P29. Expenditure on Defence. Good out of Evil. A Remedy for the Trade Decline
[Letter to The Times, 14 October 1938, p. 15]
14 October 1938
Sir,--It must seem to your readers a far cry to those remote and halcyon days of August when your correspondence columns were largely occupied with discussions on meeting a trade recession.  May I be permitted to add a final postscript in the light of what has supervened?
In those days I was engaged in advocating a refined and delicate remedy, the success of which, I was bound to admit, could only be guaranteed if certain circumstances were favourable. There is, however, a cruder and stronger remedy, the efficacy of which is less open to doubt--increased expenditure upon defence works.
If I made no mention of this in August it was not because the point was not present in my mind but because I felt a conscientious objection, as an economist, to recommending on economic grounds expenditure on something which, if only it were not necessary, would be in large part wasteful. But now that there is general agreement that on other grounds such increased expenditure is desirable,  it may be worth pointing out the connexion between this and my previous argument, both because some consolation may be derived therefrom and some injurious misapprehension removed.
The ordinary person naturally supposes that the more that is spent on armaments or A.R.P.  the less of other useful commodities can be produced and the more impoverished the community will in consequence be. This would undoubtedly be true if there were no trade cycle and the population and resources available were always fully employed. Once it be granted that the working of our economic machine leaves a large surplus of unemployed from time to time this common sense view is no longer tenable at all times. If at a phase of the cycle when a level of 2,000,000 unemployed is expected 1,000,000 of these are employed on extra defence works, the other 1,000,000 (or a substantial part of them) will be drawn into employment also to provide the extra goods which these 2,000,000 together are able to buy by reason of being employed. Thus the employment of the extra 1,000,000 on defence works causes the community as a whole to get not only its extra defence works but also more of other useful consumable goods in total than it would have got had those defence works not been initiated. There is paradox in this, but it is one which those who have studied the trade cycle deeply will allow to be true.
Thus it so happens that the coincidence of two things evil in themselves, trade recession and the necessity of extra defence expenditure, may work together to make a good--better employment and a higher level of the production of useful things than would otherwise occur in our imperfect world.
This is a somewhat over-simplified version of things. No doubt there will be shortages of special skills and materials, "bottle-necks" of various kinds, and a tendency for certain prices to rise unduly. And it will take all the vigilance and ingenuity of an Administration, revivified, we hope, by the ordeal through which it has passed, to deal with these special problems. But they are minor matters by comparison with the broad fact that the time is economically propitious for the operation of a great drive in defence works.
Unhappily danger arises from various sources that full advantage may not be taken of this conjuncture of events. The machinery by which our spending departments are curbed is supposed to be one of the most efficient parts of our Constitution. In these days of declining standards in so many spheres, no one would wish this efficiency to be reduced. On the contrary, since there is bound in the hurried development to be much wastage, a more rigid scrutiny than ever is required over all details of expenditure. Only so can our expenditure yield the maximum advantage. But I suggest that the Chancellor of the Exchequer should get authority to inform the Minister for the Coordination of Defence that provided that our equipment is increased beyond the present plan in full proportion to the increased expenditure, he would not in the least mind seeing our expenditure on defence in 1938-39 double that of 1937-38. I state this large figure advisedly. The more modest increase that has occurred during the last year has been insufficient to remedy the depression, and this would be expected by the statistically minded. The Chancellor will need to have the courage to brush aside the advice of old-fashioned economizers, into whose souls the facts of the trade cycle have not yet bitten.
Another danger comes from the views concerning Government borrowing which still circulate in influential financial quarters. This being the recession phase, it is important that most of the new money should be found by loans. At a later stage, when recession turns to revival and revival to prosperity, higher taxation may be required to curb a general tendency to excess profits. Now the influential quarters just mentioned may deem the loans unhealthy, and by their influence weaken Government credit. It is desirable that this view should be combated by the propagation from the highest quarters of the two truths,
(i) that in a rich community, with insufficient opportunities for capital outlay, it is healthy that the National Debt should grow, for otherwise the savings of the community, lacking vent, will cause deficient purchasing power and unemployment, and (ii) that the increase in the National Debt should best be concentrated in those years, the present, when the trade cycle is in its descendent phase.
Finally, the operations which I recommended in my previous letters are precisely those required to prevent the large-scale loans contemplated from weakening Government credit. Thus in the new situation my old remedy does not recede from view, but it no longer occupies an isolated eminence; it is seen as the proper and necessary complement to redoubled expenditure on defence. I am, &c.,
R. F. Harrod
Christ Church, Oxford, Oct. 10
2. Reference to the August and September correspondence in The Times, The Economist, and the Financial Times is given in note 4 to press item 20 and note 1 to press item 22 .
3. On Harrod's engagement with the Popular Front and the anti-appeasement policy see note 1 to essay 21 .
4. Air raid precautions were the subject of harsh debates in the second half of the 1930s. In 1935, the Home Office issued handbooks with instructions on making homes and shops gas-proof. In the earlier phase of the debate it was argued that the suggested measures were technically unsound and far from adequate against the destructive potential of chemical warfare. In the second phase, the debate focused on the necessity of providing civilian with shelters: the campaign was launched by the Left Book Club in September 1938, and featured J. B. S. Haldane--whose book A.R.P. was recently published in London by Gollancz, 1938--as one of the main speakers. It was argued that the main danger consisted in high explosives rather than gas attacks, and that the Home Office guidelines would induce people to stay in their homes leaving them fully exposed to the effect of bombs (see for instance G. Werskey, The Visible College. A Collective Biography of British Scientists and Socialists of the 1930s, London: Free Association Books, 1988, pp. 226-33).
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