P27. Trade Recession. Mr. Harrod and his Critics. The Nearest Remedy
[Letter to The Times, 14 September 1938, p. 8]
14 September 1938
To the Editor of The Times
Sir,--Space forbids me to deal in detail with my numerous critics and modesty forbids me to emulate the excellent summary of the earlier part of the correspondence which you gave on August 26.  I must confine myself to the main lines of the discussion.
First, a number of writers view my proposal as dangerous.  On close inspection it appears that the danger alleged is solely due to the possible irrational alarms of foolish people, supplemented doubtless by the actions of people clever enough to anticipate which way the foolish cat will jump. Of this it may be said that the alarm, if it is groundless, will be transitory. The only important way in which it could manifest itself would be a flight from sterling. We have ample gold reserves to meet this. If in the upshot we lost some "hot" money and an equivalent quantity of gold, we should be well rid of both. Moreover, we might experience favourable repercussions from an international diffusion of part of our gold holdings. And again, if we can accept the view of those who, having their eye particularly on our exports, think sterling over-valued, this would give the authorities a justification within the framework of the Tripartite Agreement for letting sterling run down a little further. 
If the alarm is groundless it would soon be dissipated. In searching your correspondents' letters for good reasons for taking fright, I find a blank sheet. There is the idea that something novel and artificial must as such be dangerous. My plan is not novel; it was adopted in 1932. Nor is it artificial; for the present level of banking assets is entirely artificial, being the fortuitous result of a number of ad hoc actions taken in the past. As well say that it is artificial to increase the number of bus routes arranged by London Transport. In particular the present level of banking assets has not the remotest connexion with the quantity of gold in the country. Moreover, there is no doubt that the level of bank assets will be increased in future, in consequence of this exigency and that. My argument is that the best possible time to increase it is when the increase may serve to avert a gathering depression. Will my critics name a better time? In fine, I want to replace chance and artificiality by system and order.
Next I must deal with the more weighty objection that my plan, however harmless, would be ineffective.  It is contended, first, that it might fail to reduce the rate of interest and ease the capital market appreciably, and, secondly, that such an easing might fail to stimulate capital outlay.  Both these contentions appear to me to carry scepticism too far. They are both entirely conjectural and can only be tested by experiment. My plea is that the experiment, supported as it is by general reasoning, should be made.
1. In this connexion I should like to add that I would not merely expand the credit base and leave it at that. My idea is that the Treasury, the Bank of England, and the clearing banks should get together and, taking the widest possible view of the field of securities in which it is prudent to operate, plan to utilize some sum between one and three hundred million sterling in the long-term capital market in a way which, having regard to the known proclivities and psychology of that market, would have the greatest effect on the long-term interest rates. Would such an operation be without effect?
2. I do not deny that some firms are strong enough to place successful issues now, and others may be of a particular nature which catches the public fancy. I do not deny that there are other means of raising money. The prevailing advice given now is that this is not the time to make an issue.  Is it sensible to hold that if a well-established avenue for expansion were reopened, none would use it? If the price of a commodity is reduced, it may be difficult to point in advance to the extra buyers, but we have some confidence that new purchasers will be forthcoming. Nor will the influence of the policy be confined to the new issue market. Of the main public bodies some at least may be tilted over from inaction to action by the cheapest cost of borrowing. I do not expect a large expansion. But in the early phase of recession a small expansion in conjunction with other favourable factors may serve to avert the snowball effect of gathering depression.
Next, there are those who wish to await American developments.  The news from there is favourable, but the position is not yet certain. Nor is it clear that American revival is by itself a sure remedy for us. She recovered splendidly from the slump of 1921, leaving us stuck in the mud. After 1931 we recovered by measures of self-help, leaving her behind. Post-War experience suggests that an American slump is disastrous for us, but provides no evidence of American recovery bringing us back to prosperity.
Furthermore, it is a curious attitude for those who build their hopes on America to be hostile to my proposal. For has she not in recent months adopted measures precisely analogous (with technical differences related to her institutions) to those I recommended? Is it worthy to leave all the planning for recovery to her and be content to reap what she has sown? Again there are reasons, connected both with the technique of her banking and her lower degree of economic stability, for supposing that the same remedy if applied here would be more efficacious.
Finally, there are proposals for alternative remedies, such as that of Mr. Wiggins for a "national monetary system."  Discussion of their rival merits would take me far. But I must content myself with the brief but, I think, cogent argument that mine is the remedy nearest to hand. It requires no legislation, no institutional changes, no departure from established practice. Furthermore, it requires the minimum of canvassing opinion, which is an important consideration, when action to-morrow is required. I cannot say if my view reigns as orthodox among the powers that be, for they are silent.  It is certainly heir-apparent to the throne. Some of us hoped that the action taken in 1932 indicated that those powers were now convinced of the view that credit should be regulated with a view to evening out fluctuations in trade. It may be otherwise. It may be that they were thinking solely of the immediate reduction of the interest burden of the Debt. Let us hope not. The only trouble in 1932 was that the action was so belated. Now is the opportunity to be more timely.
I am, &c.,
R. F. Harrod
Christ Church, Oxford, Sept. 9.
2. Two readers of The Times suggested that Harrod's proposal implies some dangers. A. P. L. Gordon argued that Harrod ignored "the fact that sterling is admittedly over-valued, and that credit inflation, if successful, would inevitably enhance this and make things still worse for our exporting industries", and that he also ignored "that credit inflation, with the trade cycle already in its recessive phase, might prove an embarrassment to the banking system and an incentive to speculation less helpful to industry than to the Stock Exchange" ("Trade Recession", 31 August, p. 6). M. Balfour argued that it is not desirable to produce a boom in new issues, "for it merely encourages the company promoting type and does not on the whole benefit industry" ("Trade Recession", 7 September).
3. Harrod refers in particular to H. Withers' criticism in "The Snares and Delusions of Credit Expansion. Some Practical Criticisms of Mr. Harrod's Panacea", Financial Times, 31 August 1938: see note 3 to press item 26 .
4. After the criticisms along this lines to which Harrod replied in his letter to The Times of 26 August ("Meeting a Trade Decline", 1938:14 ; see note 3 to press item 24 ), G. F. Lamb joined the choir of those who argued that Harrod's proposal is likely to be ineffective, on the ground that if the recent heavy expenditure on armaments has failed to check the recession, Harrod's comparatively small amount of new enterprise has even less chances of producing even a temporary check ("Trade Recession", letter to The Times, 8 September).
5. The point was raised by H. Withers, "The Snares and Delusions of Credit Expansion. Some Practical Criticisms of Mr. Harrod's Panacea", Financial Times, 31 August 1938: see note 2 to press item 26 .
6. The point was argued in more detail in "Credit, Growth and Trade" (Harrod 1938:18 , press item 26 , [jump to page] ).
7. The policy of "waiting and seeing" the American developments was recommended by J. F. L. Bray in his letters on "Meeting a Trade Recession" published in the issues of 15 and 22 August 1938 of The Times, and by G. E. Ross, "Financing Public Works", letter to The Economist CXXXII, 16 July 1938, pp. 120-21 (the relevant passage is cited and criticized in Harrod's rejoinder "Banking and Trade Recession", 1938:10 , reproduced here as press item 21 , [jump to page] ).
8. W. M. Wiggins, "Trade Recession. The Sterling-Dollar Exchange", letter to The Times, 31 August 1938, p. 6. Wiggins--chairman of the Monetary Policy Committee of the Federation of Master Cotton Spinners' Associations--remarked that the importance of the de facto stabilization of the sterling-dollar exchange had been overlooked in the debate. His suggested remedy to trade depressions was "an inquiry into the possibility of devising a national monetary system which would afford protection against the calamitous effects of ill-advised policy on the part of other Governments", with the purpose of "operating a new technique for the adjustment of the sterling exchanges which would make the pound sterling a more reliable medium for the support of internal stability." This point of view reflects the conclusion of a pamphlet on "The Trade Recession" (1938), produced jointly by the Federation of Master Cotton Spinners' Associations and the Parliamentary Monetary Committee, which Wiggins had sent to Harrod a few days earlier for comments (Wiggins to Harrod, 22 August 1938, letter 816 R; see in particular note 1 for references to the pamphlets). This initiated Harrod's collaboration with the Parliamentary Monetary Committee: see note 1 to essay 20 for details.
9. Harrod was probably thinking of the Chancellor of the Exchequer's "non-committal answer": see Simon to Harrod, 24 August 1938, letter 818 .
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