Friday, September 01, 1995

Stability and progress:  an anti-depression policy for a free economy

Chapter I. THE PROBLEM

(i) ITS NATURE

A policy aiming at stability and progress is essentially an anti-depression policy.  Depressions are the consequences of instability.  If stability can be preserved, progress can be ordered according to man's desires and capacities.

Depressions have occurred in the past with at least sufficient regularity for the term "business cycle" to be invented and applied to the long-term movement of economic activity.  A "depression" is the trough of the downswing, while a "boom" is the crest of the upswing.  The point at which the boom is about to break is known as a "crisis".

We do not agree that fluctuations anything approaching the violence of the 1929-33 experience are inevitable in a free economy.  On the other hand it is true that there is an inherent tendency to fluctuations in a free economy. (1)  To admit this is to call attention to the fact that there is an undesirable tendency to be corrected.  Corrective proposals constitute the main subject-matter of this Report.

It is generally agreed among authorities on the subject that economic fluctuations may spring from different causes.  Prominent among the causes are:  Maladjustment of the savings-investment relationship (e.g., investment not keeping pace with savings);  or structural maladjustment (e.g., failure of particular countries or industries to meet changes which have become permanent in the conditions of demand or of supply);  or forces outside the economic system altogether (e.g., the dislocations arising from war).


(ii) INTERNATIONAL ASPECTS

It is also widely accepted that cyclical fluctuations, and certainly the most disturbing of them, are international rather than national phenomena.  So attention and, indeed, emphasis must always be on international action both in attempting to prevent fluctuations and in overcoming them if they appear.  A depression may begin in one country, but in a world economically integrated -- such as ours is and must he -- it can hardly fail to spread to others.  In such circumstances action taken by one nation separately, unless its international implications are taken into account, is liable, at best, to pass the difficulty to some other country and, at worst, to lead to isolationism and fragmentation of the world economy.  Such action aggravates the disturbance and reduces all-round capacity to maintain and improve living standards.  The economic history of 1929-1939 is proof of that, the fillip given by the 1937-1939 re-armament programmes notwithstanding.

Admittedly there was some excuse then.  There was no agreed opinion about the measures which should be taken in a crisis.  The constructive measures adopted were nationally conceived and nationally adopted.  Even so, they were hardly, more than experiments.  Where the policies pursued were sound, they failed because they were not adopted in unison.  The knowledge which has accumulated since then, the international machinery which has developed, the new machinery which it seems to be the common intention to develop, and the experience in international co-operation which the Allied war effort has provided, all promise something better in the future.


(iii) OBJECTIVES

If the need for united action is accepted, it will be necessary for all to be clear about concrete objectives.  Obviously the first and major objective should be the fullest use of productive resources, especially the steady and useful employment of human resources.  Second, a more equitable spread of the distribution of incomes seems to be desirable as a condition of stability, apart from the humanitarian grounds that may be advanced.  For the same reason or reasons, the risks of interruption of earning power should be broad based on the whole community.  Associated with this should be provision of the essential material needs of all, with adequate safeguards, of course, against indolence or other anti-social behaviour.  These, as our Report will attempt to show in the appropriate chapters, are all conditions of the maintenance of economic stability.

In addition, two basic conditions are necessary to progress and are of the essence of a system of free economies:  First, the right of each person to choose his occupation should be respected and, as far as may be, promoted;  second, the right of each country to share in the world's markets should be recognised and facilitated.

In the second report by the Delegation on Economic Depressions appointed by the League of Nations these ideas are summarised as follows:

"What is required is not only a high level of employment, but efficient employment.  Policy must be concerned not only with the size of the national income, but also with its distribution;  must aim not only at reducing the risk of unemployment, but also at any equitable sharing of its burden.  It must be designed to promote the welfare not of some nations only, but of all, and to assure the smooth working of the economic system without impairing essential human liberties."

(iv) TRANSITION PERIOD

We are putting forward proposals which we believe would have been necessary had no war intervened and disrupted world economies such as they were in 1939.  It is important that they should be considered at once for, if they are to be applied, the post-war reconstruction or reconversion which is now upon us should proceed with such long-term objectives in view.

There are two dangers in respect to the transition period:  First, that we are not ready for the emergency now it has come;  and, second, that the long-term objectives will not be clearly seen and accepted, especially in their international aspect.  Lack of knowledge can hardly be a legitimate excuse in the future.  Unpreparedness, dilatoriness or unco-operativeness should not be allowed to leave the way open for the resumption of cyclical fluctuations with their periodic lapses into depression.



Chapter II. CONSUMPTION EXPENDITURE

(i) HOW INCOMES ARE USED

Constant employment depends upon the maintenance of production.  Stable production depends upon the maintenance of expenditure.  Expenditure depends upon how individuals and institutions elect to use their incomes.  The use to which incomes are put is complicated by the fact that some elect to save portion of their incomes and that the expenditure (i.e., investment) of these savings depends, not only upon the disposition of the savers, but also upon the demand for investment from time to time by industry and business.

Private expenditure takes various forms.  A large part of the aggregate is used in the purchase of non-durable consumption goods, such as food, clothing, education and recreation.  A substantial part is used in the purchase of durable consumption goods -- for example, much household equipment and motor cars.  The remainder is saved and should find its way into investment in the forms of construction (houses, factories, hospitals, schools) or industrial equipment and business stocks.  We shall discuss private investment expenditure in the next chapter.


(ii) EXPENDITURE ON NON-DURABLE CONSUMPTION GOODS

This form of private expenditure (which includes expenditure on various services) is in general fairly stable but, since it constitutes such a large proportion of total expenditure, fluctuations in it can be quantitatively great.  Anything which will tend to stabilise this form of expenditure, and especially to sustain it when it is threatening to decline, will be a real contribution to the maintenance of economic stability.

We believe that a more equal distribution of incomes would be a valuable step in this direction.  We do not believe, however, that this is to be achieved by the simple process of taking from one section and giving to another.  Taxation and the manner in which it is expended can contribute, but care must be taken that the kinds and levels of taxation adopted do not retard economic progress.

From almost every point of view the best method to achieve the object is the adoption of measures calculated to increase the productivity and the earning power of the lower-income groups.  Improvement of economic opportunities through attention to public health, education, vocational guidance and training (and, where necessary, retraining) seems to be the most certain road to the end in view.

On the other hand, keeping prices at a minimum, especially the prices of the normal requirements of healthy living, would be a substantial contribution to the maintenance of non-durable consumption expenditure.  This may be achieved by improvements in the methods of production and distribution and, where expedient, the lowering of taxes which increase production cost, of excise duties and tariffs.  A constant aim of managements should be to maintain profits by producing and selling more for less, not less for more.

The various measures of social insurance, provided they do not involve taxation which otherwise checks progress, tend to preserve the stability of consumers' demand.  This suggestion at once implies "contributory" insurance.  The general effect will be increased by reducing the contributions of industry and consumers when unemployment is developing and maintaining them at a higher level than the general average necessary when unemployment is low.  The British White Paper on "Employment Policy" has already suggested what the British Ministry of Reconstruction regard as a practicable sliding scale.

While we have thought it necessary to point to the danger of taxation, either because of its height or its forms, being a cause of instability, we believe that fiscal policy can be so contrived as to make a positive contribution to the maintenance of private consumption.  In some measure at least taxation rates can be adjusted to meet situations of incipient boom or threatening depression along the lines just suggested for social insurance contributions.

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expansion of bank credit, especially expansion by central banks.  Savings outrun investment when, though there is no further scope for investment, savings still continue.  Excess credit expansion is inflationary, while excess saving is deflationary.


(ii) EXPENDITURE ON CONSTRUCTION

Under this heading we include all forms of building construction, though it might have been better to have included such building as factories and other business buildings under "industrial equipment".  What is suggested under the latter heading will apply generally to industrial construction.  But we have taken all forms of building construction together because residential construction, which will probably occupy a major place in the Australian economy for many years to come, proceeds from the investment of savings, like other forms of construction and, moreover, will affect all other types of building construction.  On the other hand, dwellings also have most things in common with durable consumers' goods.

Investment, irrespective of the form, is very responsive to changes in economic outlook.  Moreover, it is peculiarly difficult to stimulate the demand for investment goods in a period of decline.  There tends, in fact, to be a temporary superfluity of them.

We strongly believe that the investment side of the economy would be more stable if it were more broadly based on the whole community.  A more even spread of capital holdings seems to be at least equally desirable as a more equal distribution of incomes.  Many authorities who have considered economic fluctuations and their prevention recommend that Governments should see that more adequate investment facilities are available to the small saver.  We agree, but we think this is largely a question of informing him of the opportunities available to him, the methods of approach to them, the benefits and risks involved and generally increasing knowledge and inspiring confidence.  Greater credit facilities would also be an aid.  These, we believe, would be readily forthcoming if our suggestions in the preceding sentence were adequately applied.

Building construction, and especially residential construction, is unusually responsive to changes in interest rates.  Interest is a considerable factor, because it is usually a long-term factor in financing building construction investment.  It also tends to be a constant factor because mortgages are long-term contracts.  Anything that can be done to make money for financing construction available at low interest and, in a period of threatened depression, to vary the rates of interest and amortisation payments will assist in maintaining the level of investment in construction.  The same is to be said of steps taken to increase the proportion of cost that may be covered by mortgage credit.  Government assistance along these lines (e.g., by guaranteeing or insuring mortgages) should be earnestly considered.  One example of this in Australia was the New South Wales Government's guarantee of loans made by banks and insurance societies to the co-operative building societies in the years immediately preceding the war.

This suggestion will prove of limited value if other building costs are not kept as low as possible.  Governments have a right and a responsibility to break down "monopolistic" prices or wage rates or "monopolistic" power to increase building costs by inferior or inadequate work in return for prices and wages.

Public construction, especially in a developing country, is always in strong potential demand.  In this case, there is substantial opportunity to dovetail public construction with private construction.  Such a contra-cyclical policy can be a major stabilising influence.  It will be necessary that policy be decided upon and plans prepared well in advance.  In framing such a policy the co-operation of State Governments and local government authorities should be sought.


(iii) EXPENDITURE ON INDUSTRIAL EQUIPMENT

We agree with those investigators who claim that greater stability would be achieved if business and industrial managements planned long-term investment policies.  This would involve a degree of consultation and co-operation between managements of various industries and industrial units.  It would be encouraged and aided considerably by the provision by Governments of statistics in respect to the extent and capacities of existing industries, the probable future demands and business conditions generally.  Some such organisation as the Economic Advisory Council, recommended in our booklet, "Looking Forward", would provide the means for the co-ordination necessary between Governments and business and between industry and industry.

The rate of interest has some influence on industrial investment, probably more on investment in stocks than on investment in industrial equipment.  Monetary authorities may do something, and should be concerned to do what they can, to prevent over-expansion or to stimulate a declining demand by varying the rate of interest.

Taxation can be, and often has been, an impediment to industrial investment.  Double taxation (taxation of industrial profits in the hands of shareholders as well as in the hands of companies) is always a deterrent.  A too niggardly attitude towards allowances for losses and depreciation has the same effect.  On the other hand investment, especially in new processes, would be encouraged by permitting the rapid amortisation of capital and generous allowances for obsolence in assessing taxation liability.

As in the case of construction, Governments should adopt, as far as possible, a contra-cyclical policy in respect to their own purchases of machinery and equipment.  In Australia, Governments with their business undertakings (e.g., railways) probably have quite significant opportunities in this respect.

There is always a potential demand for industrial equipment in the less-developed countries.  Much might be done to even out disturbances by a contra-cyclical development of capital exports.  The problem in the past has been chiefly a financial one.  The International Bank for Reconstruction and Development recommended at the Bretton Woods monetary conference of the United Nations should be able to facilitate financial provisions. (2)  If so, this recommendation might well prove a major contribution to the maintenance of a high level of employment in the capital-goods industries, and thus a stabilising influence on investment expenditure.

We cannot but express the same attitude in respect to monopolistic control which may affect the costs and the prices of industrial equipment or capital-goods as we have already expressed in respect to building construction.  We should add that we are not concerned with the mere existence of monopoly.  Monopoly conditions are often essential to minimum costs and prices.  The monopoly power which is used to retard, whether it comes from organised capital or organised labour, is what should be broken down.

Wide fluctuations, especially in the prices of stocks, are often caused by action in ignorance of the real position and trends.  Here again we are impressed by suggestions for Government-sponsored research and publication. (3)  The statistical position of stocks, actual and potential, the trends in demand for raw materials and finished goods, the industrial development in other countries -- these and other relevant items of information should be made as readily available as possible.  The less that speculation enters into economic activity, the more stable it is likely to be.


SUMMARY

Recommendations in this chapter include:

  1. More investment opportunities for small savers.
  2. More elastic credit policies, especially in respect to construction investment.
  3. Prevention of the exploitive use of monopoly power, whether by Capital or Labour.
  4. Contra-cyclical public construction schemes and public purchases of industrial equipment.
  5. Official research and also co-ordination aids in planning industrial development.
  6. Contra-cyclical private-credit policy.
  7. Avoidance of taxation which discourages industrial investment.
  8. Industrial development of under-developed oversea countries and methods of finance.
  9. Up-to-date information in respect to world stocks.


Chapter IV. PUBLIC EXPENDITURE

(i) BUDGET POLICY

It has hitherto been generally considered the proper course for the Government of a country to attempt to balance its Budget year by year.  If it failed in one year its supreme purpose was to restore the balance at the earliest possible moment.  It is now recognised that the public or State Budget is only part of the aggregate national or community Budget.  In that new light we look at public expenditure and fiscal policy generally.  This is especially necessary now that public expenditure is likely to take so large a part of national income.  Taxation and expenditure must be considered in the light of their probable effects on general stability or on the tendency to economic fluctuations.

For that reason we subscribe to the view now widely held that budgetary policy should be to strike a balance over a series of years rather than annually.  That would mean that public expenditure, especially public investment expenditure, could be increased in periods of business recession, thus incurring deficits.  The corollary would be to wipe out deficits and build up surpluses when business was buoyant, especially when boom conditions were developing.  Taxation in all periods would be so contrived that it would exert as small a de-stabilising influence as possible.  We have already suggested in Chapters II and III the lines which such a taxation policy might follow.

We are not as optimistic as some writers on the practicability of implementing a policy of long-term budget balancing.  We can see both statistical and political difficulties.  It was adopted by some countries (e.g., Sweden) before the war but it can scarcely be said that it has been tested.  There seems to be, nevertheless, no reason why it should not be given a trial nor why on the whole beneficial results should not be expected.

On the other hand, it seems to us important that public financing should have a contra-cyclical pattern as one of its main characteristics.  This means, in the first place, avoiding imposts likely to discourage enterprise, a sine qua non to progress.  In the second, it means quick relief from burdens likely to aggravate a declining trend in activity, and a prompt application of measures calculated to stimulate recovery.

It is not likely that these policies can be successfully pursued unless estimates of national income, both present and future, are available to Governments in as accurate and complete a form as it is possible for statistical science to produce.  Only by that means can the existing position and the probable trends be satisfactorily appreciated. (4)  Indeed, these statistics should form part of the annual Budget papers.  It is necessary, for one thing, that the public should be able to construe the Budget in terms of them.


(ii) LOAN POLICY

Except where Governments may borrow on long-term in order to repay short-term advances made to sustain a Budget deficit, Governments usually borrow to spend on capital works.  Here they can undoubtedly adopt a significant role in preserving stability or stimulating recovery.  It would mean an almost complete change in policies hitherto pursued.  Public borrowing and expenditure, for example, intensified the boom which preceded the last depression.

Some national developmental works cannot wait, but many can.  These latter can be planned and pigeon-holed.  They can be postponed if they are likely to de-stabilise an economy where the employment of resources is already high, and given effect to at a time when employment is slackening.  Such a contra-cyclical policy appears to us to be practicable and promising of substantially beneficial results.  The main difficulty is a political one.  The spending Government is usually popular and the political interest is in the short-run rather than the long-run.

The vexed question arises whether the money is to come from borrowing from the public or through the expansion of bank credit.  Idle savings should, of course, be tapped as far as possible.  Whether the holders will lend at reasonable rates of interest will depend largely upon their confidence in the Government of the day and its policy.  Failing that and in a situation where substantial productive resources are idle, the expansion of bank credit will be sound.

There are two reservations we feel bound to make.  First, care must be taken to avoid expansionist policies likely to lead to inflation.  A stimulus to recovery, even if it achieves some recovery, will not restore stability if it has an inflationary or potentially inflationary basis.  That was one of the weaknesses of the "New Deal" policy in pre-war United States.  Second, care must be taken to avoid building up a public debt which the expected future productivity of the community cannot conveniently support.  This will depend in a large measure upon the probable productive value of the works upon which public money is being expended.

In planning public works to meet a recessionary situation it must be remembered that all kinds of works are not equally conducive to the end in view.  The aim is to stimulate employment, and especially private expenditure on consumption goods.  Those works in which the portion of wages to total costs is high and which create demands for production in industries in which wages is a major part of total cost are most likely to be fruitful. (5)  The labour employed indirectly is of equal consequence as, and may be of greater consequence than, the labour directly employed on the project selected.  If the public expenditure can be so directed as to give rise to immediate private investment expenditure so much the better.  In a period of recession private investment will have to revive before it can be expected that recovery is really on the way.  In fact, it is generally agreed to-day, and cannot be repeated too often, that one factor in the maintenance of economic stability which must be watched at all times is private investment.  Stability is largely governed by it while progress depends on it.


SUMMARY

Recommendations in this chapter include:

  1. Periodic instead of annual balancing of Budgets.
  2. Contra-cyclical pattern in revenue collection and expenditure.
  3. Estimates of the national income, present and future, associated with preparation and publication of Budgets.
  4. Contra-cyclical public borrowing and expenditure policy.
  5. Avoidance of inflationary possibilities associated with credit-expansion policies.
  6. Preference for public works which have most effect on the national wage bill.


Chapter V. CREDIT POLICIES

(i) INTERNAL

Authorities are now beginning to attach less importance than many of them did ten to fifteen years ago to credit policy as a means of preserving stability or stimulating recovery in a period of downswing.  That is not to say, of course, that it can have little significance anyway.  Undoubtedly it has a substantial influence on all forms of private investment and the demand for durable consumers' goods.

As a rule, variations in credit policy should be selective rather than general.  General restriction in a period of upswing may check a boom but precipitate the crisis.  All parts of an economy seldom manifest boom conditions at the one time.  Restriction will probably be most effective and least harmful if it can be applied selectively to those parts of the economy which are most conspicuously developing boom tendencies.

A cheap and plentiful offer of credit can be safely applied fairly generally in a slump.  The demand, which will not be strong anywhere, is likely to be the best directive.  If this is expected to be effective the prevalent idea that a cheap money policy is good at all times needs revision.  Easy money in a period of upswing may well prove the primrose path to boom and subsequent crisis.

Remembering that depressions are mainly due to structural maladjustments, care must be taken lest credit policy acts like a drug that gives a false sense of health rather than effects a cure.  The real correctives of conditions of recession and growing unemployment are more likely to be found in such steps as facilities for the mobility of labour and adaptations in the mechanism of production.  These will be achieved only if there is all-round co-operation in a common aim.  Managements must be ready to adapt production to meet shifts in demand.  Labour must be willing to allow wages to respond to changes in relative demand.  We believe that employers' organisations and trade unions have a fruitful field open to them if they will only bring themselves to co-operate.  Governments may help by imposing such measures as will prevent either side from exploiting such a situation to the detriment of the other.


(ii) EXTERNAL

Lending in overseas countries is fairly readily adaptible to policies for preserving stability and even to anti-depression measures.  It tends to stimulate the export of capital goods, the demand for which is usually the first to fall off in conditions of approaching depression.  This policy can be given effect to best by the highly developed industrialised countries, but it is precisely in those countries where depression is always most likely to begin.  The International Bank for Reconstruction and Development proposed at Bretton Woods can play a conspicuous part in implementing such a policy.  Assuming that Australia adopts the Bretton Woods Agreement, we will become a subscribing member of the Bank.  That will be our opportunity to exert our influence.

We agree with those authorities who regard foreign lending as a valuable instrument.  We also agree that as far as possible such lending should be direct (i.e. to industries rather than Governments) and that it should be in equities rather than in fixed interest bearing loans.  Loan indebtedness may become a serious burden in times of receding business and prices, whether borne by Governments or others.  Where loan indebtedness is not to be avoided if financial aid from other countries is to be expected at all, it should be practicable to provide for elasticity in respect to interest rates in loan contracts, but especially in respect to the period of amortisation.

A country so dependent on exports as Australia must be specially interested in the development of international action for the purpose of avoiding fluctuations in trade.  If it hopes for the maintenance of employment at home it must regard as a prime objective the maintenance of a smooth-working multilateral world-trade system.


(iii) INTERNATIONAL IMPLICATIONS

We believe that it would be disastrous to assume, especially with an economy such as ours, that slumps in other countries can be walled off by some form of resistant or compensatory action.  To meet a fall in foreign demand by reducing imports is certain to intensify the depression abroad, and may even add to the complications at home.  To meet such a possible situation we believe that Australia should aim at building up a substantial foreign exchange reserve.  It should certainly be interested in another proposal made at Bretton Woods -- the International Monetary Fund, the prime purpose of which is to maintain the stability of international exchange rates.

If, of course, a fall in oversea demand is due to causes likely to be permanent (e.g. the substitution of a synthetic for some raw material) a structural alteration at home will be inevitable.  Just what form that should take will depend upon whether the export of some other products can be increased or whether it will prove economic to produce locally goods previously imported.

It should be our constant aim to avoid domestic policies likely to create exchange difficulties -- e.g. inflationary movements in prices.  We should also be wary of increased oversea demand due to inflationary policies elsewhere.  In this case it would be wise to offset the rise in oversea demand by a contraction of domestic expenditure.  Not to do that would be helping to develop what is called "the vicious spiral".

If we are forced into the position that exchange depreciation or exchange control or import restriction becomes imperative, the first named is probably the least of the evils.  Control is not likely to do more than delay depreciation, while it will probably make it the more inevitable.  The objection to import restriction we have already stated.

The persistent aim of all countries should be to preserve appropriate exchange rates.  A persistently growing surplus of payments from overseas will be just as dis-equilibrating as a persistent deficit.  Such a surplus will tend to be inflationary at home and deflationary abroad.  Short-term capital movements, while they have their legitimate and necessary purposes, can have the same effects.

It seems to us that in the future a great deal will depend upon the availability to national monetary authorities of accurate information in respect to the exchange positions of all countries.  We believe further that the establishment of some such international institution as the proposed International Monetary Fund is eminently desirable, and that its advice and, when occasion arises, its authority should be respected.


SUMMARY

Recommendations in this chapter include:

  1. Selective credit restriction rather than general in a period of upswing.
  2. Cheap credit with a general expansion in a period of downspring.
  3. Measures to increase the mobility of labour and the adaptation of industries.
  4. Oversea credit to maintain the demand for capital goods.
  5. Preference for advances to industries and for equities rather than fixed-interest bearing loans.
  6. Maintenance of substantial foreign exchange reserves.
  7. Attention to necessary structural adaptations.
  8. Avoidance of policies likely to create exchange difficulties.
  9. Acceptance of international authority rather than reliance on unilateral policy.


Chapter VI. STRUCTURAL MALADJUSTMENTS

(i) ACCIDENTAL

Some of the structural maladjustments which develop in a free economy from time to time are "accidental" in the sense that they are unpredictable.  They are liable to arise from one or more of a variety of reasons.  They could be checked, if at all, only at the cost of progress.

Industries decline because of such phenomena as changes in fashions or taste.  New industries arise because of inventions.  New industries may entirely supplant old industries or lead to drastic modifications in them.  Partial or localised depression is a likely consequence.  The corrective is increased adaptability.

This may mean the transfer of labour and capital to existing but progressing industries.  It may mean the establishment of new industries in the depressed areas.  Either will involve the speedy transfer of labour.  In either case this transfer would be to other industries and in the former it may be from the depressed areas.

While the responsibility must rest largely on business managements, Governments can adopt a useful and sometimes necessary role.  They may encourage the establishment of new industries by selective tax remissions, in special cases by guaranteeing credit facilities or by the provision of factory buildings at moderate rentals.  It is of significant social consequence that new construction should be encouraged in depressed areas.

Probably the most valuable contribution that Governments may make is the facilitation of the transfer of labour to the points of employment.  Employment exchanges, training facilities (with maintenance while training if necessary) and loans and, in special circumstances, grants to cover travelling and removal expenses are to be recommended.  Anything calculated to remove the normal rigidities is to be recommended for critical occasions as an expenditure likely to repay in social benefit.


(ii) INCIDENTAL

In a free economy, which is an economy which depends upon private investment as its mainspring, there is an almost chronic tendency for savings to exceed investment.  This applies mainly, of course, to the more highly industrialised and, therefore, wealthy economies.  The result is a tendency towards a permanent deficiency in total expenditure and chronic unemployment.  This is a long-term expectation in rich and highly industrialised countries.  The opposite phenomenon of investment exceeding savings (an inflationary phenomenon) is usually short-term and critical.

We have already suggested in Chapter III ways in which private investment might be promoted, and there is no need to repeat them.  The now popular credit policy of cheap money is to be approved when there is obviously under-investment, because slackness of investment arises from the hesitancy of borrowers rather than the reluctance of lenders.

Governments may, and we think should, open the way for new private investment by various developmental schemes.  Such opportunities are readily available in partially developed countries such as Australia.  Government research, to which we have already referred, can also lead to the production of new kinds of consumers' goods or to the reduction of costs and a consequent increase of demand for existing production.  The Council for Scientific and Industrial Research points to what can be done in this direction.

We have already suggested the desirability of a more equal spread of income distribution.  In a situation now being considered (i.e. an excess of savings) the increase of social services financed by appropriate forms of taxation may well be advised.  New developments in education, public health schemes, and similar services provide a wide field in Australia.

There is probably little need to urge many of the proposals put forward in this and earlier chapters upon Governments because with most of them they are perennially popular.  What needs to be emphasised is their timing.  From the point of view from which we are considering them their purpose is to prevent economic fluctuations or to overcome them if they arise.

To apply these expedients at the wrong time is likely to provoke instability and to leave Governments with blunted weapons when the occasion for their effective use comes along.  Before the last depression, for example, Australia was suffering not from an excess of saving but from an excess of investment, to which the Governments themselves contributed.  That, of course, was not true of Australia alone for the investment boom which preceded the last depression was almost world wide.  In those circumstances it was virtually impossible to turn the edge of the depression by stimulating investment further.  About the only hope, if such a situation is allowed to develop again, is the stimulation of investment in under-developed countries by the richer and more developed countries granting long-term credits to them.  Even then some liquidations in countries in which over-investment had taken place probably could not be avoided.


SUMMARY

Recommendations in this chapter include:

  1. Government encouragement of the development of new industries, especially in depressed areas.
  2. Facilitation (including financial assistance) of the transfer of labour to points of employment.
  3. Policies for stimulating private investment already recommended (see Chapter III).
  4. Government research likely to lead to new types of production or increased demand for existing types.
  5. Increased public expenditure on social welfare schemes.
  6. Attention to the appropriate timing of expenditure, especially public expenditure.


Chapter VII. PRIMARY PRODUCING COUNTRIES

(i) THEIR VULNERABILITY

Our considerable industrial growth notwithstanding, Australia is among those countries the welfare of which turns on primary exports.  Such exports are peculiarly subject to wide fluctuations of prices.  Mineral exports are more open than agricultural to shocks from industrialised oversea countries.  The volume of production of agricultural or pastoral commodities is affected only slowly by a fall in prices.  A fall in mineral prices usually brings with it a sharp fall in output and employment.


(ii) APPROPRIATE MEASURES

It is, of course, a sound policy to aim at a diversification of the economy, especially where a country is dependent on a few highly specialised articles of export.  The extent to which this can be achieved depends upon conditions both internal and external.  Such a structural adaptation depends upon local facilities and costs, and also upon the probable effects in other countries (e.g., if it leads to import restrictions) or, if the new product is for export, to disturbances in other exporting countries.

We have already concurred with the view that such expedients as subsidies and guaranteed prices are likely to be self-defeating.  On the other hand, we strongly support the view that short-term agricultural credit and interest rates should be kept as flexible as possible.

The countries with economies now under discussion must be especially interested in monetary stabilisation.  Their aim should be to maintain large exchange reserves so that they can weather through periods of temporary export-income contraction.  If this is not done, such countries will run serious risk of being obliged at times to adopt exchange control or import restriction.  Either is liable to add to the sum total of world disequilibrium.  These, and exchange depreciation if ultimately resorted to, are also likely to bring retaliatory action in other countries.  The years between the depression and the war have demonstrated the probability of that.


(iii) INTERNATIONAL ACTION

We are impressed by the suggestion made by some authorities (e.g., the League of Nations Delegation already quoted) for the establishment of an "International Buffer Stock Agency".  Such an agency would be financially supported by both the exporting and importing countries of the products it was intended to cover.  Its general plan would be to buy on a falling market and sell on a rising market, thus acting as a shock-absorber and stabiliser.  Such activity would have a strong tendency to even out prices, to avoid unilateral action in the face of a crisis in the agricultural or raw material market, and also to rid the market of speculative buying and selling.

Where prices are falling, not because of cyclical movements but because there is a tendency to over-production in the existing and probable future state of the market for a commodity, structural adaptation becomes inevitable.  This may involve some production control.  If so, such control should be worked out as far as practicable under international agreement.  Such a policy would lead to the least dislocation, the most satisfactory arrangements in respect to compensatory action and, ultimately, to the displacement of the high-cost rather than the low-cost producer.

The suggested international buffer stock agency would seem to be the obvious body to undertake the task of directing such production control.  Indeed such an agency, working in collaboration where necessary with the proposed International Bank for Reconstruction and Development (e.g., in long-term foreign lending) should be able to go to considerable lengths to avoid or at least substantially modify the effects of market crises on primary producing countries.

These recommendations, however successful they may prove if applied, will not obviate the necessity for keeping the costs of primary products to be exported as low as possible.  They can be regarded in no way as substitutes for efficiency.  Nor can they remove from Australia or any other country similar in structure the responsibility of seeing to it that industrial costs, due to uneconomic tariffs, industrial inefficiency or insistence on wage rates at too high a level do not force primary production costs out of line with world prices.  The report of the Tariff Committee appointed by the Bruce-Page Government in 1928 shows that this warning is necessary.


SUMMARY

Recommendations in this chapter include:

  1. Diversification of the national economy.
  2. Flexible system of agricultural credits.
  3. Special attention to monetary stability and adequate exchange reserves.
  4. Establishment of an international buffer stock agency.
  5. Production control and structural adaptations, where necessary, under international agreement rather than unilaterally.
  6. Establishment of international long-term credit organisation.
  7. Special attention to efficiency in the export industries and avoidance of other cost burdens likely to affect export income adversely.


CHAPTER VIII. THE GENERAL PLAN

(i) NATIONAL

We believe that the suggestions submitted in previous chapters make for a coherent plan.  The fundamental principle behind them is the maintenance of expenditure.  The various forms of expenditure have been considered separately and methods for their greater co-ordination submitted.  Special attention has been paid to the desirability of increasing the earning capacity of the lower income groups and the necessity for providing that no consumer's spending power shall completely disappear.  The importance of increasing mobility or the movement of labour and capital from industry to industry and area to area has been shown and means likely to stimulate mobility have been put forward.  These and other measures suggested in this Report are all in our opinion calculated to offer reasonable assurance of a high level of employment and a sound economic and social distribution of the accruing national income.

Both Government and industry have their responsibilities, and their respective roles have been indicated.  We recognise that up to a point Government interference in industry is both desirable and necessary.  This point is that at which opportunities are increased and individual liberties enlarged.  In particular, the policies of Governments in respect to social insurance, taxation, the provision of credit facilities, public works, etc., should be contra-cyclical.  If Governments are able to contribute effectively to the avoidance of fluctuations in their respective economies, progress can safely be left in the hands of industry in all its parts, which include lenders, investors, managements, workers and their respective organisations.  Success, that is to say, will depend upon the aggregate behaviour of the whole of business.

Managements, we have pointed out, must also make greater contributions to stability than in the past.  Efficiency must always be their first aim, which can be interpreted as a continual striving to sell more for less, not less for more.  They must also share with Governments the responsibility for the adequate training of workers and the facilitation of mobility both from occupation to occupation and upwards through grades to positions of greater responsibility and earning power.  The provision of incentives is one for agreement between employer and employee organisations.  Payment by results, for example, could have great significance both for the nation and the individual.  The main stumbling block at present is the antipathy of the trade unions to it.  Certain chapters of our recently published "Increased Production" give serious cause for thought on this question.  A rational outlook on the problem of employer-employee relationships, buttressed by a wise use and all-round respect for Arbitration Courts, would assure, we believe, the co-operation between the "partners" in industry necessary to the maintenance of stability and the direction of progress.


(iii) INTERNATIONAL

We have tried to emphasise our opinion that no country can hope to succeed by a policy of isolation.  This is especially true of countries largely dependent upon primary production for export.  Above all, no permanent good can be expected from policies which aim at avoiding slumps at home at the cost of spreading them abroad.

We have called attention to the necessity for international co-ordination and, for the purpose, to the desirability of establishing international research, monetary, long-term credit and stock-pool organisations.  With the degree of co-operation that should be forthcoming, liberal and dynamic policies aiming at world stability should succeed.  But, whatever one nation acting alone may do, success is hardly to be expected without a purposive international co-ordination of policies.

The prospects are at the moment bright.  The repeated declarations of the United Nations (e.g., the Atlantic Charter and the Mutual Aid Agreement), their decisions at Hot Springs, Dumbarton Oaks, Bretton Woods and San Francisco, all leading up to the establishment of the Economic and Social Council under the United Nations Charter, are indicative of the intentions in the international field.  The readiness and unanimity with which so influential a Power as the United States has adopted the Bretton Woods Agreement and the United Nations Charter constitute a portentous promise.

It remains for Australia to put her own house in order, to decide upon her own programme of economic objectives and methods at once, and to make her attitude clear and her influence felt in the international councils.  We hope that our Report will be a contribution to these ends.



ENDNOTES

1.  A totalitarian economy is no more immune from fluctuations than a free economy.  For a time the effects of fluctuations may be covered up or smothered, but eventually they break out and produce a crisis of colossal dimensions.  In the meantime various forms of regimentation and coercion accompanied by contracted living standards are the prices paid.  One of the forces which impelled Germany to gamble on a European war was the fact that the economy had reached breaking point.  Russia was able to present a facade of stability longer because, being at a primitive stage of development, expansion could be embarked upon in almost any direction to cover up decline in another.  But, even so, at what price?  At one period five million people starved to death partly because the agricultural front broke down and partly because wheat had to be sold abroad to keep the industrial wheels turning.

2.  It is not clear from the Bretton Woods Report whether the International Bank fur Reconstruction and Development is intended to function beyond facilitating reconstruction immediately after the war.  Our point is that this Bank can be made an instrument of contra-cyclical action and that it or some similar institution should be used to that end.  It is important, too, that the Bank should conceive this to be its function early.  If it regards immediate post-war rehabilitation as its only function it may speed up reconstruction even if this leads to a boom.

3.  While we emphasised the potential value of government research, both economic and scientific, we do not in any way discount the need for private effort in research.  On the contrary, there is a clear necessity for the expansion of private research.  Indeed, the two should work together.  Government research alone is liable to become far too academic and unreal.  The main value of government research is that research on an international plane is likely to be sufficiently complete only through the co-operation of governments, since governments are the agencies most likely to be able to collect all the necessary data.

4.  If we are really to have budget-balancing over a period, it will probably not be enough that the Government should interpret the statistics for itself and, of course, the general public.  Greater assurance would come from the establishment of a really live Public Accounts Committee upon which the Opposition was represented.  Such a two-party or all-party committee (as the case may be) assisted of course by experts, would beget more confidence in its forecasts than would be the case if the statistics were prepared and the forecasts made under the direction of the Government, which would mean actually the Treasurer of the day.  There are two points to keep in mind:  first, public confidence is necessary if general co-operative response is to be expected and uncertainty in the public mind as to real aims is to be avoided;  second, budget-balancing over a period, unlike annual balancing, is likely to be the concern of more than one government.

5.  Works in which the proportion of wages to total cost is high may not always be the best choice.  The choice of public works to be undertaken would rather depend upon the type of workers to be employed and the industries to be stimulated into activity.  The essential aim of the policy being considered is not so much "relief" as "correction" by the restoration of equilibrium.  It may, for example, be advisable to proceed with a work of modernising railway rolling stock which would involve a good deal of material, some of which might even have to be imported, rather than, say, railway and road construction.  Of course, in the long run almost everything is reduced to wages.

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