2. MEASURES FOR OVERCOMING THE DEPRESSION. § 24. INTERFERENCE WITH THE STRUCTURE OF PRICES AND OF PRODUCTION (RESTRICTION).

Turning now to the measures which are proposed for overcoming a depression, we come to a question which brings us face to face with the most pressing difficulties of the day, and which can also best be treated from the standpoint of this present-day problem. We are dealing here not with the question discussed in the previous section of how the waves of the cycle can be smoothed out and future crises prevented by stemming the boom at the right time, but the question by what means the existing crisis, once it has come about, can be overcome. Unused human and material factors of production are available in abundance, but the inducement to bring them back into the flow of production is lacking. It follows that everything depends on somehow producing this missing incentive. Before the war this came about in the later phase of the depression of its own accord from the situation which gradually set in on the different markets, and there was nothing to prevent us from assuming, indeed everything constrained us to assume, that it would be the same again this time. It may be said that “it must stop raining some time,” but the discomforting and dangerous thing about the last depression was that this time it lasted such a terribly long time, much longer than corresponded to the objective economic conditions. The focal point of the whole question is thus whether and by what means the revival from the depression can be speeded up.

This gives us the rationale of State intervention but does not tell us the point of attack of such intervention. As regards this, there is a considerable variety of opinions. First of all, there are two schools which are in an almost irreconcilable opposition to each other. The one hopes for the overcoming of the depression through measures of liquidation and adjustment whose task it is to lower prices, costs, and incomes, either in particular or in general, while the other school expects that the end result of such a policy of liquidation and deflation will be an aggravation of the depression and recommends instead expansion.

To the first of these schools—we shall call it for convenience sake the restrictionist school—there belong those who hold the firm belief that the last crisis, even in its later devastating stages, must still be regarded as the inevitable reaction to a vast credit expansion, a reaction which has been unduly prolonged over several years and tremendously intensified by a great number of other factors, as, for example, various long-run economic tensions and political conflicts, certain degenerative tendencies of the capitalist system, and the lack of general economic elasticity caused by interventionism and monopolism, and untimely attempts at dodging the inevitable repercussions of the boom period. This school leans towards the laissez-faire outlook, severely condemning every attempt to shorten the allegedly salutary processes of liquidation and adjustment and vehemently urging the removal of all that stands in the way of the adaptation of the whole structure of prices and costs to the lower economic level demanded by the crisis. Its members do not deny that the crisis is characterized by a terrific process of contraction, very complicated in nature, and they may even reluctantly go so far as to apply the term “deflation” to this process. But they warn us that the phenomenon of deflation owes its origin to random and independent causes and they regard it as the inevitable manifestation of liquidation and readjustment. They beg us to rely on the well-founded hope that even this crisis will at the proper time give way, more or less spontaneously, to a new period of recovery, and that this will occur when the situation is ripe, i.e., when the crisis has fulfilled its purgatory mission and universal confidence has once again been restored. All that we can do, according to this restrictionist school, is to facilitate this mission by all possible means, leaving no stone unturned in the attempt to create a fresh atmosphere of confidence. There seems to be nothing for it but to go patiently through with the crisis unto the very end. Prices, costs, and incomes must be lowered over and over again, in accordance with the steady decline in the economic level; and at the same time State expenditure must be severely restricted, and if there is no other way of balancing the budget, taxes must be raised. Liquidation, adaptation, restriction, then, appear as the main features in the programme of this school of thought, which may be said to have been the dominant attitude in Germany under the Brüning Government and, in a less strict form, to be still the theory underlying the present economic policy of the countries of the Gold Bloc (France, Holland, and Switzerland).

The second school—we will call it the expansionist school—is not quite so easy to define since it contains a number of varieties ranging from a radical Left of wild monetary schemes to a conservative Right of well-dosed and carefully controlled credit expansion, and equally varied is the diagnosis of the present situation given by the adherents of these different subdivisions. The more moderate form of the expansionist theory may be summed up as follows: The present crisis is to be fundamentally and primarily regarded as a cyclical crisis, i.e., as the inevitable reaction of credit expansion and accumulation of capital in the leading countries during the last boom period. When regard is had to the unprecedented scale on which credit expansion and investment of capital had taken place a very painful reaction was to be expected. But had it not been for an unfortunate coincidence of various accidental factors, there would have been nothing to prevent the emergence in due course of a new equilibrium. These accidental factors which play such a prominent role in the more popular explanations of the crisis, and need not be repeated here, are responsible for the fact that a distinct degeneration of the crisis set in. Consequently, we have to distinguish between a primary and a secondary phase of the crisis, the latter being characterized by a vicious circle which constantly interferes with the attainment of a new equilibrium. We have, then, the cumulative process of recession which has been described at greater length in § 16 of this book. In view of this development, the policy recommended by the restrictionist school seems only to make the vicious circle worse. The only sensible thing to do, according to the expansionist school, is to stop the circulus vitiosus and to turn it into a circulus salutaris in which recovery may gain force by its own momentum so that the cumulative process of recession will be replaced by a cumulative process of recovery. The way to bring this about is expansion in a sense which will be explained more fully in the next section.

As for the respective merits of these two schools, enough has been said in the course of this book, especially in the section on the secondary depression (§ 16), in order to make clear the position of the present author. With due allowances for necessary refinements and modifications, there seems to be rather strong evidence of the general superiority of the expansionist point of view. Considering the great importance of the subject, however, it may be useful, even at the cost of some repetition, to add some further remarks on the pros and contras of the restrictionist viewpoint with special reference to the experiences of Germany.

In order to form an opinion on the policy of deflation and liquidation it must be first recognized that every depression is a depression of profits occasioned by the fact that the price curve and the cost curve cut. The immediate consequence is that a proportional fall of prices and of costs—including, especially wages—would be a completely ineffective measure, while a price fall below the fall in costs would only augment the disparity between prices and costs. So the idea that was openly and seriously pursued for a long time in Germany that the equilibrium of the economic system could be re-established by a general lowering—by say 20 per cent.—of the whole price, cost and income level is superficial in the extreme. The level would have certainly fallen all along the line, but nothing would have been done to improve the disparity between prices and costs. Indeed, there is a danger that this essentially purely nominal measure may lead to a still further upsetting of the equilibrium since the difficulties of the transition from one level to the other throw new sand into the economic machine and add to uncertainty and nervousness. This effect is so much the more probable since the policy of general cuts—if it is to be carried out systematically—makes interference with existing contracts (long-term employment, delivery and loan contracts) inevitable and thus gives a destructive blow to the moral and psychological bases of the economic system which must plunge it deeper still into the depression. With the thoroughness and systematicness characteristic of the Germans this policy was carried to its extreme limits by the Fourth Emergency Decree (of 8th December 1931) of the Reich Government so that it looked as though the country which had established the world record for inflation was now striving to reach the summit of achievement for “deflation,” only with the difference that this new attainment was held by many people at the time to be a thoroughly praiseworthy accomplishment. The present writer made no secret at the time of his opinion that—contrary to what these circles believed—the policy of all-round cuts in the advanced stage of the depression was mistaken. His view was that so long as this policy was not resolutely cast aside there would not only be no chance of an economic revival but that a further progressive decline of economic activity was certainly to be expected. The further course of the German depression under the influence of the policy of all-round cuts has confirmed this opinion in every respect. The prophecy that the cuts would lead to a constantly increasing contraction of economic activity, to a progressive aggravation of the financial difficulties and therewith to an ever more self-denying heroism of emergency decrees, unfortunately turned out to be true—for reasons which are obvious if we keep in mind what has been said at a previous juncture (§ 16) on the cumulative process of the depression.

Those who, in spite of this, still spoke, until quite recently, of a necessary process of readjustment of the economic system, and would therefore have liked to shape all public trade-cycle policy accordingly, forgot that the depression all over the world had long since passed the stage where the adjustment and “cleaning up” necessary for the revival is accomplished. The depression had long since become devoid of every necessary function and was therefore without sense. It had in fact deteriorated into a process of murderous and ferocious destruction. It had led to the irritating paradox that vast possibilities of production and a constantly increasing poverty of the masses were standing side by side, the only explanation being that the forces which normally connect up production and consumption in our economic system into an harmonious whole had stupidly misfired. A further process of cleaning up seems to give proof of its own justification by the fact that in the course of this process more and more firms collapse and thus provide new tasks for the work of cleaning up, but it is the continuance of this process, the continual contraction of economic activity, which is responsible for mowing down firms in ever quicker succession. The “cleaning up” fanatics resemble people who are clearing a forest of dry wood—a thing that is highly commendable and gives light and air to the living trees—but who in order to speed up the work set fire to the dry trees. The unfortunate result then is that the fire spreads to the healthy trees, drying them up beforehand by the rising heat of the forest fire. The further the fire spreads the more dry trees there are, but it is the fire that dries them up and so makes them ready for cleaning out. And it may be imagined that our forest workmen would still assert entirely in good faith that it is still a “cleaning up” fire—by the side of which we may rub our hands in grim satisfaction—and not a raging forest fire!

It is not only the idea of a necessary “cleaning up” which lies at the back of the policy of cuts but also the widespread feeling that previously we have been living beyond our means and must now reaccustom ourselves to poverty and a simple life. The ascetically inclined even welcome the depression in so far as it helps us to relearn the virtue of self-denial, and at the same time the sentiment gains ground that those who still allow themselves this or that pleasure are obviously behaving out of keeping with the spirit of the age. Fewer and fewer people dare to display their wealth, and this new style of living eventually becomes the fashion. Tendencies to level up incomes which are more often based on vague sentiment than on calm consideration are combined with the puritanical wave. Almost every country, it seems, has at some time during the last depression gone through a period of being plagued by this puritan bad conscience about “too much spending” and the cry for a “drastic reduction of expenditure all round.” In Germany the atmosphere was thick with it during the chancellorship of Brüning, and the British “Economy Stunt” of 1931-32 seems to have amounted to the same thing. At the present moment the French are similarly afflicted.

Now it is undoubtedly correct that in the period before the crisis there was not the right proportionality everywhere. Not only the State but also many individuals—especially the middle classes—were living beyond their means. But to draw from this the conclusion that the whole standard of living must be lowered if we want to return to healthy conditions is premature. Is the present situation characterized after all then by a scarcity of goods instead of by an overflowing abundance of them? Are we not almost suffocating under the increased productive capacity which has been created by the progress in technique and organization of the last decade? Is not recovery from the depression synonymous with getting rid of the surplus of goods and productive capacity? Can a further reduction of consumption really be the way out? The ascetic eulogizing of self-denial and thrift as great and timely virtues is thus, contrary to the popular view, pernicious, since it results in demolishing a productive system which is adjusted to the production of an exceedingly abundant supply of goods.⁴

It is more difficult to prove unequivocally the error of another notion bound up with this same train of ideas, a notion which commences by claiming the necessity of increased capital accumulation and arrives thus at the recommendation that there should be a restriction of consumption and a lowering of income. It is clear, however, that it must be incorrect when we recall the earlier discussions of saving and investment (Chapter IV, page 97 ff.) and the real dynamics of the depression (Chapter IV, page 119 ff.). Economically considered, saving means the releasing of means of production, and the services of labour, for the production of future goods.⁵ Now nobody will deny that such a freeing of the means of production had taken place during the last depression to a great extent, only, unfortunately, these factors of production which had been set free were not being applied to the production of future goods, and the result was that the whole economic process, and with it the volume of money savings, was contracting. What was lacking then was not savings—in the sense of reserves of productive capacity available for the re-expansion of the economic system—but investments which would make use of these reserves and thus produce a rebuilding up of the shrunken economic process, accompanied by an automatic increase in the accumulation of money capital. A policy which pursues the aim of increasing savings leads to a continued shrinkage of the national income and is therefore self-frustrating. If we were to make the start of the economic recovery dependent on the economic system’s being sufficiently enriched with money capital provided out of savings beforehand, if we were to pursue a policy stubbornly directed towards raising the amount of savings at all costs, we should as things are at the time of a secondary depression be promoting the permanent duration of the depression.

There still remains the question whether it would not be helpful if we were at least to lower the level of wages. It is now beyond all doubt that the wage level was raised too high in many countries in the course of the last boom and that harmful effects have followed. Accordingly, we have to recognize the necessity of making the regular apparatus of wage adjustment again flexible. There is agreement on this question even among the labourers. Here, again, there is thus nothing to be said against the re-establishment of the elasticity of the labour market if it is earnestly accompanied in like measure by the restoration of elasticity in other spheres in which State intervention and monopolistic formations have produced immobility. It is quite another question whether in the last phase of the depression the lowering of the general level of wages is a measure suitable to preparing the way towards economic revival. This question must be answered in the negative so long as the “slack” created by the cut in wages does not give an incentive to the revival of activity in other parts of the economic system. So long as this is not the case, all cuts lead only to an aggravation of the depression since they cause a falling off in demand without putting any new demand in its place in other spheres. In other words, pursued within the framework of a restrictionist policy and without simultaneous measures of expansion, wage-cutting is liable to aggravate the depression. Considering the level of wages which has now already been reached, it is anyhow very doubtful to-day whether a general lowering of wages—which only had a function as part of a trade-cycle policy so long as it was connected with a policy of expansion—is any longer needed in order to secure the necessary “play” for a revival of economic activity.

The final question is whether a restrictionist policy might not be based on considerations of external equilibrium, that is, of the foreign exchange situation. We propose to deal with this question in the next section in connexion with the possibilities of an expansionist policy.

§ 25. EXPANSION: ITS NATURE AND SIGNIFICANCE.

It cannot be the purpose of this section to go into a monotonous repetition of the description of the nature of the secondary depression which is such as to call for expansion as the logical remedy instead of restriction. It is to be feared, however, that to leave matters there would promise little hope of advancing the embittered discussion between the restrictionists and the expansionists beyond its present unsatisfactory point where both schools are lined up against each other like the Montecchi and Capuletti. Or to use another simile: The restrictionist school may be compared to a well-meaning and experienced mother, who, standing no nonsense, accepts the diagnosis that her patient is still suffering, even after long years on a sickbed, from the effects of his debaucheries and feels it her duty, for fear of a fatal relapse, to harden her heart against his desire for plenty of food. According to the expansionist school, on the other hand, the lamentable condition of the patient has no longer anything to do with the debaucheries of the distant past, but is the result of a dangerous edema brought about by a long process of undernourishment. Both diagnosticians, standing by the bedside of the poor patient, are fervently protesting that the patient will be killed, the one being accused of luring him on to fresh debauchery, the other of leaving him to die of hunger—in spite of the intentions of both being the best in the world.

Though the expansionist school is, in the natural course of events, everywhere gradually gaining the upper hand, and modifying fairly perceptibly the stern attitude of the restrictionists, it is still a matter of urgent necessity to stop the scientific warfare between the two schools, with its reciprocated abuse of “sadistic deflationists” and “foolhardy inflationists,” and to work for a reconciliation that will be something more than a weak compromise.

With this end in view it should be pointed out that each school comprises a variety of opinions and that the most satisfactory solution of the whole problem will be found in a judicious combination of all that is essentially sound on both sides. And so we are finally compelled to realize that the division into two schools is rather clumsy and superficial and hinders a better understanding of the problem. To begin with, it should not be denied that the restrictionists are absolutely right in their diagnosis of the primary crisis and in their opposition to premature attempts at re-expansion. And it seems certain that their general attitude will once again become extremely sound when the circle has swung round and a new boom of an inflationary character is in sight (which may come sooner than it is expected to-day). Furthermore, the majority of expansionists cannot but offer their sincerest approval of the restrictionist’s insistent demand that the machinery of our economic system should be cleared of the cartloads of sand which, in the form of tariffs, price-fixing, subsidies, valorization schemes, foreign exchange control, manipulation of wages, monopolism, &c, have been so liberally thrown into it during the last decade.

All this goes to show that the advocacy of a policy of expansion is not inconsistent with that of a policy of readjustment, which wise expansionists will indeed favour. Expansion and readjustment are not only compatible with each other, but must be combined if the best possible result is to be assured. On the one hand, there is no great chance of successfully combating the manifold interventions and economic rigidities unless the economic pressure is being relieved by expansion and the first signs of recovery are being felt; the opposite course means putting the cart before the horse. It is just the atmosphere of hopeless depression where an economic policy thrives which plunges deeper and deeper into the muddy depths of interventionism and tears our economic system into pieces. The lamentable failure of the late World Economic Conference in London (1933) with its great and very laudable efforts in preaching a reasonable commercial policy is one of the outstanding proofs of the truth of this statement. In fact, it is not too much to say that expansion is necessary to save capitalism from complete decay and give force to the struggle against the hysteria which is all too prevalent a feature of the present time. On the other hand, expansion is extremely apt to lead to a dangerous development unless it is combined with a number of restrictive and liquidating measures.

The greatest confusion of all, however, in the issue between restrictionism and expansionism has been created by the completely erroneous, though very popular, notion that advocacy of expansion means advocacy of a drastic rise in the general price level (reflation). The reader will by now have become sufficiently familiar with this “price-level complex” to understand why Expansion is not to be interpreted as Reflation. This interpretation is the more dangerous since it is very apt to lead to the still less defensible notion that Expansion is to be interpreted as Devaluation. It is true that it is impossible to imagine a business revival without an expansion of credit. That is what the restrictionists need to realize. But it is easy to imagine—and this is what many expansionists need to realize—a business revival without a perceptible rise of the general price level. Moreover, it is to be feared that if a higher general price level is the objective, business-cycle policy may be led into the maleficent belief that going off gold and lowering the external value of the currency is a good way to. achieve this goal. This is exactly what has recently happened in the United States. There is no reason whatsoever why the Americans should have tampered with the external value of the dollar to bring about a marked recovery, and there is every reason why they should have refrained from doing so in order to save themselves and the rest of the world a great deal of unnecessary trouble.

Evidently, the policy of expansion—by which is meant an effective expansion of credit, leading to an expansion of the volume of production, incomes, and demand—can be carried fairly far without bringing about a marked rise of the general price level because, at this stage of the depression, it will be a compensatory credit expansion and not an inflationary one. It is expansion—or re-expansion—that is wanted, not reflation. There is only one serious objection which might be raised here. The advocates of reflation might point out that a mere policy of re-expansion seems incapable of solving the urgent problem of general over-indebtedness, and that, for this reason alone, a sharp rise of the general price level is indispensable. There is no denying the fact that the general over-indebtedness constitutes a most urgent and grave problem which must be solved in one way or another to pave the way to recovery, but it can hardly be said that reflation presents the only or even the best solution. It is only one among a number of other solutions and is far from being the most recommendable of these.

The first solution is to do nothing and to let things take their natural course. In this case, we leave the task of bringing the volume of debts down to the level of the contracted volume of production, prices, and incomes to the institution of bankruptcy or to individual debt settlements. Though this is the normal solution corresponding to the inherent nature of our economic system, the depression is, in most countries, too far advanced by now to make this course feasible, quite apart from considerations of social justice. There is no sense any more in aggravating the depression by this rough and cruel method. The second solution is the all-round relief of debtors by legal reductions of the rate of interest or of the amount of the debt itself. This compulsory method is the ultimate consequence of any determined policy of deflation (restriction), i.e., of a policy aiming at regaining equilibrium solely by the contraction of costs. It is hardly necessary to say, however, that it is a very crude and mechanically working method which, by causing disturbances on the credit markets, is liable to retard recovery and, by scaring borrowers, to work ultimately against the very interests of the debtors even. A very deterrent example of this was the deflationary policy of the Brüning Government in Germany. The third solution is reflation, i.e., the reduction of the real value of the burden of debts by a lowering of the purchasing power of money. But this also is a very clumsy and inorganic method very much inferior to the fourth solution of re-expansion, i.e., of making the burden of debts again bearable not by raising prices but by augmenting the volume of production and turnover so as to adjust it to the large volume of indebtedness. It must be admitted that the problem of agricultural indebtedness has special features, but this is the concern of a constructive agricultural policy which should not be allowed to push the business-cycle policy off the sound road of re-expansion rather than reflation as it has done in the United States.

So we see that the expansionist can and, as I think, must join whole-heartedly with the restrictionist in his stand against reflation, and, consequently, the restrictionist should learn to differentiate more carefully between his adversaries and to realize that most of his polemic efforts are wasted on propositions which are attacked just as much by a number of expansionists. What has been said, from an expansionist point of view, against reflation applies a fortiori to devaluation. Since this notion plays such an important role in the current discussion on the right method to combat the depression, some additional remarks may not be out of place.

As regards the usefulness of devaluation in combating the depression, two different ideas have to be clearly distinguished. The one idea is that the devaluation of the national money may itself be an efficient instrument for abating the crisis; the other is that it may be an indispensable prerequisite for credit expansion.

Regarding the first idea, it is not always made clear how the devaluation of the currency can work the miracle of putting an end to depression. The reasoning underlying this idea is for the most part a particularly confused set of half-baked notions about some causal relationship between the internal purchasing power of money and its foreign exchange value. A sober examination of the problem shows that there are only two possibilities which can give any grounds for the expectation that the devaluation of the currency would be an effective remedy against depression.

The first is that it might restore the external equilibrium of a country and thus give a new impulse to economic activity. It cannot be denied that, under certain circumstances, devaluation might be a rather smooth way of restoring the external equilibrium of a country, though a number of factors are to be reckoned with which are liable to exert a disturbing influence. There are other ways of doing it which are at least worthy of consideration, but there are certainly cases where, on balance, the method of devaluation might be defended as the least evil. England, the Dominions, the Scandinavian countries, and Finland might be cited as examples, and there can hardly be any doubt that after the majority of the countries have devalued, devaluation may be a practical way of restoring external equilibrium for the few gold-parity countries which are still left. But apart from this special problem of the present moment, we are faced here with a very difficult dilemma. For, on the one side, devaluation will work the more safely the greater and the more important is the country or the block of countries which puts it into practice, while the devaluation of the currency of a “country” like the unhappy city of Danzig, is a real tragedy tinged with comedy.

On the other side, however, the greater and the more important is the country the more disastrous will be the effect on the world as a whole. This is precisely what the break in sterling did. Undoubtedly, England could afford to devaluate its currency together with the Empire, but we must remember what a terrific shock it was for the whole world to find that even the pound and the Bank of England were no more the proverbially solid rock. All lenders and investors became scared. Nothing, it seemed, could be trusted any more except gold, and thus the effect on the whole world of the devaluation of the pound and the other currencies was an all-round international contraction of credit and a general scramble for gold. Gold, as the last anchor of confidence, rose in value everywhere, which was equivalent to a further decline of prices measured in gold, and then with the breakdown of the machinery of international credit the formidable Juggernaut of sky-high tariffs, quotas, exchange control and clearing arrangements was set in motion. The devaluation of the pound and later of the dollar, consequently, meant nothing less than further deflation for the rest of the world with its inevitable repercussions on England and on the United States. We may be ready to grant England every possible excuse, but it should be clear that what the world needs now is a complete rest from monetary shocks and a gradual return to the normal.

The second possibility that devaluation may work per se as an effective remedy against depression is still less real. It rests on the idea that, even if there is no external equilibrium to be restored, devaluation may act as a stimulus to economic activity by raising the internal price level. This idea is a very muddled one, because if the external equilibrium of the country had not been disturbed and there is no increase of the volume of money and credit taking place simultaneously with the devaluation, how can devaluation raise the internal price level? The one chance is that it may create the belief in a permanent rise of the price level and thus, by a sort of shock tactics, really give rise to a speculative boom characterized by rising prices.⁶ But as long as there is no real expansion of credit—which has, however, a slight chance of being evoked by the speculative boom—a dangerous reaction is bound to occur sooner or later. This is exactly what happened in the United States during the first year of the New Deal until a real expansion of credit was started.

So much for the idea that devaluation per se would be an efficient instrument for abating the crisis. Let us see whether the case for using devaluation as a prerequisite for credit expansion is any stronger. Here we are touching upon a question which has already been dealt with at greater length at an earlier stage of the discussion (§ 22). We repeat, then, that the need for devaluation could arise only if the policy of expansion were to bring about a rise of the price level and a disturbance of the balance of payments. It would be wrong, however, to suppose that anything like this is necessarily bound to happen. It is a common error to mistake the compensatory credit expansion, which is necessary for stopping the depression, with the inflationary credit expansion of the boom period and to forget that the former draws on the unused productive reserves which correspond to the deficit of purchasing power engendered by deflation. It is not easy, therefore, to see why a tendency towards rising prices should be expected. It is even possible that the fuller use of the productive resources might tend to lower prices. Allowance must be made, of course, for cases where it would not be wise to rely on this hope or where the actual level of prices and costs is too high compared with the competing countries. Even in these cases, however, it would not be necessary to depreciate the external value of the money since it would still be possible to cope with the situation by lowering wages. It is true that, without a simultaneous policy of expansion, wage-cutting is almost certain to aggravate the depression, but as part of a policy of expansion it might not only fail to do this but might even become an indispensable condition for real success. It can be argued, moreover, that it might be easier to lower wages in the atmosphere of a buoyant programme of expansive reconstruction than in the drab atmosphere of a melancholic programme of restriction and retrenchment, the more so if the workers are confronted with the uninviting alternative of devaluation. In all this, regard has always to be had to the fact that whether a simultaneous policy of lowering costs is really necessary depends on the special circumstances of every country.

As a last point, it might be argued that the policy of expansion may possibly jeopardize the stability of the foreign exchanges by evoking distrust in the future stability of the currency and thus causing a flight of capital. This is certainly a point which is of no little importance, and every care should be taken with regard to it in the technical execution of the policy of expansion. On the other hand, however, there is certainly a good chance that what there is of a tendency in this direction might be compensated by the confidence-inspiring effect of a decline in the number of unemployed, bankruptcies, or political riots. It should not be forgotten, in this connexion, that the recent attacks on the countries of the Gold Bloc were able to gain strength only on account of the growing distrust in the economic and political future of those deflation-ridden countries. Furthermore, it is to be observed that in countries where the banking system is closely connected with industry as in Germany, Switzerland, and Austria, the crisis in the sphere of production immediately impairs the position of the banks, spreading distrust among their depositors and thus putting a strain on the balance of payments. There comes a moment, therefore, from which time onwards a policy of expansion on the basis of the Gold Standard encounters growing difficulties instead of being made easier by the lapse of time. On the other hand, it is to be surmised that a recovery in the sphere of production, by thawing frozen industrial assets and thus improving the position of the banks, acts in the direction of reducing any danger for the Gold Standard that might come from this quarter. Summing up this argument, we may conclude, then, that it is very questionable whether devaluation is a necessary prerequisite for carrying through a policy of expansion. On the contrary, it is highly probable that it will introduce a dangerously disturbing element, for reasons which need not be repeated here.

Despite his unsparing efforts to explain the rationale of expansion, the author cannot overcome the uneasy feeling that there may still be people who vigorously decry expansion as inflation. They are so obsessed by the fear of inflation that every enlargement of the volume of money and demand, no matter under what circumstances it occurs, is characterized by them as inflation, and all such expressions as “expansion” or “reflation” are, in their eyes, nothing else but a terminological smoke-screen to disguise the invariable policy of inflation. Now, the present author has every sympathy with the fear of the terrible scourge of inflation, and during the Great Inflation in Germany he was among those economists who spared no effort to divert the monetary policy of the government from its catastrophic course. That was a time for sounding the alarm-bell. During the last boom also, there was every reason to worry about inflation, and it is more than probable that after the present depression there will again come a time—perhaps very soon—when it will behove the economist to be on the look out for renewed inflation. But there has never been a more inappropriate time to worry about inflation than the present depression when the world is suffering from the worst case of the opposite evil, i.e., deflation, and it is doubtful whether the devastating effects of this deflation do not actually surpass the devastating effects of the worst inflations. Are we really to believe that there is no middle course between the “arctic hell” of deflation and the tropical heat of inflation? Is it arson to kindle a cosy fire in a freezing room? Of course, there is always the danger that we may set the house on fire, but is it not pathological pyrophobia to leave the fire in the stove unkindled by reason of such a remote danger? If the scaremongers had their way, we should apparently have to submit to an unlimited degree of economic contraction, and if deflation had been driven so far that the last bank note were to disappear from circulation it would be “inflation” to put it back into circulation again. I am not in the least scared by the fact that expansion does mean an enlargement of the volume of money and credit, and ardently hope, moreover, that it will be so, since it is the only way to get out of a depression. In the present situation not to want an increase of circulating media is simply tantamount to not wanting recovery. Consequently, if recovery should unexpectedly set in spontaneously, the same logic demands that it should be strangled deliberately.

Thus there is no getting away from the fact that recovery is expansion, and the only point to be discussed is whether we should wait until it comes spontaneously or whether we should do something to bring it about deliberately. And, finally, how often must it be repeated that at the present moment credit expansion, drawing as it does on the unused reserves of productive capacity is a compensatory one, and that it will become inflationary only when recovery has developed so far as to absorb all those reserves? In saying this, one must be quite aware that the danger of inflation may, after a while, become a real one. Neither is it to be denied that a crude form of the policy of expansion might harbour some danger in this direction, i.e., if it is carried through in a manner and under circumstances which make the attempts at “ignition” unsuccessful. But it is possible to exaggerate these dangers since wherever a policy of expansion—with the possible exceptions of Germany, Italy and Japan—has been launched, no real symptoms of inflation have as yet become noticeable. The big inflations after the war have left, moreover, such a powerful impression on the contemporary mind that most people seem to underrate the time which usually elapses before inflation grows to any perceptible dimensions, just as it is common to underestimate the enormous elasticity of our economic system. Therefore, it is well to recall how long it took even in Germany and under the most adverse circumstances before the first signs of inflation became visible during the war.

Resuming the general trend of the exposition on the nature of expansion, we note that it is neither reflation nor devaluation nor—least of all—inflation. In all these respects, it is certainly not what most of the adversaries of expansion imagine it to be. But still less is it Planning. To confuse a policy of expansion with Planning shows exactly the same lack of discrimination as that which leads people to believe that there is an exclusive alternative between internal or external stability (the Doctrine of Alternative Stability) or between deflation and inflation. This general lack of discrimination with its crude mental patterns is really one of the great curses of our times and cannot be too strongly attacked. No progress is to be hoped for unless we cease to think in terms of these crude alternatives with their futile polemics. This is what is most badly needed in the discussion of the issue between laissez-faire and Planning. A policy of expansion is certainly not laissez-faire, but is it therefore Planning?

Let us start with attempting to give a clearer definition. The term “Planning” no doubt owes much of its present popularity to the fact that it is being used more and more in a sense which covers almost every conceivable activity of the State in economic policy. Since some sort of activity on the part of the State is demanded by almost everyone to-day, the looseness in the use of the term “Planning” is very useful for advertising it and for coaxing the masses into the belief that the world is headed towards Planning. The term itself is very helpful in carrying through this cunning manœuvre since it is difficult to imagine any act of economic policy which does not involve some sort of a “plan.” Even the imposition of a protective tariff is based on a preconceived plan of the structure of production of the country in question, but obviously it would be absurd to say that a protective tariff means Planning. The same is true in the case of the construction of public roads or State railways, and even the public works which are so popular nowadays as a remedy against depression hardly constitute a planned economy. Most cities have been built according to some sort of plan, and the monetary and financial policy of many countries has also assumed more and more the character of regulative measures which take into account the course of the entire national economy.

If all these things are “planning,” then the term becomes absolutely meaningless. We should then have had planning since the dawn of history, for economic life has always been subjected to certain rules and collective influences. And then, of course, capitalism would be a Planned Economy too, since the legal and institutional framework of this economic system also has been created in the light of systematic reasoning involving a preconceived idea of the competitive economy as a whole. Capitalism has been deliberately “planned” as a system which needed no further Planning. We conclude therefrom that if the term is to retain any meaning at all it must not be applied to an economic policy characterized by a “plan,” for that is true in the case of any economic policy, even in that of economic Liberalism whose plan it is not to “Plan.” Therefore, it is not the “plan” as such which characterizes Planning but a certain method of executing it, i.e., the method which is the contrary of that of the competitive market economy. While the latter is based on the complicated interaction of spontaneous decisions of all groups on the market, it is the essence of Planning to replace this mechanism of spontaneous reactions by commands from above and to hand over the all-important decision as to the allocation of the productive forces of the community to the office of a governmental department.

All this goes to show that the term “Planning” is extremely misleading, and badly in need of being replaced by some other term such as will really express its contrast to the market economy. Perhaps “Office Economy” would not be bad, or “Command Economy,” or even “Red-tape Economy.”⁷ But if we keep to the term “Planning” we should not tolerate any vague use of this word and must demand that it be strictly reserved for denoting an economic policy which replaces the mechanism of the free market by governmental command. Planning in this sense must be distinguished from such kinds of intervention as are in accordance with the inner structure of our economic system (conformable intervention), which leave intact the market mechanism itself and attain their objective not by contravening the rules of this mechanism but by making use of them. To this type of conformable intervention there belongs the traditional tariff policy, as contrasted with a policy of quotas, clearings, or exchange controls which present examples of non-conformable intervention or Planning.⁸ Sunday-rest regulations are again a case of conformable intervention while price-fixing is an example of a non-conformable intervention. A good test of whether or not an intervention belongs to the non-conformable category (Planning) is the well-known fact that measures of this kind are liable to start a chain of repercussions necessitating more radical acts of intervention until we finally arrive at a Collectivist Economy pure and simple, a fact which is well illustrated by the experiences with the policies of fixing maximum prices, especially in house rents after the war, and by the present trend in international commercial policy. Partial Planning, therefore, tends to develop into Total Planning by its own motive force.

It is clear then that for trade-cycle policy the choice is not between laissez-faire and Planning but between laissez-faire, a conformable trade-cycle policy and Planning. The laissez-faire case can be discarded as impracticable since it is obvious that something has to be done to overcome this depression and to prevent the recurrence of another. There remains the choice between a conformable business-cycle policy and Planning. Here at last we have a clear alternative which we cannot escape: either we want to overcome the present depression by setting again in motion the normal mechanism of reactions of the market economy or, if we think that we must have recourse to Planning, we must recognize that we have to replace the entire mechanism of the market economy by collectivist Office Economy. We must make up our minds as to the direction we are taking and not count on the possibility of an easy compromise. If we recoil, not without justification, from total Office Economy we have to realize that the success of whatever we may do depends on the reconstruction of the mechanism of the market economy. First of all, we must know that, whether we like it or not, we are dependent on the entrepreneurs and their optimistic mood, that we must not drive them to exasperation and at the same time be surprised that recovery will not come. Not only, then, is judicious activity in combating the depression compatible with forgoing any idea of Planning, but, on the contrary, combining it with Planning is a sure way to compromise any success of an active policy in combating the depression. It must be clearly understood that the whole philosophy of expansion is based on a framework of economic reactions which would be destroyed if a country embarking on such a policy should at the same time try to remodel its economic system on socialistic or— what is closely related to it—on autarkistic lines. The experiences especially of Germany in recent years seem sufficiently to prove that a policy of expansion eventually stultifies itself if it disturbs by all kinds of non-conformable intervention the mechanism of economic reactions which it is calculated to resuscitate. Again, the disappointments of the New Deal in the United States must be largely imputed to the same cause. All the wails over the shortcomings of the competitive system and all the vague yearning for the better organization of production cannot get away from the fact that, as long as we do not take the foolhardy plunge into the total Office or Command Economy, all measures of Planning are liable only to hinder recovery. The importance of this statement is not impaired by the other fact that our competitive market system (“capitalism”) possesses such an incredible vitality and such an astounding elasticity that it can digest a considerable number of obstructions before it succumbs. It is, indeed, hard to kill, but some countries have already come quite near to the breaking-point.

It is from the same point of view that we must treat the present tendencies, noticeable in many countries, to subject the volume of production and the establishment of new plants to a strict governmental control.¹ When there is over-production and unused productive capacity, would it not be sensible to order a reduction of output and to prevent newcomers from invading overcrowded industries? Not at all. Leaving aside the special case of the restriction of agricultural production, it may be said unhesitatingly that this revival of the medieval principle of numerus clausus is a very short-sighted interference with the dynamic forces of our economic system which should be stimulated instead of being strangled. If there are enterprising persons to-day who have enough optimism and courage to undertake new investment we have every reason for rejoicing, for that is just what we need in the interests of recovery. They should be encouraged instead of being intimidated, even if they are uncomfortable competitors for the old-established firms and a danger to vested interests. If the State does not leave it to individuals to decide whether one line of production is to be preferred to another it kills the economic reactions on which we must rely in our hopes for recovery unless the State takes over the complete control of the national economy. And the fear of a misdirection of investment? This is again one of those economic scares based on a narrow and static view of the economic process. Capitalism is an economic system which, when its dynamic forces are in full swing, can afford to sow its seeds on barren ground, and the best way to bring those forces into full swing is to let capitalism sow its seeds. The waste of misdirected investment during the secondary depression is a trifle compared with the additions to the total wealth concomitant with recovery, and it is just those experimental investments which are usually essential for turning the tide. The development of capitalism is unthinkable without faulty investments, and perhaps most of us would not have been born were it not for the stormy growth of the productive forces brought about by recurrent waves of experimental investments, directed at one time towards railways, at another towards electrical or other lines of investment. To fight against the whole of this illiberal spirit of jealous narrow-mindedness and of thinking in terms of the status quo instead of in terms of potentialities is not the least important part of the philosophy of expansion.

The issue between laissez-faire, a conformable trade-cycle policy and Planning may be summed up as follows. In certain circumstances, it is just as wrong to rely on the natural respiration of economic life resuming automatically as it is wrong to club it to death and then to make attempts at replacing the natural organism by an artificial one made of tin and wire. Both the uncompromising Liberal and the Planner—each is wrong where the other is right, and right where the other is wrong. The uncompromising Liberal is right in his recommendation to stick to the essential principles of our competitive market system, but he may be wrong in relying on the automatic mechanism of this system for overcoming the secondary depression; the Planner is right in demanding an active policy against depression, but irremediably wrong in suggesting Planning as the right method. Why not combine what is right on both sides? Why should it not be possible to agree on a policy of reanimating the natural respiration? That is just what the policy of expansion will do so long as it is strictly confined to conformable intervention.

To avoid any possible misunderstanding this section may be concluded by the remark that the conflict between the expansionist and the restrictionist school gives way when a spontaneous recovery really begins to develop. Since the artificial measures advocated by the expansionists are to be merely a temporary makeshift for a spontaneous recovery there is no point in insisting on them when the latter is already under way.

§ 26. THE TECHNIQUE OF EXPANSION: SOME RECENT EXPERIENCES.

The essence of the technique of the policy of expansion conceived in a manner explained in the last paragraph consists in compensating deflation by re-expansion in a way which anxiously avoids interfering with the process of the market economy. No uniform prescription can be given for achieving this end. The technique of expansion must be adapted to the special circumstances of each country, without any dogmatic views on the invariable merits of this or that method. In milder cases, there may still be a chance of stimulating private initiative by various measures of a “provocative therapy,” combining a “cheap money policy,” aided especially by a vigorous Open Market Policy, with special incentives to new investment (e.g., tax exemptions for installing new machinery or for building purposes, propaganda, new tariffs for special industries,² or—still better—opening new outlets for exports by diminishing tariff barriers). The case of Great Britain is the outstanding example of such a policy, but it is doubtful whether it would have been successful in many other countries.

Similar attempts in the United States under President Hoover and in Germany have clearly failed. If private initiative does not respond sufficiently to the incentives offered to it, so that the effect of “ignition” fails to appear, there is no other way than to complement this policy by public initiative in enlarging the volume of credit and demand. If the private entrepreneurs do not make use of the new credit facilities, in other words, if private borrowers are not to be found in a sufficiently large number, then the State must step in as an extensive borrower in order to make credit expansion really effective and thus to help drag the market economy out of its present deadlock. Or to use expressions employed earlier in this book: the public sector of the national economy has to be enlarged to make up for the contraction of the private sector and to start a process leading to the re-expansion of the latter. As soon as the re-expansion of the private sector is sufficiently under way so that the economic circuit, relieved of its torpor, is working again, the expansion of the public sector must be stopped and must even be turned into contraction if private expansion assumes anything approaching inflationary dimensions.

The general principle, then, of a policy of expansion by public initiative is to start credit expansion by using the State as the pioneer in starting up new borrowing in place of the scared entrepreneurs. Once this general principle is understood, it is only a technical question how to execute this programme. To this end two broad courses are open. The one is to bring about deliberately a regular budget deficit by the abolition or lowering of taxes or by raising expenditure or by both. The other is to borrow in order to finance large public works or, in other words, to create a budget deficit by expenditure of an extraordinary and special nature. Both methods have their advantages and disadvantages which have to be weighed up against each other without any dogmatic preferences or political prejudices.³

The first method of deliberately creating a regular budget deficit appears especially advantageous if the budget deficit is brought about by abolishing or lowering those taxes which, as explained on an earlier occasion (§ 21), fall most heavily on production and enterprise (business taxes, turnover taxes, stock exchange taxes, &c). In this way two birds would be killed with one stone. An expansion of credit would be effected as a result of the State’s additional demand for credit, and at the same time a very strong stimulus would be provided to private initiative, causing an expansion of credit in the private sector also. This method thus presents an attractive combination of the policy of expansion by public initiative with the “provocative therapy” applied to the private sector. This is equivalent to saying that it has the great advantage of departing in the least possible degree from the normal behaviour of our economic system. Connected with this is the other appreciable advantage that it is most conducive to creating a psychological atmosphere of normalcy which gives little chance to all sorts of wild reformers of hysterically hailing the beginning of a “new epoch.” Finally, this method has the merit of working promptly and without the need of a new and costly organization whereas it takes a considerable time to develop a programme of public works. On the other hand, it has the great psychological drawback that it does not sugar the bitter pill of a budget deficit. To cover regular expenditure by increasing public indebtedness seems to run counter to the most sacred principles of orthodox public finance. It takes strong nerves cold-bloodedly to stand the sight of such a budget deficit in all its naked horror, and most people perhaps would prefer to draw over it the merciful veil of public works. Whatever we may do to mitigate these fears, we have to accept them for the moment and to shape our programme according to them. This psychological drawback becomes especially important if the budget deficit has to be covered not by short-term advances but by government issues offered for public subscription. In this case it is to be feared that a mere budget deficit to be covered by these bonds will seem less attractive to the imagination of the public than public works. Shining automobile roads, water-dams or cleared slums look rather nice on posters inviting the public to buy government bonds while the mere gap between revenue and expenditure lends itself less readily to artistic propaganda. These are some of the psychological points which have to be very seriously considered. It has to be kept in mind, moreover, that making an excusable exception of the principles of conscientious administration of public finances might render it very difficult later on to bring those principles back to the respect which they deserve. It is certainly extremely dangerous to make, even for a short while and under exceptional circumstances, the spirit of financial recklessness respectable—though in these times of the secondary depression there is nothing that is not dangerous, most of all the policy of letting things drift.

A rather interesting experiment with a very mild form of this method was made in Germany towards the end of 1932 under Chancellor von Papen. It was based on providing incentives for new investment by private entrepreneurs. These incentives consisted mainly of certificates to be given to business men in return for payment of those taxes which, as explained above, may be regarded as a direct burden on production, in the sense that their removal may be expected to react promptly on the willingness of entrepreneurs to undertake new investment. The certificates (Steuergutscheine) were to be redeemed at a later date, together with a certain agio, and they were made rediscountable at the Reichsbank so as to give them the character of negotiable paper of the most liquid type. What in effect the plan amounted to was that the most burdensome taxes (business taxes, turnover tax, &c.), while not actually being abolished, were transformed into liquid assets. The whole system was rather complicated, but its meaning can be summed up by saying that in the place of these taxes there was instituted a forced loan, the titles to which, thanks to the collaboration of the banking system, could be sold or employed as collateral. In other words, a certain amount of taxes were virtually abolished, but the financial burden of this abolition was temporarily shifted from the State to the banking system, which would expand credit to the corresponding degree. This assumed that business men would employ their certificates, not for paying off or consolidating old debts—improving their own liquidity thereby—but for making new investments in working or fixed capital. The behaviour of the entrepreneur of course constituted the real problem. While he might or might not respond to the stimuli administered to him, on the whole it appeared likely, at that time, that the degree of response would be insufficient to render the pull effective. The only result would then be an improvement of private balance-sheets and an increase of the public debt, without any visible alleviation of general economic conditions. For these reasons, the Papen Plan did not prove, indeed, a great success. The success would undoubtedly have been much greater if the government had had the courage to abolish the taxes in question without the roundabout way of the tax certificates. In this case a prompt expansion of credit would have been ensured, regardless of the uncertain behaviour of the entrepreneurs. For this reason it has been a very illuminating experiment.

The advantages of the first method are, to a large extent, the disadvantages of the second method (i.e., the method of public works), and vice versa. It takes rather a long time to develop the latter, and it gives rise to new and costly organizations. It must be considered as a further disadvantage of this method that it is very apt to create the impression of a marked departure from the normal behaviour of our economic system so that there is much unnecessary talk about Planning and the dawn of a “new era,” though, on the other hand, it can be argued that it may be the least harmful diversion of the socialistic leanings of our times. A much discussed point is whether public works mean a waste of productive resources. As contrasted with the first method, it could be argued that in the case of public works we have at least something to show for the budget deficit, or, to put it in another way, public works might be said to bridge the gap between saving and investment by raising investment instead of decreasing (or wasting) saving. There seems to be some misunderstanding here, however. The difference in the primary effects of the two methods must not be mistaken for a difference in their ultimate effect which is to overcome the depression by setting the normal circuit of economic life again in action and by equalizing saving and investment on the highest possible level of investment compatible with the volume of voluntary savings. The fact that in the case of public works the primary (“pulling”) effect is connected with the construction of public roads or other things is really not so important since the first method also will give rise to new investments, which may perhaps be more in accordance with the preference scales of the community. It is just this point which many adversaries of public works have in mind. It is, indeed, not always easy to find, in the necessary amount, projects for public works which can be defended as compared with the private investments evoked by the first method. This comparison as regards a possible waste by public works is an essential point. Compared, however, with the waste of doing nothing at all, any waste in executing more or less unnecessary public works appears rather insignificant. Consequently, the only people who are entitled to criticize the possibly wasteful character of public works are those who can suggest a better method of expansion. Compared with the first method, public works have the advantage that they represent a form of budget deficit which facilitates the task of abating the psychological shock of such a bold course and of letting it appear less reckless and adventurous, though there will be differences, in this respect, from country to country. A last point to be considered is whether the very fact that public works attack the problem of the economic deadlock from outside the private market system, might not, apart from its psychological drawbacks, offer some advantage of a more mechanical character, since it transfers the starting point into a non-competitive sphere, perhaps avoiding thereby a good deal of primary friction.⁴

The conclusion to be drawn from this discussion of the two methods of public expansion is that their respective advantages and disadvantages are so much in the balance as to make it impossible to say beforehand which is superior. As a general rule, therefore, it seems advisable to combine both in the manner best suited to the special circumstances of each country. In both cases, it is an essential condition, however, that the government should raise the funds for its programme in a way which really ensures an expansion of money and credit. Nothing would be gained, therefore, if the funds were to come out of savings which would have been invested in any case. That is the reason why there is some doubt as to the usefulness of raising the funds by placing long-term issues on the capital market. This method would result in expansion only under one of two conditions. Either there must be bank advances to contractors or to the subscribers to the loans issued by the government, or, if this is not the case, the funds must come from hoards (including idle deposits) which would not have been invested save for the special attractions of the government issues. The prospects of the latter are not too bright since there is no reason why anybody who is prepared to invest should not have other almost equally attractive opportunities for investment. Idle money might be lured out to some extent, but as this must of necessity be rather small, only a fraction of the public expansion necessary for an effective “pull” can be financed in this way. The bulk, therefore, must be financed by short-term advances the technique of which will not be discussed here. This is, moreover, the method which exactly corresponds to the financial situation at the time of the advanced depression when an exceedingly low rate of interest prevails on the money market while the rate on the capital market remains relatively high. It seems, therefore, logical for a policy of public expansion to draw by preference on the easy money market instead of the still rather tight capital market. Repulsive as this idea must seem from the point of view of the normal principles of sound finance, there is, indeed, a special virtue, at this extraordinary period, in preferring short-term advances to long-term notations for financing public expansion. The consolidating of these advances later on during the full development of recovery has the additional advantage of exerting a checking influence on the boom.

These, then, are the broad principles of a policy of expansion. It cannot be said too often, however, that complete success depends upon the skilful and considerate hand with which it is executed with a view to the special conditions of the country, its general atmosphere, and the mentality of the people. It must be combined with a general economic policy which, marked by circumspection and sober consideration for continuity, is susceptible of inspiring confidence and optimism. A riotous political atmosphere, regimentation, economic rigidity, monetary instability, cynical boasting of unorthodoxy in economics and politics, legal insecurity, and lack of respect for contractual obligations—all these and many other things are fatal for a policy of expansion. The combining of expansion with the breaking up of economic rigidities, the balancing of orthodox with unorthodox measures, a minimum of new constructions and a maximum of conservatism, should be the guiding principle for a wise policy of expansion.⁵ The less we hear of “reconstruction” and “new epochs,” the more we avoid creating the impression that we need a new money or credit system,⁶ a new State, a new philosophy and newer and better economics, the greater will be the prospects of success. There is, however, a great danger in retarding the policy of expansion, for the longer we wait the more probable it becomes that the growing hysteria will finally result in a crude and reckless sort of expansion, if not in the complete upheaval of the economic and political structure of society.

While the success of a policy of expansion is fairly conspicuous in the case of Great Britain, of Sweden, of Australia and a number of other countries, there are some countries whose experiences are not so encouraging. Pre-eminent in this respect are the United States and Germany. Though much has been said already on the recovery programme of these two countries on various occasions in this book, it seems pertinent to refer to them again in a more coherent manner.

Everybody who was convinced that the economic recovery of the world was to be expected predominantly from a policy of expansion in the great creditor countries, felt relieved when in the spring of 1933 the Roosevelt Administration seemed determined to launch such a policy. But from the beginning the effect was spoilt by the fact that the Roosevelt Administration, influenced by a set of particularly confused ideas, pulled at levers which brought disorder into the whole mechanism of recovery, almost up to the present day. This confusion was a twofold one. Besides confusing re-expansion with reflation (in the sense explained on an earlier occasion), the Roosevelt Administration made the second mistake of pursuing this wrong goal by an equally wrong means, i.e., by abandoning the Gold Standard and depreciating the dollar, without going far, at first, in real expansion. Valuable time was lost in all kinds of monetary manœuvres for making the depreciation of the dollar really effective, while the opportunities of the World Economic Conference in London in the summer of 1933 were deliberately wasted. The inevitable reaction to the speculative boom brought about by the devaluation of the dollar gave rise, later on, to the familiar chain of more or less radical interventions which added considerably towards impairing the elasticity of the economic system and shaking the general confidence and optimism which were already undermined by the monetary instability. Small wonder that, in the face of these attacks on the mechanism of reactions of the American economic system and on the psychological attitude of the groups most important for recovery, the New Deal had a rather wavering success. It is rather a wonder, and altogether a credit to the vitality of American capitalism, that, in spite of these obstructions, a considerable measure of recovery has been achieved. But the great chance offered to the Roosevelt Administration in 1933 has been definitely missed. At that time it could have laid the foundations of a solid recovery and earned the gratitude of the whole world if it had combined a policy of effective expansion (by public works, lowering of burdensome taxes, incentives to new private investments, subsidies to farmers and other destitute groups, &c.) with a policy of adjustments in prices and costs and of staunch maintenance of the Gold Standard, ensuring by such a combination of boldness and confidence-inspiring conservatism the transmission of the igniting spark from the public to the private sector of the community. On the strength of the more encouraging development later on, the danger that the unfortunate combination chosen by the Roosevelt Administration for its policy of recovery might eventually result in an enormous volume of public indebtedness and in the economic systems being made inflexible and unmanageable by interventionist ossification, seems to have been averted, but in the meantime untold harm has been done to the country itself and to the world as a whole. No better proof of these views could be found than the fact that recently a very hopeful recovery has promptly set in immediately after the obstructive parts of the N.R.A. policy were removed and the dollar brought to rest.

Owing to the lack of exhaustive and reliable information, it is very difficult to give any approximately exact account of the German policy of recovery, the more so since the political implications of this case are very apt to lead even the most unbiased observer astray. On the whole, it seems safe to say that the success of the Third Reich’s policy of recovery was until quite recently much greater than most of its political adversaries believed, but also that it is not quite as great nor quite as certain as its representatives usually affirm. The error of the first group which has been in the habit of counting on an early breakdown of the German recovery programme is very interesting, as it throws some further light on general questions treated in the course of this book. The belief that the economic policy of the Hitler Government was heading for an early disaster reminds us somewhat of the well-known opinion, held by many people at the outbreak of the Great War, that the war could not last more than a few months. In both cases the enormous elasticity of capitalism was seriously overlooked. It is true that the greater part of the public expenditure of the Hitler Government has been unproductive and, looked at from the standpoint of its primary effect, even positively wasteful, especially the expenditure on rearmament. But, owing to the secondary effects of this expenditure and to the existence of large idle capacity and man-power, the result, surprising only to the superficial judge, was, up till recently, that the population had on the whole certainly not been made much worse off by it, though this result was largely obscured by the simultaneous process of depriving certain groups of the population of their means of livelihood for political reasons.

It is, therefore, not the programme of public works and the other stimuli connected with it that are to be blamed, nor the expansion of credit which is sometimes incorrectly called “inflation.” Not that the Hitler Government embarked on a policy of expansion is the bad thing, but that it did so under circumstances and by a combination of political and economic measures which gave small chance of ultimate success. Like the United States—but to a much greater degree and in a much more disquieting manner—Germany is an outstanding example of a rather ill-fated policy of expansion. It illustrates extremely well the truth of the statement that once expansion has become the subject of mass cries and mass discussions it is in great danger of being finally executed under the worst possible circumstances and in a crude and ill-considered manner. By creating a dangerous political atmosphere inside and outside of the country and by trying to remodel its economic system on autarkistic and heavily interventionist or even socialistic lines, the Government went far in destroying the framework of economic reactions on which the philosophy of expansion must be based.⁷ On top of this the German Government evidently went further in expansion than would have been defensible even under better circumstances. Since there is, despite the great cost of public expansion, still little sign of private initiative having been aroused to the necessary extent, and since also there are small signs that the financial mechanism of the country has come any nearer to normal working order, expansion in Germany is still largely confined to the public sector, with small hope of any change for the better in the immediate future. Economic activity in Germany is still dependent to a large degree on continued public expansion, while it should be expected that, with the progress of the policy of expansion and with increasing activity in the private sector, public expansion would gradually become less important for the total economic activity. But with the public debt rapidly accumulating, it becomes pertinent to ask how long this course can be pursued.

In the case of Germany, there is a very real danger that the ultimate result of the experiment may consist of a gigantic volume of public indebtedness and of the economic system’s being made inflexible and unmanageable by interventionist ossification. In spite of the opinion, widely held in Government circles, that the normal working of the German economic system, based on private initiative and the freedom of markets, is to be restored as soon as possible, Germany has become not less but more entangled in the web of artificial constructions and interferences. The most fatal flaw in the whole process is undoubtedly the foreign-trade situation. Even under the conditions prevailing before the new régime, it was to be expected that a serious strain on the balance of payments would result from an internal business revival, engendering, as it does, increased imports of raw materials without a simultaneous rise of exports of industrial goods and without any appreciable reserves of gold or foreign exchange. To bridge this “import gap” Germany would have to rely for an intermediate period on foreign credits. Unfortunately, however, things took a fatal turn in two directions. Firstly, exports fell off at a catastrophic rate, owing to various reasons, among which the autarkistic tendencies of German Commercial Policy, especially in agricultural products, have been particularly conspicuous.⁸ For years and years the warnings of the more far-seeing people against this trend had been ridiculed and decried by the advocates of economic nationalism, but the experience of the last years has been sufficient to turn this spirit of mockery into the greatest anxiety. At the same time, the wholesale cartellization of German industry as a solid by-product of semi-socialistic ideologies together with the enhancement of the cost of living by agrarian protectionism and with the devaluation of leading currencies increased the difficulties of German industry in competing on the world markets. While the “import gap” was widened by these tendencies, the chances of getting new foreign credits fell off, at least temporarily, almost to zero point. It is this desperate situation around which centres the greater part of the German difficulties at the present moment, and the manifold interventions to which they give rise are bound to react in turn very unfavourably on the internal conditions of economic recovery, as, e.g., the heavy tax on industrial turnover recently introduced in order to create a fund for export bounties. Since the expedient of devaluation is also not without its drawbacks in the case of Germany, the prognosis for this type of a policy of expansion must, with all allowances for the elasticity of capitalism, be rather reserved.

It is well, however, to refrain from all the gloomy prophecies which are so current now in many quarters. Many of the unfavourable factors might possibly take a turn for the better in the immediate future. The credit embargo against Germany can and will not last for ever, and the change in this respect will be accelerated by an improvement of the external and internal political atmosphere. At the same time, it is quite conceivable, under present conditions in Germany, that German protectionism might be modified in order to widen the export markets. All this may possibly be combined with a cautious devaluation of the mark preparatory to a reduction of exchange control.⁹ When the situation in foreign trade has been improved in this way, there is good reason to believe that the internal market also will be freed from many fetters. That is not to say that all these things will happen, but they may happen, and then there would be a chance that economic activity in Germany might be stabilized on a rather high level. In the case of Germany, therefore, all prophecies are more or less futile, though it must be said that the prospects are becoming increasingly bad.

It seems fit to conclude this short survey with some remarks on the situation in France since it is a good illustration of many points of general interest. France was one of the last countries to be hit by the present depression, but the development during the last two years leaves no doubt that it has now entered the phase of the secondary depression with its familiar vicious circle and even with its political and social implications. France has now, roughly speaking, reached the stage of Germany under Chancellor Brüning when it became impossible to avoid a growing budget deficit, and it is very ominous that in France also the difficulties of budgetary policy are slowly undermining the bases of the parliamentary and democratic system. On the other hand, however, the economic and financial position of France is still so strong as to make a policy of expansion fairly easy, even perhaps without devaluation and abandonment of the Gold Standard. The French difficulties, therefore, are more of a psychological character. Public opinion in France has not yet awakened to the truth that the rather uninviting choice between Brüning and Roosevelt does not exhaust the possibilities, and that a middle course, consisting of a policy of expansion combined with a steady policy of monetary stability and of economic conservatism, offers the best chances of success. France is just the country where the general principles of a sound policy of expansion, as explained in this and the preceding sections, seem to be especially applicable. Even the extremely sensitive mentality of the French population towards everything with the faintest smell of economic “unsoundness” should not be an unsurmountable obstacle to a fairly skilful policy of expansion with some eye for “window-dressing.” It seems that M. Flandin, when he was Prime Minister, had grasped the situation and the suitable means very well so that it was very unfortunate for the country that he was not allowed to pursue his policy. Under these circumstances, there is every reason to fear that the political convulsions accompanying the unchecked progress of deflation may, in France also, finally end in a crude policy of expansion as the result of exasperation and demagogy.