P33. Finance by Loan. Effect on Gilt-edged Prices. Supplementary Measures
[Letter to The Times, 22 February 1939, p. 15]
22 February 1939
To the Editor of The Times
Sir,--The announcement by the Chancellor of the Exchequer of the proportion of defence expenditure which he intends to finance by loan in the coming year will meet with widespread satisfaction.  The stimulus administered by this method of finance may well lead to the paradoxical result that more goods other than arms will be produced and consumed in this country than would have been in the absence of the arms programme.
Now that this initial decision has been taken it becomes more than ever important that the supplementary measures which I proposed in your columns last summer should be adopted.  It is undesirable for a variety of reasons that the Government borrowing should be allowed to weaken gilt-edged prices. The cooperation of three parties is required:--
1. The Bank of England should increase the volume of bankers' balances. This can easily be done within the limits of its existing powers by the purchase of Government securities through the Banking Department.
2. The Treasury should reverse the existing trend and increase the supply of Treasury bills available in the money market. If it is objected that this might militate against the choice of the most opportune moments for defence loan issues, this may and should be met by the release of Treasury bills from the Exchange Account and/or other Public Departments and/or the Issue Department of the Bank of England in exchange for longer-dated securities.
3. The object of both these adjustments is to enable the great deposit banks to give adequate support to the gilt-edged market by providing those banks with an increase of liquid assets in various forms. They could then proceed with the purchase of long-dated Government securities without violating their canons for a due proportion in their holdings of more and less liquid assets. 
If these measures are adopted, not only will it be possible for prosperity and rearmament to go together but valuable precedents will be established for meeting a future trade recession, when the deus ex machina of rearmament will not, we earnestly hope, be present.
I am, &c.,
R. F. Harrod.
The Athenaeum, Pall Mall, S.W.1, Feb. 21.
2. References to the debate ongoing in the columns of The Times between August and October 1938 are given in note 1 to press item 22 .
3. On the importance of co-operation by the banks see in particular Harrod, "Meeting a Trade Recession", 1938:11 , press item 22 , [jump to page] .
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