1. MEASURESFOR CONTROLLINGTHE CYCLICAL MOVEMENTAS A WHOLE. § 20. CREDIT CONTROL.

The exposition in the previous chapter of the causes of crises and cycles should have made it clear why in the course of the discussions of the last decade on the possibility of trade-cycle stabilization the means of credit control has increasingly pushed its way into the foreground and has found a steadily growing number of adherents. If it should prove possible so to regulate the volume of credit as to nip in the bud any tendency to over-investment, then we should, indeed, have got hold of the cyclical movement by the roots. So the utmost of what is possible in the field of trade-cycle stabilization would be reached if the banks were to place sharp checks at the right time on the credit expansion of the boom. This would mean first and foremost an early and vigorous raising of the rate of interest. Once this comparatively simple idea of credit control had been expressed, it very soon awoke in many countries, and especially in England and the United States, extravagant hopes of a millennium of the “cycleless economy” and it also gave a new importance to the credit policy of central banks. It was believed that at last we had the key of the door to “eternal prosperity” in our hands. The circumstance that this enthusiasm was followed by the most severe of all economic depressions has displaced the enthusiasm by extreme scepticism and has seriously discredited the idea of credit control. Nevertheless, the bitter experiences of the depression should not lead to the conclusion that the idea of credit control has in the least lost in importance. The American crash was in reality due, as we have already shown, not to an excessive but to an insufficient and wrongly directed control of credit. The experiences only go to prove that there is no more urgent task for the economists of all countries than to show how the repetition of such a disastrous credit and economic expansion as the most recent may be prevented in the future by a more rigid and more carefully thought-out credit control. They prove also, however, that this task is much more difficult than had previously been assumed—indeed, that the difficulty seems almost insurmountable.⁵ All problems relating to a trade-cycle policy based on credit control can be seen from two main points of view: from the point of view of the aim, and from the point of view of the means, of such a policy.

So far as concerns the aim, the question is one of determining the criterion to be followed in regulating the volume of credit. It was thought formerly that this question could be answered simply by the requirement that the control of credit should stabilize the general price level so that trade-cycle stabilization would be synonymous with price-level stabilization. This supposition must, however, be rejected on two grounds. The first is that the concept of the general price level is extremely vague and we cannot even speak of a very approximate determination of the average price level. Every index number is to a certain extent arbitrary: the selection of the commodities that are to be included, the choice of the weighting, the base from which the index starts, and, lastly, the mathematical processes applied, are all arbitrary, and it is consequently to be feared that the calculation of the index number, in face of the extreme importance which it would acquire for the carrying out of a stabilization policy, would become an object of a struggle between parties and pressure groups.⁶

The decisive factor is, however, that the stabilization of the price level is far from guaranteeing any stabilization of the cycle and may, indeed, in certain circumstances as was explained above (§ 15), only aggravate the evil. A stable economic system is not an economic system in which everything stands still but a system in which there is a continually moving equilibrium. Consequently the keeping constant of any single factor may lead to the most dangerous dislocations as was most recently the case in the United States. The criterion of the general price level thus fails completely. Better no credit control at all than one based on this treacherous and dangerous criterion! If the stabilization of the general price level through credit control—or by any other monetary means such as that of the “compensated dollar” proposed by Irving Fisher⁷—does in no way guarantee the prevention of an over-expansion of the economic system and therewith the maintenance of equilibrium which is sought, the same applies to similar criteria that have been proposed (the level of employment, the volume of production, the movement of commodity stocks, &c.).

Just recently the question of what is to be the aim of credit control, if it is to rid economic activity of the ups and downs of disturbances of equilibrium, has been considerably clarified. This has come mainly from the recognition that what we must aim at is not to stabilize the purchasing power of money by adjusting the volume of money and credit to changes in economic data, but that we must replace the ideal of stable money by the ideal of neutral money, that is, a money which exerts no influence on the structure of production and prices.⁸ It would have been equivalent to such a policy of neutral money if, recently in the United States, no attempt had been made to compensate the tendency to a fall in prices, coming from the side of production, by a policy of credit expansion. This would have prevented that credit expansion through which those responsible, in the belief that they were pursuing the ideal of stable money, let loose a gigantic boom and its consequent depression.

How to shape a monetary and credit policy which attains this objective of the neutrality of money is a question whose elucidation is at present only in its beginnings but which, following on the explosion of the price stabilization dogma brought by the world depression, forms one of the major tasks of present-day monetary theory. So much is, however, already clear that a neutral monetary policy must involve a much stricter preservation of the constancy of the amount of money than does a policy of stabilizing the value of money; we may even say that, contrary to all the traditional ideas of the necessity of an “elastic” monetary system, the keeping constant of the quantity of money must be the rule and the alteration of its quantity the exception. What are the exceptional cases which permit and even necessitate this alteration of the volume in the interests of the neutrality of money is a question which we cannot attempt to answer here. At all events, it is evident that the problem is an extremely difficult one, but perhaps some practical way out might be found by regulating the volume of credit in future in such a way as to stifle every tendency to a sudden and excessive increase of investment activity. The movement of investment activity will thus probably become the sole utilizable criterion of future credit policy if the latter is intended to be an effective tool of the stabilization of economic activity.

The current discussion on the concept of “neutral” money as contrasted with stable money unfortunately suffers from certain dogmatic and scholastic tendencies which are perhaps largely due to the attractive antithesis between those two terms. In reality, it is possible to exaggerate the contrasts between these two goals of monetary policy. For it can hardly be denied that most of the advocates of stable money also aim at a sort of neutral money. What they want is to get rid of inflations and deflations, i.e., of monetary disturbances of the economic process. So far there is no difference between the advocates of neutral money and those of stable money. Both want money to be neutral. Only the means they advocate in order to attain neutrality of money are different, because their conception of the neutrality of money is different. For this reason the antithesis of neutral money and stable money is rather confusing and not quite fair towards the stable-money school, but as it is now generally accepted no attempt has been made in the text above to replace it by another terminology. The great merit of the neutral-money school lies in the discovery that, under certain circumstances, a stable money may not be neutral, i.e., in the case when a general lowering of costs due to technical progress tends to lead to a lower price level without deflationary effects. As a practical issue, this may generally be rather an exceptional case, but it is actually a case which has been of the greatest importance in the immediate past. To stabilize the purchasing power of money under circumstances such as those in the United States from 1926 to 1929 is not to neutralize money but to make it a very disturbing factor. This is the one substantial result of the whole discussion, but beyond that everything is highly controversial. In other words, the neutral-money school is able to demonstrate in a special case, which is of the greatest importance in modern conditions, what neutral money is not, but as to what it really is this school has not arrived at any definite conclusion. The concept of neutral money is a very useful one because it circumscribes the ideal aim of any rational monetary policy and also because it may prevent the latter from falling into serious errors, but it would be shutting our eyes to the realities if we were to ignore that it does not as yet provide any definite rules upon which monetary policy could be based. In this the old stable-money policy was obviously superior, as it did at least provide a rule of thumb for practical purposes. There is no need, therefore, for the Neutral-Money School to look down superciliously on the Stable-Money School, the less so since there is a great danger that their exultation over the discovery of the phenomenon of a relative inflation (the American case of the last boom) may make them blind to the possibilities of monetary disturbances brought about by deflation. That is just what is happening at the moment. We should expect that the advocates of neutral money, in order to live up to their ideal, would vigorously demand a re-expansion of money and credit at the present moment of the most destructive deflation, but, inconsistently, not a few fail to do so.

Added to the difficulties of finding the correct objective of credit control, there are the equally serious difficulties of finding effective means for successfully carrying it out. To estimate these difficulties, we must first realize that the bulk of modern credit money is created by the private competitive banks. Linked up with this is the question by what means, and in what degree, can these banks be induced to follow a different credit policy than formerly. It is evident that nothing much is to be expected from mere exhortations to the private banks when we reflect that bank managers are motivated by the object of making the largest possible profits, so that any single bank can hardly proceed differently from the banking system as a whole. If the banking system as a whole adopts an expansive policy in the boom, any single bank which was to proceed in the opposite direction would be driven out of business. Each bank waits for the others to make a start, with the natural consequence that nobody makes the start while there is still time. Conversely, in the depression the same situation stops any single bank from undertaking a credit expansion so long as the whole banking system has not come out of the period of contraction. In face of this state of affairs there is no other alternative than to steer the banking system in the desired direction by a superior authority. This superior authority is the central note-issuing bank which regulates the quantity of cash (to-day mostly bank notes) in existence through its credit policy.

For this purpose it has three tools at its disposal. The most important is the raising or lowering of the discount rate (discount policy). Since the dampening down of cyclical fluctuations through credit control depends on a timely attack on the expansionist tendencies setting in at the beginning of the boom, the manipulation of the discount rate as an instrument of trade-cycle policy would mean that the central bank would have to raise the discount rate earlier and more vigorously at the beginning of the expansion of credit and investment than has hitherto been the case when discount policy served primarily to defend the reserves held against notes. This has been very pertinently expressed by Hawtrey in the oft-quoted sentence: “So long as credit is regulated with reference to reserve proportions, the trade cycle is bound to recur.” Now discount policy is, in spite of its far-reaching effects (especially on commerce and speculation), far from being an instrument of universal application suited to all situations. In fact the effectiveness of discount policy is rather limited and this applies to the case where a restriction of the amount of credit (restrictive discount policy through the raising of the rate of discount) is in question as well as to the case where a credit expansion (expansive discount policy through the lowering of the rate of discount) is desired.

A lack of complete effectiveness of discount policy in the first case may lead to the adoption of the very drastic means of credit restriction by which the central bank does not leave the determination of the amount of credit to the automatic functioning of the discount rate but fixes itself the maximum amount of credit it will give and distributes it according to a certain rule (credit rationing). The credit rationing necessarily bound up with the restriction of credit introduces a qualitative control of credit quite apart from the merely quantitative control which the central bank exercises through its discount policy. In this way the central bank regulates not only the total quantity of credit but interferes at the same time with the application of credits and so takes on a planning function, a function which it is quite unsuited to assume since it would mean its becoming the central organ of a quasi-socialistic economy. It is usually explained that the distribution of credit is made according to “the economic needs of the community,” a notion which is extremely popular at the present time, but to which we must object that it gives only a description and not a solution of the problem. For these reasons alone the method of credit rationing is to be rejected in principle and should, therefore, only be applied in emergencies because it introduces an inflexibility into the economic system which may have the most dangerous consequences and may make banks which are inwardly sound unable to meet their obligations. Nevertheless, credit rationing is the rip-cord which may yet save the situation even when the safety valve of the discount policy fails. A further method of credit control available to the central bank are the so-called “open market operations” which consist in the central bank’s regulating the amount of credit it supplies through the purchase and sale of various kinds of securities. By purchasing securities it increases the amount of central bank money and by selling securities it decreases the amount. Although this instrument of credit policy is not foreign to the European central banks either, it has in recent years been operated systematically and on an especially large scale in the United States by the Federal Reserve System.⁹ It is important in the present moment, when the question is not one of restricting but of expanding credit, because it indicates to the central bank a way of augmenting the measure of credit expansion that can be achieved by a mere lowering of the discount rate (a measure that has recently shown itself to be very small). It should be noted here that the question of what are the effective means by which an expansion of credit can be secured represents a special problem which we shall treat later when we deal with measures for getting out of the depression.

In addition to the credit policy of the central banks, there is one other instrument of credit control consisting in the policy of varying deposit reserve requirements. Such a policy would mean that the banks would be forced by law to hold a minimum reserve against their deposits and that this minimum would be varied in accordance with the credit policy pursued by the central bank. Raising the reserve requirement, for example, would be tantamount to the central bank’s raising the discount rate or selling securities. This instrument of credit control has not yet been tested by practical experience, but it seems hardly questionable that it promises to be fairly effective in regulating the volume of credit, even in cases where the discount rate does not work satisfactorily.¹

It should be noted, however, that this instrument of credit control is essentially a repressive instrument for checking the boom, while it is of not much use as an expansive instrument for stimulating recovery. It is obvious that it could alleviate the depression only if it effected a lowering of a legal reserve minimum which had already existed before the depression; there is no sense in starting with this kind of credit policy during the depression. But even then it would hardly make the banks more disposed to increase their credits, and as for the problem of finding enough borrowers it offers no solution at all. Thus we are again brought face to face with the problem of how to bring about an expansion of credit if the necessary inclination towards new investment is lacking. It is the old problem that it is easier to prevent a horse from drinking than to make it drink. We may conclude, then, that the chief value of this instrument of credit control lies in its use as an instrument for checking a progressive credit expansion even when the less drastic measures, especially the discount policy, do not bring satisfactory results.² Thus it might have been very useful during the recent American boom. As an interesting fact, it may be mentioned that in Germany this instrument of credit control has been recently added—by the Reich Credit Law of 5th December, 1934—to the instrumentarium of the Reichsbank, and in the United States also similar measures have been widely discussed.

The list of instruments for regulating the volume of credit is not yet exhausted. There remains the final possibility of a Compensatory Budget Policy, i.e., a policy of varying public revenue and public expenditure in such a way as to exert a regulating influence on the total volume of credit. But as this is a rather roundabout method of credit control and is usually considered from a different aspect, we shall leave its discussion to the next section.

§ 21. COMPENSATORY BUDGET POLICYAND OTHER MEASURES.

Among the measures which are proposed alongside credit control for the smoothing out of cyclical fluctuations there is one that deserves special attention. This is the proposal that the State should so conduct its taxation and spending policy as to secure an evening out between good and bad times. This proposal is usually given the narrow formulation that the State and the public bodies under its domination should as far as possible postpone their orders to private industry from the time of the boom to the time of the depression. This formulation is, however, too narrow to convey the full significance of the idea. The emphasis should be laid not so much on the time distribution of the orders as on the fact that the State pursues a restrictive financial policy in the boom and an expansive financial policy in the depression, that is, that in the boom it retrenches expenditure, keeps revenues high, and accumulates reserves, while in the depression it consumes these reserves and also resorts to borrowing.

Since the public sector has, as we have seen, swollen to such large proportions as compared with the private sector of the national economic system, it would seem not unwise, so long as we accept this change of proportion between the two sectors, to connect the public sector with the circuit of economic activity in such a way as to make the manipulation of the public sector instrumental in counterbalancing the movements of the private sector. This is, in short, the idea of a Compensatory Budget Policy.³ Such a policy has both a quantitative and a qualitative side. A quantitative Compensatory Budget Policy means that the State regulates the total of its expenditure and revenue in accordance with the phase of the business cycle so that during the boom phase expenditure is restricted and revenue expanded with accumulating reserves as the consequence, while during the depression just the opposite policy is pursued. This implies that the State also acts as part of the national credit structure in a sense contrary to the behaviour of the private sector, that is, reducing its indebtedness during the boom and augmenting it during the depression and thus continually shifting to and fro from a debtor to a creditor position. The ultimate effect of such a quantitative Compensatory Budget Policy would be a regulation of the volume of credit, and this indirect method of credit control would seem to be very promising, as it apparently combines comparative smoothness with a high degree of efficaciousness, though this is not to say that it is immune from serious objections. The qualitative Compensatory Budget Policy, on the other hand, is not concerned with the total of revenue and expenditure but with the qualitative composition of the total, i.e., with the variation in the different kinds of revenue and expenditure. By shifting the weight of taxation and of expenditure now in this and now in that direction the State can, of course, do a great deal to give encouragement or discouragement wherever it deems it desirable in order to regulate the flow of economic life. Preeminent in this respect is the regulation of those taxes which exert a specially strong influence on production and enterprise (business taxes, turnover taxes, stock exchange taxes, &c). The introduction or augmentation of these taxes during the boom appears to be a useful means of restraining hectic buoyancy, while their reduction or abolition can do much to stimulate production and enterprise during the depression.

The idea of the Compensatory Budget Policy offers, then, a new principle of public finance, which may be called the cyclical principle of public finance, and may be added to the time-honoured list of our text-books. It is obvious that with the enormous growth of the public sector of the economic system and in view of its close interconnexions with the private sector the State has assumed new responsibilities in its financial policy beyond those which are described by the old canons of Economy, Justice, Certainty and so forth. The present depression has witnessed, in the first experimental trials with the new principle in many countries, signs of the States having become awake to these new responsibilities. It remains to be seen, however, what will happen during the next boom when the State is supposed to show the less popular reverse side of the expansionist budget policy of the present moment.

On the whole, there is no denying that the idea of the Compensatory Budget Policy merits favourable consideration. But, on the other hand, it will be wise to refrain from too dithyrambic enthusiasm. The present writer cannot help but feel rather uneasy at the idea of enlarging the responsibilities of the State to such an extent as to entrust it with the regulation of the business cycle by a means which raises not only general problems of State administration but also special political, social, and economic problems of budgetary policy where the State and the political institutions connected with it usually appear at their worst. This idea of a glorified budget policy is, of course, infinitely superior to the idea of economic planning proper since it would not meddle with the inner functioning of the free market, but even then it raises grave difficulties. Is the wisdom of the State so much superior to that of the private sector that it will make no mistake in diagnosing the different phases of the cycle and in deciding when to restrict and when to expand? If even central banks are known to be not infallible, will not those persons, parties, pressure groups, and institutions that are responsible for the budget policy, fall even much below the rather modest standard of the central banks?

Another grave danger already hinted at is that this principle is very apt to work one way only. It is, indeed, extremely likely that those responsible for the budget will eagerly relish the pleasures of expansion during the depression but be rather reluctant to undergo the mortifications of restriction during the boom. This danger might be diminished by the restraining influence of the debts incurred in the preceding depression, but grave doubts still remain. In view of these and other possible objections, it seems to be advisable not to dogmatize. In general, no efforts should be spared in order to reduce the present overgrown size of the public sector to reasonable proportions so as to render our economic system, from this side also, less top-heavy than it is to-day. For the rest, of course, the idea of the Compensatory Budget Policy should not be ignored but should be rather considered as one useful principle among others, without making it the dominant principle of trade-cycle policy. A special case is presented by the present depression where in some respects an expansionist budget policy would seem to be one of the most useful instruments for overcoming the deadlock.

If it is a sound proposal to manage the budget (including the budget of the public insurance schemes, especially unemployment insurance) in such a way that there is an accumulation of reserves, the question arises what to do with these reserves.⁴ The point is that they must be sterilized somehow if a checking (deflationary) effect is to be attained. Otherwise there is great danger that this sort of budget policy might make things even worse by adding to the monetary forced saving, which is the concomitant of the boom, the additional investment facilities of authoritarian forced savings. This would surely happen if the reserves were to flow into the capital or money markets so as to lower the rate of interest there and widen the possibilities of over-investment. The simplest way of avoiding this would be to keep the reserves in cash hoards. But there is a definite limit to the extent in which this method would be practicable. A slightly less efficient but more practicable method would be to hold the reserve funds as demand deposits and to leave them untouched until the advanced depression. This would be conducive to blocking up the banking system during the boom while the mobilization of such deposits would have an expansive influence during the depression. After what has been said earlier in this book (p. 123n.) on the functioning of the banking system, these conclusions will be readily understood. Leaving demand deposit accounts idle amounts to hoarding credit money, and making them active amounts to dishoarding credit money. If the public sector is to be made a compensating part of the credit cycle, working for restriction during the boom and for expansion during the depression, the thing to do. is to make the State an inactive “creditor” on a large scale during the boom and an active “debtor” on a large scale during the depression.

One of the fatal characteristics of the last boom was that in many countries the governments did just the opposite of what would be expected from a rational budget policy of the kind indicated above. Most conspicuous in this respect were the errors made in Germany up to the time of the present depression. It was precisely during the preceding period of economic expansion that the German budget was continuously being expanded by increased expenditure, alleviation of taxes, enlargement of public indebtedness, and the using up of reserves accumulated after the stabilization of the mark. On top of this, a large programme of public works was executed during the very same period of economic expansion. The worst part of it was the public building programme consequent on the rent-restriction policy under which the building market had largely been taken over from the private sector by the public sector of the economic system. The result was that, whereas before the war building activity had usually reached its peak in the later stages of the depression and had thus exerted a mitigating influence, it now reached its peak during the boom, so that the general economic expansion was enhanced and little was left over for the subsequent depression. This has been an experience which shows the danger of enlarging the public sector and diminishes our faith in the compensatory capacity of the State. A similar error was made in Germany (and elsewhere) with regard to unemployment insurance, very little being done to build up reserve funds for the subsequent depression. The continuous increases of insurance contributions which then became necessary during the depression were, of course, an extremely unwelcome addition to the forces making for depression. As an interesting incident it may be recalled that it was the parliamentary struggle over a trifling increase of the pay-roll contribution which overthrew the last parliamentary government in Germany in the spring of 1930. Taking all in all, we may say that, if we want to know how public finances should not be administered from the point of view of the trade cycle, we must turn to the budgetary policy of Germany during the last decade. On the other hand, however, we can plead for extenuating circumstances in the case of Germany, since the economic conditions in that country were so peculiar at the time that it was extremely difficult to pursue a policy that was anything like rational.

Turning now to other measures of business-cycle policy, we may say at once that the success of direct interferences with the structure of production, costs and prices aimed at the mitigation of the trade cycle is extremely dubious. What are the real facts of the case should have been amply proved by the circumstance that the most severe of all depressions has descended upon us just in a moment when capitalism has been disfigured by an excess of interferences of all kinds (protective duties, price stabilizations, subsidies, wage regulations, restrictions on immigration and emigration, restrictions on the movement of capital, &c.) until it is practically unrecognizable, and the power and number of monopolistic formations have reached a hitherto unknown peak. It is all so palpable that we should speak not of a “crisis of capitalism” but a “crisis of interventionism.” Any attempt to smooth out cyclical waves by measures of this kind can only effect the opposite of what is intended and increase the confusion.

Until not very long ago it was the fashion in many quarters to look upon the spread of large monopoly organizations (cartels, trusts, concerns, trade associations, &c.) as one rather promising instrument for smoothing out the trade cycle. Were not the excesses of competition largely responsible for the wild fluctuations of economic activity, and was not “orderly marketing,” “organized business,” and “elimination of wasteful competition” the way to domesticate capitalism into a manageable and well-harnessed animal? This was surely the way in which the more lyrical economists saw it, but it must be emphatically said that the hopes set upon the stabilizing influence of monopolistic organizations have proved rather ill-founded in the light both of reasoning and of experience.⁵ For it is obvious that holding certain prices rigid is not identical with economic stabilization but more likely to be detrimental to it, since, to take the case of the depression, the downward movement of the uncontrolled prices is thereby accentuated, and since stability of prices in certain industries means instability of production and employment. It is almost a common-place to-day that the growing lack of elasticity of our economic system has made the trade cycle not more, but decidedly less, controllable, but it is almost equally a truism that this development is largely due to the spread of monopolistic organizations on all sides.

A further point familiar from earlier discussion in this book is the fact that monopoly profits are very liable to lead to faulty investments since they are likely to be invested in the corporation’s own plant, even if the profit accruing therefrom is lower than the interest which would be gained by investing them on the capital market.⁶ Thus it is just the spread of monopolies which has made a not inconsiderable addition to the forces making for over-investment and, consequently, disequilibrium. Though it would be an exaggeration to hold monopolies responsible for the present crisis, our appraisal of the possible contribution of industrial combinations to the problem of stabilization must end in the conclusion that, in contrast to popular views which still tenaciously linger on and embody themselves in the present world-wide passion for organization and regimentation of industry, the growth of monopoly organizations is apt to intensify the boom and to delay the recovery. It means faulty investment of capital on a huge scale, and it means lack of elasticity of the whole structure of prices and costs. For this, perhaps, no better example could be found than the case of Germany where, as is well known, monopolistic development has always been especially strong, aided to a large extent by German tariff policy⁷ and by the German talent for administration and organization.⁸ Careful and impartial investigations have shown that in the period prior to the present depression the tendency of over-investment was most conspicuous in the great monopoly industries, especially in the iron and steel industry, which has, mostly by self-financing, built up a plant with a productive capacity far in excess of any reasonable estimates of potential demand. The cement industry also has been a much-discussed example of over-expansion. Later on in the depression, it was really a disaster that the German monopolies in the most essential raw materials and half-finished products did not adapt their price policy sufficiently to the changed circumstances, so that there arose a wide disparity of movement between the free (competitive) and the fixed (monopolistic) prices which has been so detrimental to the elasticity and adaptability of the economic process during the depression. Let us repeat then that Monopoly Capitalism or State Capitalism is not more stable that Competitive Capitalism but decidedly less so. Therefore, it would seem that it should be an important part of any rational programme of trade-cycle policy to break up the monopolistic and interventionist rigidity of our economic system instead of enhancing it.

This also involves the total rejection of the idea that protectionism might be a suitable method of economic stabilization. It is really impossible to imagine how tariffs could be conducive to combating the real cause of booms and depressions, i.e., over-investment financed by credit expansion. The existence of a tariff is a datum for the economic system of a country which will be assimilated after a while in a manner likely to reduce the wealth of the country concerned, but how it is to have a greater influence on the real causes of the trade cycle than other economic data remains a secret of the tariff-enthusiasts. On the contrary, it is to be feared that, by reducing the mitigating influence of international economic relations, it might enhance the severity of national disturbances of economic equilibrium. Another question is that of the influence of the introduction of new tariffs or the increase of old tariffs. These belong to the long list of random factors which might influence the real causes of the trade cycle in a direction incapable of being predicted in advance. Therefore, it is not a limine impossible that the introduction of new tariffs or the increase of old might be some help in overcoming the depression (see § 26).

It will not be out of place here to apply the foregoing conclusions to that type of economic system which, under the name of Corporativism or its terminological equivalents, is held in many quarters to-day to be the superior form of economic organization which promises to bring stability, justice, smoothness, intelligent co-operation, and, in short, all-round happiness.⁹ The curious thing about Corporativism is that, in spite of the verbose literature on this subject, nobody seems to be able to tell us exactly what it really means—a fact which is closely related to a further fact, i.e., that the subject of Corporativism plays a prominent role in countries where the totalitarian character of the State (Fascism) makes any real discussion wellnigh impossible. Indeed, the confusion on this subject is amazing, and it is still more amazing to find that very few seem to notice it. To any sober mind, however, it should be clear that Corporativism may mean one of two mutually exclusive things.

In the one case it means genuine economic self-government executed by the different branches of industries organized in great corporations after the pattern of the mediaeval corporations and guilds. In this case it is an extremely dangerous thing breaking up the national economy into a positive anarchy of uncontrolled pressure groups, and also a thing which, as a general principle of organization seems rather impracticable under modern conditions. Corporativism, in this sense, was tried in Germany immediately after the war as a sort of socialistic makeshift, but among those who know something of the experiences with the autonomous economic bodies created at that time there can be no possible divergence of opinion as to the utter and deterrent failure of this system. It was a hot-bed of corruption and of arbitrariness on an unprecedented scale. If capitalism is economic anarchy without chaos, then this system of genuine Corporativism is economic anarchy with chaos at its worst, and as such it is, of course, absolutely useless as an instrument of economic stabilization.

In the second case the State imposes its authority on this idyllic economic self-government, and then Corporativism is not genuine but is just another word for a heavily monopolistic-interventionist society adorned by collectivist phraseology. So far as the economic side is concerned, the innovation is purely terminological in character, a statement which, nevertheless, is not meant to imply that this terminological economic policy may not be very useful from a propagandist and political point of view. It is obvious that it is this meaning which Corporativism has in totalitarian countries to-day, since it would be preposterous to assume that the Fascist State would be willing to yield a single atom of its Absolutism to really autonomous corporations. The Italian Government certainly did nothing of the kind in creating the Corporazioni. As a careful study of the legal foundations of the Corporazioni shows, every care has been taken to bring all possible activities of the corporations under the strictest control of the State. It is evident, then, that in the case of a Fascist country it is quite inappropriate to speak of a Corporative State, since it is not the State that is “Corporativo” but the Corporation that is “Statale.” Consequently, the whole thing amounts, to all intents and purposes, to a wholesale cartellization of the national economy aided by all kinds of government intervention and subjected to strict supervision by the State. In accordance with what has been said above on Monopolism and Interventionism with reference to economic stabilization, it seems clearly impossible to look upon Corporativism as a useful instrument of stabilization. In fact, the economic situation to-day in countries which have adopted either Corporativism or some other form of glorified cartellization is much worse than that of many other countries without it. In so far as the N.R.A. Codes in the United States also involved universal cartellization, enforced and directed by the State, it seems safe to say that they have contributed to confusion rather than to recovery and stabilization.¹⁰

As for the ultimate possibility of economic stabilization by the aid of a Planned or Socialistic Economy, enough has been said on this subject on an earlier occasion¹ to make clear the uncompromising attitude of the present writer.

§ 22. TRADE-CYCLE POLICYAND THE GOLD STANDARD.

Up to this point no attention has been given to the question of whether a trade-cycle policy on the lines depicted in the preceding paragraphs can be conducted on a purely national scale or whether it will encounter international complications which are apt to limit the possibilities of a national policy. It is this international aspect of trade-cycle policy which will be considered in this section.

It must be said at the outset that there do exist international complications which need very careful examination. The central question to be asked in this connexion is how far a trade-cycle policy conducted on a national basis is compatible with the Gold Standard and a policy of stable exchange rates. In answer to this question, the dominant school of thought, which owes most of its influence to the writings of Mr. Keynes, holds the view that we have to face a clear alternative between, on the one hand, a policy of internal economic stability and, on the other, a policy of stable exchange rates or, practically speaking, the Gold Standard, save for the case that the policy of internal economic stability coincides exactly with a corresponding trend abroad. If, the argument runs, the world as a whole is marked by boom conditions, with prices rising and the volume of money and credit expanding, the individual country in question must follow suit in order to observe the rules of the Gold Standard and to offset the heavy inflow of gold. On the other hand, if the world is passing through the depression phase with prices declining and the volume of money and credit contracting, the individual country cannot refrain from following the same course if it wants to maintain the Gold Standard and the stability of the exchange rates. In both cases it is assumed that the country is compelled by the rules of the Gold Standard to adopt a monetary policy different from that which it would like to adopt in order to smooth out the trade cycle. This doctrine has perhaps done more than anything else to spread the present distrust of the Gold Standard since, faced with the alternative, people have become more and more convinced that internal stability is, on balance, preferable to external stability.

As a matter of fact, there are to-day not a few theorists and politicians who seem to believe that the future will belong to that type of monetary system in which the goal of stable exchange rates will, in principle, be subordinated to the goal of stable prices and, consequently—though the inference is doubtful—of stable economic conditions at home. They believe, therefore, that the Gold Standard is dead as a door nail and that it will be permanently replaced by a frankly national monetary policy, in spite of the occasional lip-service they pay to the ideal of the Gold Standard and its theoretical virtues. Thus a sort of monetary autarky would be the model of the future as a corollary to the commercial autarky, and all this in the sacred name of Stabilization. Parallel with this goes the work of economists who tell us that the virtues of stable exchange rates are much overrated, and that the world does not sacrifice much in letting them fluctuate as they will. This whole trend of thought which is, in the opinion of the present writer, very dangerous, has, of course, been tremendously strengthened by the experiences of the present depression when it seems, to most people, strikingly obvious that no country can escape the alternative choice either of leaving the Gold Standard or of letting the depression take its sombre course. In face of this development, it seems highly necessary to scrutinize very closely the Doctrine of Alternative Stability which underlies this attitude.

In the attempt to define our own attitude, we shall begin by separating out that part of the ground which is uncontroversial. All parties agree that the alternative choice in question does not exist if the national credit policy runs parallel to the international trend of credit policy. If it is in the interest of national economic stability to expand credit, no collision with the Gold Standard is to be feared as long as this policy is in harmony with the international course of the trade cycle, and vice versa. So far, the awkward alternative does not exist, and the question arises as to whether it might not be possible to ensure a greater degree of international conformity by the much-heralded co-operation of central banks or by some international monetary scheme.² We shall not enter here into this very intricate question, but shall rather direct attention to another point which seems to be somewhat neglected in the current discussion of this problem. We must not lose sight of the fact that the international course of the trade cycle—the world “conjuncture”—is not something hovering above the earth and falling down from the sky on all countries at the same time. What actually happens is that it begins somewhere and is subsequently transmitted to the rest of the world, and it is the mechanism of the Gold Standard by which it is primarily transmitted. Suppose that in one country a boom begins to develop, then, through the effect of an adverse influence on the balance of payments, gold will be drained away to other countries where, in accordance with the working of the Gold Standard, the increase of the gold reserves will give rise to credit expansion and thus create a boom there too. We have then two phases, in the first of which the outflow of gold accompanies a strain on the balance of payments and on the exchange rates so that the cyclical situation comes into conflict with the exchange situation, whereas, in the second phase, the effects of this process in the other countries tend to ease the tension so that the conflict automatically creates the forces which lead to its own eventual elimination. Stated thus, it is, of course, really too good to be true. We hasten to add, therefore, that several conditions must be fulfilled if this automatic self-adjustment is to work. If this were not so, we should obtain the absurd result that the course of the world “conjuncture” could be changed at any moment by any country.

But that the automatic self-adjustment really works under certain circumstances is proved by the experience that a turn of the cycle always starts in a particular country or in a particular group of countries though it may be transmitted rather quickly to other countries. If we want to ascertain the circumstances under which this process of automatic adjustment comes into action, we are led to a special problem of particular interest. For our present purpose it may be sufficient to remark that the effecting of the “ignition” depends not only on a certain minimum size of the country starting the movement and of its gold reserves, but also on a certain susceptibility on the part of the other countries where the non-monetary conditions of a cyclical turn must be already to some extent fulfilled. An example which, unfortunately, has assumed great importance at the present time may elucidate the meaning of this statement.

Suppose that in the spring of 1933 a spontaneous recovery had set in in the United States, it is hard to believe that this would have put the American Government before the alternative either strangling the recovery or of going off the Gold Standard. On the contrary, there is no doubt that in this case the aforementioned mechanism would have come into action: at first we should have got a certain pressure on the dollar exchange and, consequently, a certain outflow of gold, but by transmitting the cyclical impulse to the rest of the world the outflow of gold would have stopped itself automatically after a while. This would have had the further consequence that the American recovery would have obtained strong support from the course of events abroad, not to mention the heaven-sent opportunity of the World Economic Conference in London where the American Government could have made a strong and effective appeal to the other countries to further the expansive tendencies on the basis of the Gold Standard. There is not the slightest doubt that in this case we should have to search in vain for any alternative between the Gold Standard and an active trade-cycle policy. Exactly the opposite is true, since leaving the Gold Standard would have been positively detrimental to the process of economic recovery. The mechanism of the international transmission of the cyclical impulse being destroyed, the American recovery would have been left without the necessary support from the international economic recovery. Allowance must be made, of course, for the possibility that the economic expansion in the United States might have reached dimensions incongruous with the size of even the American gold reserves so that from this point onwards the Gold Standard and the national economic expansion would have become incompatible with each other. The situation in the United States at that time was, however, quite unique as the enormous gold reserves made possible a degree of economic expansion which would probably have been sufficient for the “ignition” not only in the United States but for the rest of the world as well. At all events, there was no harm in trying it. By taking the precaution of going off gold, the American Government would have resembled a man who, intending to go on a sailing-cruise, starts by plunging into the water in order to anticipite the risk of getting wet in the very remote case that the yacht might capsize.

In assuming that the economic recovery in the United States would have come spontaneously in the spring of 1933, we have so far spoken of a hypothetical case. This assumption was made in order to facilitate the understanding of the process and to bring home the fact that we are not dealing with extravagant guesses but with self-evident truths. The essential point, however, is that it makes absolutely no difference for the matter under discussion if the recovery did not come spontaneously but came as the result of deliberate policy. Everything we said, therefore, applies without any alteration to the actual case of the American policy since the beginning of the Roosevelt administration, and there is hardly any need to add that by doing the unnecessary and harmful thing of abandoning the Gold Standard, this policy has become the outstanding example of the fatal consequences of the Doctrine of Alternative Stability. The abandonment of the gold dollar by the Roosevelt administration must, indeed, be viewed as one of the most disastrous acts on record of any government and any country in recent times, disastrous both for the country itself and for the rest of the world.

Important as this reasoning is in certain cases, it can only narrow the scope of the problem of alternative stability but not do away with it altogether. If the forces of self-correction explained above do not work adequately, we are really faced with the question of whether all that a country has to do, in order to protect its economic stability against the troubling influences caused by a change in the data of external equilibrium, is to make up its mind to let go the exchanges. We come here to the heart of the argument of the Doctrine of Alternative Stability. Oddly enough, it has not yet received as much critical attention as it deserves. It should be clear, however, that the burden of proof is with the adversaries of the Gold Standard since prima facie there seems to be no reason why it should be possible for a country connected up with the world economy to insulate itself against outside disturbances by mere manipulation of the exchanges. In other words, it is difficult to see how mere manipulation of the exchanges could make the course followed by the trade cycle within the country the same as if there were no changes at all in the data of external equilibrium. Without exchange manipulation, these changes would have necessitated an immediate readjustment of the internal economic structure (changes in the direction of production and changes of the prices of the factors of production).

Now there is no doubt that such a process of readjustment may be very painful and detrimental to economic stability, in extreme cases becoming even an unbearable strain on the economic and social structure of the country. There is equally no doubt that the immediate necessity of the process might be averted by a manipulation of the exchanges. Nevertheless, it would be wrong to suppose that there are no counterbalancing items or that the chain of reactions will stop at this point. On the contrary, it is obvious that in this case also the economic process within the country will not behave in the same way as if there were no change in the data of external equilibrium. In this case also further consequences and repercussions will ensue, and the next task must be to analyse their effects on internal economic stability.

An analysis of this kind would have to start from the statement that, by leaving the exchanges free, the immediate pressure emanating from the change of the international data would be diverted from the producers and diffused by a rather intricate process over the national economy as a whole. The cyclical effect of this roundabout process of diffusion cannot be expressed in any general formula though there are good grounds for the surmise that in the short run the effect will be on the side of equilibrium rather than of disequilibrium. But as regards this point, we must again be on our guard against the all too common danger of thinking too much in mechanical terms instead of giving due weight to the decisive psychological factor. The ultimate effect of a policy of exchange instability will depend on the psychological reactions of those groups which really make up the economic process, i.e., the entrepreneurs, the consumers, the savers, and the investors. It is extremely likely, however, that on the whole the psychological reaction to a deliberate lowering of the exchange rates will engender an unsteady trend of business. In this respect—and in many others—a policy of bringing the exchange rate down to a new level of stability with one stroke will do decidedly less harm than a policy of continuous and erratic exchange fluctuations. It is more than probable that it is here that the main reason for the many disappointments of the New Deal is to be found. The prejudicial effect of unstable exchanges on the psychological disposition of the dominant groups is, without doubt, capable of being compensated by a large monetary expansion, but it is quite possible that this compensating dose may have to be made so strong as to cause the exchanges to fall further, thereby starting a vicious circle which might perfectly well end in a fully-fledged inflation of the pernicious kind. This danger becomes the more real because the international disturbances made inevitable by this development are apt to bring forth new conditions of instability and, finally, because the disappointment in the first results of this kind of trade-cycle policy is likely to lead to desperate experiments in economic planning which, adding to the confusion, augment the need for inflationary compensation. All this is again illustrated by the American example. In other words, an active policy of recovery, if combined with a policy of unstable exchange rates, may possibly only become effective after dangerous overdoses of monetary expansion which are tantamount to real inflation with a host of new disturbances following suit. It may be so, but, of course, it need not be so as the English example amply proves. Even in the case of England, however, it will be wise to postpone the final verdict and to wait and see what will be the ultimate effects of the disastrous chain of international disruptions which started in 1931.

Though we have not arrived as yet at any definite conclusions the foregoing analysis will have at least made it clear that the alternative between stable exchanges and internal economic stability is far from being exclusive and unequivocal. The “conjuncture” of a country connected up with the world economy is likewise connected up with the “conjuncture” of the world economy, and no monetary manipulation, much as it may mitigate and even neutralize for a while the immediate consequences, can do away with it.

There is one further point in the Doctrine of Alternative Stability which deserves critical examination.

The essence of this doctrine is the supposed conflict between exchange stability and internal business stability in the qualified sense made clear earlier in this section. When we come to ask the reasons for this conflict, we shall be told that it is the behaviour of the internal price level, consequent on the given cyclical phase, which endangers the exchange stability. If it is intended, for example, to bring about a recovery by credit expansion—the actual case to-day—the recovery will, according to the doctrine in question, be identical with a rise of the general price level which, in turn, is supposed to be identical with a certain pressure on the exchanges. Formulated thus, the intricate problems involved in the doctrine become clear at once, for it is a twofold identity which it supposes; the identity of a cyclical upswing with a rising price level and the identity of a rising price level with sagging exchange rates (for the national money), and of these two suppositions the one is just as problematical as the other. The point which is common to both cases is that the correlation which undoubtedly does exist, is allowed to cover up the existence of a fairly wide margin within which the process of recovery is able to move without raising the price level, and also the price level without raising the foreign exchanges. The whole mechanism works with a good deal of “play,” and so far as this is the case no incompatibility exists between the Gold Standard (stable exchanges) and an active policy of recovery. It is easy to imagine cases where the margin is large enough to allow a dose of credit expansion sufficient to give a complete turn to the trade cycle, a case demonstrated above by the recent American example.

Tackling first the problem of the supposed identity of the upswing with a rise of the price level, a reference to earlier passages of this book will convince the reader that this popular idea is, in this peremptory form, quite untenable. It is again the ghost of the “price-level complex” that is crossing our road, and we may exorcize it once more by stating that the trade cycle is not primarily a price-level phenomenon, since the economic process adjusts itself to the ups and downs of the trade cycle not only by price alterations but also by quantity alterations. Moreover, it is possible to favour by deliberate policy the adjustment made by quantity alterations (“Mengenkonjunktur” in the German terminology) and to repress the adjustment made by price alterations (“Preiskonjunktur”). This applies especially to the case of the secondary depression which was treated at length in § 16 of this book, to which the reader must again be referred. A marked rise of the general price level consequent on an inflationary credit expansion is the necessary pre-requisite of the boom ending in the subsequent crisis, but no rise of that kind is necessary in order to put an end to the depression by reabsorbing the idle reserves of productive capacity and man power. The contrary view rests on a confusion of the compensatory credit expansion necessary for overcoming the depression with the inflationary credit expansion responsible for the later boom. As the example of the New Deal shows, any attempt at overcoming the depression by spasmodic efforts at raising the price level is only apt to give a misleading and dangerous turn to trade-cycle policy. In so far as the Gold Standard hinders these attempts so that there does arise a real alternative between this kind of trade-cycle policy and the Gold Standard, it means that it places difficulties in the way of an ill-advised sort of trade-cycle policy, which is hardly a reason for regret. We may conclude, then, with special reference to the present situation, that a clear alternative does not exist between the Gold Standard and a compensatory credit expansion, but only between the Gold Standard and an inflationary credit expansion. In other words, the Gold Standard is an unequivocal hindrance to a trade-cycle policy which, by driving the boom to the boiling point by inflationary credit expansion, is itself liable seriously to endanger economic stability, whereas there probably exists a rather wide margin in which a compensatory credit expansion compatible with the maintenance of the Gold Standard can take place.

Turning now to the second assertion that a rise in the price level will exert a certain pressure on the exchanges, it will be clear to anybody familiar with the theory of international trade that this argument of the Doctrine of Alternative Stability bluntly assumes the familiar purchasing-power parity theory of foreign exchanges.³ Consequently, the Doctrine of Alternative Stability, or what is left of it after the foregoing analysis, holds good only so far as the purchasing-power-parity theory is valid. Even the more orthodox adherents of this theory, however, will admit to-day that it is only valid subject to a greater or smaller coefficient of deviation which interrupts the strict causal relation between the movement of the internal price level and the exchanges and creates a rather wide margin of indeterminacy. If, for example, the upswing actually leads to a rise of the price level, it is possible that the pressure on the exchanges to be expected from it may be either compensated or accentuated through a change in the coefficient of deviation, and it would have to be carefully examined whether the upswing itself may not influence the coefficient in the one or in the other direction. It is probable that such an influence does exist. Its exact nature, however, will surely vary with the economic structure of the country concerned. If we take the case of the highly industrialized countries which are dependent on large imports of raw materials, it is to be assumed that the upswing will change the coefficient against the country for a while since the increase in industrial activity will raise the imports of raw materials without an immediate compensation through a corresponding rise of the exports of finished goods. A particularly good example of this lag between the movement of imports and exports in the first stage of the upswing is the case of Germany. It means that in this case the upswing presents, whatever the circumstances, a short-run exchange problem which is usually solved by gold losses or by short-term foreign credits. In this case also the abandonment of the Gold Standard is a rather dubious device. But it must be admitted that there are a number of difficult problems waiting for a closer examination.

Let us now try to summarize the results of our analysis. We found that the Doctrine of Alternative Stability turns out on closer inspection to be rather vague and, stated in peremptory form, absolutely incorrect. It is not true that we always have a clear choice between internal economic stability and exchange stability. In all cases there is a certain margin which has to be examined very carefully before we can give any definite verdict. It would not even be an overstatement to say that in most cases a stable exchange policy is not only compatible, but actually complementary with a policy of internal economic stability. One of the many inferences from this statement is that the case for the Gold Standard is much stronger than commonly presented. Most advocates of the Gold Standard seem to accept the Doctrine of Alternative Stability and to defend the Gold Standard only by pointing to the other great advantages which can be set against the alleged disadvantage implied by the said doctrine. In my opinion, the Gold Standard would, in most cases, be worth even this price, but the point of our analysis is just that we actually get a heavy discount on this price. In my conviction, this discount is, on the average, so large as to make the case of the Gold Standard absolutely irrefutable. In other words, there is a margin of compatibility, though this will not usually be so wide as to make the Gold Standard compatible with any and every sort of business-cycle policy, the case most likely to bring the Gold Standard into conflict with the trade-cycle policy being that of a deliberate boom policy. As for this latter case, it will be conceded by everyone that this sort of incompatibility is entirely in line with a rational trade-cycle policy, since to hold the boom in check is directly in the interest of economic stabilization. It would be much more sensible to blame the Gold Standard for exerting its checking influence on the boom insufficiently or too late, and this is, indeed, one of the most serious cases of any conceivable incompatibility between the Gold Standard and a rational trade-cycle policy. What is a country to do if, in time of an international boom, it wants to check the boom within its territory and still cling to the Gold Standard? This really seems to be a dilemma incapable of solution, since a country which checks its own boom in the face of an international boom will find its gold reserves rising and will thus be forced either to expand credit again or to “sterilize” gold, which is equivalent to an infringement of the rules of the Gold Standard. Though in reality the dilemma will rarely be as clear-cut as this, it has to be admitted that it raises another problem of grave importance.

Much has been made in this connexion of the American experience during the last boom. It is said that the Gold Standard would actually have compelled the United States to expand credit to still greater dimensions than they actually did if they had not deliberately sterilized a part of the heavy inflows of gold during this period. The insinuation is that a more orthodox adherence to the Gold Standard would have engendered a still greater inflation and, consequently, a still worse collapse. This blow to the Gold Standard, however, is not as deadly as it seems since the situation was vastly more complicated than this view implies. Firstly, it is not true that the recent American boom was accompanied throughout by rising gold reserves. On the contrary, from the spring of 1927 until late in 1928 the American gold reserves were actually declining. Secondly, the working of the Gold Standard was heavily obstructed by the American tariff policy together with Reparations and Inter-allied Debts. Thirdly, what inflow of gold into the United States there was, was closely connected with the fact that Great Britain, at that period, did not observe the rules of the Gold Standard by a policy of contraction which should have been expected under the circumstances then prevailing. “So long as Great Britain, the centre tending to lose gold, was not contracting, the other centres were under no obligation, according to ‘the rules of the Gold Standard game,’ to expand” (Robbins).

§ 23. SUMMARY.

What is the precise result of our investigation into the possibilities of a rational trade-cycle policy aimed at mitigating the cycle as a whole? The answer is neither unduly optimistic nor patently discouraging. Since over-investment financed by credit expansion is at the bottom of the cyclical disturbances of economic equilibrium, it should certainly not be an impossible task to hold credit expansion within reasonable bounds in spite of the manifold difficulties discussed in the preceding paragraphs. To bring this about, the various methods of credit control and the Compensatory Budget Policy seem to be useful instruments though neither can be applied according to cut-and-dried rules. Much experimentation will still be needed in order to find out that technique of trade-cycle policy which will be the most smoothly working and, at the same time, the most efficacious one. So far as the present stage of experience and discussion allows provisional judgments, it seems that the policy of varying deposit-reserve requirements and the Compensatory Budget Policy are to be considered as valuable and promising additions to the technique of trade-cycle policy.

Of at least equal importance is the problem of the criterion according to which the instruments of control are to be applied. The reader cannot have escaped the impression that the problem of criteria involves the gravest difficulties, as is evident in the current discussion on neutral money versus stable money and on the interpretation to be given to these ambiguous terms. These difficulties can be solved best by remembering that it is the phenomenon of over-investment which is at the root of the trouble so that investment statistics will provide the best guide for the policy of control. Whenever the volume of investment climbs suddenly to the heights experienced in the United States during the last boom, it is high time to apply the brakes no matter what is happening to the price level. This seems to be the only practical solution of the problem of criteria available at the present stage of the discussion.

But the difficulties do not end here, and two other problems have to be considered, the one being the problem of the workability of a rational trade-cycle policy under the limitations of the Gold Standard, and the other the problem of the prospects of a rational trade-cycle policy from a political or practical point of view. As for the first problem, the analysis of the last section showed that though it cannot be entirely brushed aside it seems less real than is commonly supposed. Since the experiences of the last years have proved that a stable world monetary system is an indispensable prerequisite for the working of our economic order, it is reassuring to know that the monetary standard which achieves this most important end does not exclude a fairly reasonable degree of rational trade-cycle policy. An irreducible remainder is, however, left, in accordance with the sad philosophy that we cannot have everything, that every asset is balanced by a liability, and that not all sufferings on earth are capable of being cured.

As regards the second problem of the prospects of a rational trade-cycle policy from a political or practical point of view, something has already been said on it in connexion with the Compensatory Budget Policy. Let us repeat, then, that to know that a boom must be stopped in time in order to avoid disaster is one thing, but to get it done by those responsible for the trade-cycle policy is quite another. Rational trade-cycle policy is certainly not planned economy, or it ceases to be rational. It means steering the course of the entire economic process without infringing upon the working of the mechanism of the free market, but it has that in common with economic planning that we entrust the government or its equivalent with enormous power of economic control without any real guarantee for the wise use of this power. Quis custodiet custodem? Who plans the planners? And do all the enthusiasts of trade-cycle control clearly realize that it would make the course of the entire economic process a political issue with all the grave implications of this word? The old economic system of the Victorian age, which is now such an easy target for mockery, had at least that one great virtue that it was practically foolproof. Its very laissez-faire character, which now causes people to recoil from it in horror, had the great advantage that it was not at the mercy of wise or foolish governments or constituencies, and there can be no doubt that the latter is much worse than being at the mercy of the whims of a competitive market economy.

Though we cannot go back to this old economic system, it is well to remember its virtues in this respect so that we may see the difficulties of the present economic system in a more realistic and less romantic light, and may also draw the logical conclusion that it would be wise to restore, as far as possible, the resilience of our economic system and its faculty of automatic self-adjustment, and to restrict the field of deliberate control to the utmost minimum. This is one of the main reasons why the complete restoration of the Gold Standard with all its prerequisites is absolutely essential. In order to see this clearly, we have to recall that one of the greatest practical difficulties of a rational trade-cycle policy lies in the fact that it will be a rather arduous task to put through a restrictive policy during the boom when everything is going at its best and everybody is talking about a “new era” of permanent prosperity. Mild inflations are always vastly more popular than even mild deflations, especially with those who are pulling the strings of government. Therefore, the automatic safety brake provided by the Gold Standard has to be considered as an indispensable part of our economic machinery if we want to be safe against real disaster. We do not even trust the locomotive engineer enough to forgo automatic safety appliances, in spite of the fact that there are no personal economic interests of his at stake, and that his own personal safety depends on his sense of responsibility. How much less can we do without automatic safety appliances in the case of governments whose affairs are conducted in an atmosphere not entirely free from personal economic interests, and whose leaders are responsible only “before God and History,” writing their memoirs if anything has gone wrong! It is desirable that all planners, all popular writers on the “end of capitalism,” and all despisers of “orthodox” economics should take this to heart, and as far as the policy of trade-cycle control shares some of the dangers of economic planning, here is a lesson also for the more enthusiastic advocates of monetary management.

There is still another reason for damping the enthusiasm for any of the schemes of economic stabilization which are so popular nowadays. It is the inherent nature of these schemes that they are conceived more or less mechanically. Invariably the idea is to set up a framework of external economic conditions capable of bringing harmony into the economic process. Important as this may be, it must not be forgotten, nevertheless, that, in the last analysis, economic life is dependent on the psychological attitude of countless individuals, and the trade cycle also is, at bottom, a psychological phenomenon. Now the danger, which must not be overlooked, is that any deliberate and duly advertised policy of economic stabilization might exert an adverse influence on the psychological attitude of the individuals, by giving a treacherous feeling of security provided by the omniscient State and by inducing the individuals to recklessness. The fact that, during the last boom, there was never more talk about economic stability than just at the time when the temerity nursed in this very atmosphere of over-confidence was sowing the seed of the worst crisis tells its own tale. Thus we might venture to give voice to the paradox that it is in the very interest of economic stability to be rather sceptical about the possibilities of economic stabilization. Let us not promise more than the absolute minimum of everything that is warranted, let us not talk away all the dangers and difficulties that are to be envisaged—then, perhaps, something might really be achieved.

A last word of warning must be said on the subject of trade-cycle policy. Such a modest view of the possibilities of trade-cycle policy as that expressed in the text is apt to convey the pessimistic impression that the economist seems not very helpful in suggesting a solution of the problem of how to avoid a recurrence of the last disaster. If that is so, what about the prospects for our whole economic order? Is not trade-cycle policy the last vestige of hope we have for saving it from utter condemnation? The answer is a very emphatic no. The reason is very simple.

If a wrong trade-cycle policy in the proper sense of the term had been alone responsible for the present depression, it is hardly conceivable that it would have been anything like so severe and long-lasting. The whole complicated causation of the present depression is unimaginable in the absence of a number of factors which have nothing whatever to do with wrong acts of trade-cycle policy: the Great War with its host of disastrous economic consequences, the Peace Treaties with their political and economic partitions, Reparations and Inter-allied Debts, the Great Inflations, State intervention in defiance of all wisdom and reason, the illogical tariff policy of the United States and its equivalents in other countries, the reckless management of public finances, the political upheavals of every description, and so on all down the list. It is not easy to see how any trade-cycle policy, be it the wisest and most rational one, could have coped with the situation thus created, or, indeed, how any other economic system could have endured the terrible strain.

Just as we must fight against the very bad habit of treating our system of economic organization as a scapegoat for all errors of economic and general policy, so we must not expect trade-cycle policy to expiate what economic or general policy have sinned. A rational trade-cycle policy in a world of enormous irrationalities can hardly attain its ends. If the economics and politics of the world were more rational, the whole subject of crises and cycles would be decidedly less pressing and important. Thus we arrive at the conclusion that the best trade-cycle policy would be the rehabilitation of wisdom and reason in every act of economic and general policy, and we should let trade-cycle policy in the proper sense of the term take care of the rest. Even then it would be too much to expect the complete disappearance of cyclical fluctuations, but perhaps it is not too extravagant to hope that what is left of booms and depressions would not be much above the minimum which is at once both tolerable and rather indispensable for a certain speeding-up of economic progress.