for co-operation. The practical person is bound to have a better view of the technical difficulties. Oppressed with day-to-day worries, he has not the time to construct for himself a clear model of the working of the system as a whole. This is where the cloistered person may be useful. What otherwise were the cloisters built for but to provide space and time for someone removed from immediate worries to think things through? It cannot be done in a day or a month. Let he who wishes try. Co-operation between the two points of view is essential. Anyone suggesting the suppression of either does disservice.--I am, &c.,
2. In his article, Withers wrote: "It is a purely academic delusion to suppose that [a reduction of the price for long-term or short-term money] alone, even if it were lowered to zero, would revive the confidence of industry if it were faced with doubts about the movement of other kinds of costs, and, above all, if it were doubtful about the future market for the products that it was equipped to provide."
3. On Harrod's claim that his proposal could do no possible harm (press items 20 , [jump to page] ; 21 , [jump to page] ; 22 , [jump to page] ; and 24 , [jump to page] ), Withers wrote: "In the present hysterical state of nerves abroad a formidable flight from the pound might be followed by its depreciation to an extent that might upset the tripartite agreement and so possibly jeopardise the completion of the Anglo-American trade pact". He continued: "Harrod [...] first terrifies industry with the promise of painful and dangerous pangs, and then tries to cheer it by stimulus which is not required and might produce most undesirable results."
5. Harrod elaborated on this point in The Trade Cycle ( 1936:8 , pp. 104-5): at the outset of a recession "the existence of outstanding orders gives a breathing space during which the recession is held within fairly narrow limits, when some countervailing force may come into operation and save the situation."
7. Harrod refers to the conversion of the 1917 War Loan from 5per cent to 3.5 per cent in June 1932. He used this example in "Meeting a Trade Recession" ( 1938:11 , press item 22 , [jump to page] ), in "Expanding the Credit Base" ( 1938:17 , press item 25 , [jump to page] ) and in letter 804 to Simon of 11 August 1938, [jump to page] .
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