Can We Prevent Depressions?

June 29, 1953

The views of Arthur F. Burns, now serving as Economic Adviser to the President, should be of interest to every businessman, for they may affect the future of his firm. An excellent synopsis of them can be obtained from Dr. Burns’s last annual report, just published, as director of research of the National Bureau of Economic Research, the private organization from which he has taken a leave of absence to assume his government job.

Much in Dr. Burns’s statement is excellent. Government action against depressions, he reminds us, must also mean action against the preceding unsound booms. Yet political officials, “while earnestly resolved to do away with depressions, sometimes seem to neglect the need of controlling booms and trust too exclusively in our ability to check any contraction that may get under way.” What preceding official has had the economic insight, sincerity, and political courage to point this out so clearly?

Dr. Burns says many other good things. “There are no adequate grounds, as yet, for believing that the government will resist inflation with as much tenacity as depression. . . . Not only is the art of contracyclical action as yet imperfectly understood, but there are practical obstacles [such as the existence of political pressure groups] to the effective use of such knowledge as exists.”

But after he has said all this, Dr. Burns still seems to be convinced that governments both can and should undertake what he calls “contracyclical policy.” He quotes with apparent approval the statement of Mr. Eisenhower that “never again shall we allow a depression in the United States. . . . [If signs appear] of any . . . depression that would put . . . men and women out of work, the full power of private industry, of municipal government, of state government, of the Federal government will be mobilized to see that that does not happen.”

Dr. Burns himself makes the following statements: “Since 1929 . . . social control of business cycles has emerged as a political necessity, both domestically and internationally. . . . Our economic system will continue to generate cyclical tendencies. . . . It is reasonable to expect that contracyclical policy will moderate the amplitude and abbreviate the duration of business contractions in the future. . . . Perhaps, before many years pass, an economic general staff will emerge within the government and take on some of the characteristics of military general staffs.”

Some of the implications of these statements are disturbing. They imply that there is some inherent tendency in the capitalistic system to “generate” cycles and depressions, but that continuous government intervention could correct or at least “moderate” this. They assume that party politicians will act with more foresight and objectivity than private producers. An economic general staff, in particular, implies a quasi-military staff giving orders to businessmen on when to expand and when to contract. Some of us had assumed that the main trouble in the Communist, Fascist, and Socialist countries was that they already had such “economic general staffs.”

I would like to suggest a different approach to business cycles. It is no accident that the most violent fluctuations in prices, production, and employment have corresponded with the period of most government interference in business. Most major modern business oscillations have been the result either of credit and currency expansion deliberately instigated by government, followed by inevitable collapse, or at least by failure of government to halt an unsound credit expansion until too late. The best government “contracyclical” policy would be to keep an inflationary boom from starting, not to try to whip it up again after it has begun to flag. Governments need no encouragement to do the latter; it is, in fact, almost impossible to stop them. But they have no appetite whatever for doing the former and have almost never been known to try.