§ 19. The Bases of Trade-Cycle Policy

In the preceding section we described as trade-cycle policy all those measures with which it is sought to remove, or at least to smooth out, cycles and crises, and there was included under this general formula the discussion of the effects of crises and cycles. As a starting point for this discussion, such a general formula was both suitable and necessary. It remains now to determine more precisely what the concept of trade-cycle policy signifies.

The aim of trade-cycle policy, as we have up till now conceived it, was the elimination or the damping down of the trade cycle as a whole so as to remove the conditions under which new economic depressions and their losses continually arise. This is, indeed, the main and most comprehensive objective of trade-cycle policy, but it is not its only aim. In addition there are two narrower aims which in times of depression like the present push the former more comprehensive one into the background. The question of how we can control the cycle as a whole habitually occupies only a small circle of people, because still few are aware that the crisis and depression must be explained as part of the cycle as a whole and that their real cause is to be sought in the preceding boom. The majority want to sip the “sweet nectar” of the boom without also swallowing the inevitable “bitter medicine” of the depression, and believe that we can allow ourselves all the extravagances of the boom only to declaim later in the depression against the economists because they can give no recipe which can be applied to render the consequences of the extravagances ineffective. As against this it cannot be too often emphasized that the combating of the depression must take place in the preceding boom and that once an over-investment has been allowed to develop in the boom we cannot evade the depression and must accept it as a necessary reaction to restore equilibrium. It would be radically wrong to combat this reaction by means of new injections of credit inflation : this would only postpone and make more difficult the final recovery of the destroyed economic equilibrium. In spite of all this, trade-cycle policy is never so popular as in the actual time of the crisis and depression.

The tragedy of this situation is that, just when the disturbing consequences of the cycle descend upon us, all that the economist can in general recommend is patience and confident waiting for the ultimate recovery from the depression, and he must give emphatic warnings against the thousand and one projects for escape which are wont to be conceived in this time in the brains of more or less fanatical reformers. The rôle into which the economist is thrust is an extremely thankless one. For a generation which has become accustomed to the State’s intervening in all cases of economic difficulty or distress does not like to be told that, in face of an economic crisis, we are in no better position than a doctor who, if he does not wish to be a quack, can, in the case of an internal malady, do nothing else than rely on the powers of self-healing of the body, strengthen them, and make their way easier.

This is sufficient, however, to imply that, even in times of depression, it is possible to adopt prudent measures aimed at accelerating the recovery from the depression by seeking to strengthen all those forces which eventually bring the economic process back to its normal course. Generally speaking, the measures suited to this will be of a negative kind and will be directed towards ridding the economic process of obstacles and frictions and towards reducing the amount of State intervention instead of increasing it. The present depression shows, however, that there are cases where positive measures as well may be apt. Such is the case when the depression has entered the phase of the secondary depression. The nature of the problem here involved has already been explained in the preceding chapter. It is around this question that the current discussion on trade-cycle policy is centred, while trade-cycle policy in its stricter and more comprehensive sense of the control of the cyclical movement has at the same time assumed on the whole a more academic character. For some countries, however, the recovery has now already progressed so far that trade-cycle policy in the latter sense is gradually gaining in immediate practical importance.

Lastly, a trade-cycle policy in times of depression may set itself a final, still more modest aim and may content itself, so long as the way out of the depression cannot be found, with making the social and financial consequences of the economic recession as little felt and therefore as bearable as possible. In particular the giving of relief to the masses of unemployed is a task which must be carried out somehow even if no direct remedy for the depression is discoverable, and the same applies in certain situations to the supporting of large banks on the verge of failure. These are merely symptomatic measures or palliatives, and considering their modest aim it is doubtful whether we should include them under trade-cycle policy. The real problem of these symptomatic measures lies in the fact that, while the necessity of mitigating measures is undeniable, it is equally undeniable that there is a danger that they may create new frictions and obstructions, making more difficult and delaying the automatic healing process. It has, for instance, to be carefully considered whether the shortening of working hours, which is demanded in many quarters and by which the unemployed would be transformed into short-time workers, does not mean a new economic obstruction making the recovery more difficult. The system of unemployment relief also gives rise to a similar dilemma. The proposal for the shortening of working hours is, moreover, an example of the widespread lack of understanding of the merely symptomatic character of a measure and the tendency often to mistake what is only an attack on symptoms for an attack on causes. On the other hand, it must be acknowledged that a mitigation of the consequences of the depression lends support at the same time to measures that are directed towards the real overcoming of the depression by keeping the unemployed from disturbing outbursts of despair or protecting the economic system from the incalculable consequences of the breakdown of a large bank.

Three kinds of measures of trade-cycle policy can thus be distinguished:

1. Measures for controlling the cycle as a whole.

2. Measures for overcoming the depression.

3. Symptomatic measures.

This is the division which we shall follow in our more detailed analysis.

References : M. B. Hexter, Social Consequences of Business Cycles, Boston, 1925; D. Thomas, Social Aspects of the Business Cycle, London, 1925; J. Soudek, Die sozialen Auswirkungen der Konjunkturschwankungen, Bonn, 1929; A. C. Pigou, Industrial Fluctuations, London, 1927, part II; A. Müller, Oekonomische Theorie der Konjunkturpolitik, Leipzig, 1926; J. R. Bellerby, Control of Credit, London, 1924; A. B. Adams, Economics of Business Cycles, New York, 1925, chap 11; R. G. Hawtrey, Trade Depression and the Way Out, London, 1933; E. Wagemann, Economic Rhythm, New York, 1930; L. Mises, Geldwertstabilisierung und Konjunkturpolitik, Jena, 1928; A. H. Hansen, Economic Stabilisation in an Unbalanced World, New York, 1932; R. Bachi, La politica della congiuntura, prevenzione e attenuazione degli effetti delle crisi economiche, Rome, 1929; Paul H. Douglas, Controlling Depressions, London, 1935.