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More interesting observations from Robbins . In the pre-war (WWI) business depressions a very clear policy had been developed to deal with this situation. The maxim adopted by central banks for dealing with financial crisis was to discount freely on good security, but to keep the rate of discount high. Similarly in dealing with the wider dislocations of commodity prices and production no attempt was made to bring about the artificially easy conditions. The results of this were simple. Firms whose position was fundamentally sound obtained what relief was necessary. Having confidence in the future, they were prepared to foot the bill. But the firms whose position was fundamentally unsound realised that the game was up and went into liquidation. After a short period of distress the stage was set once more for business recovery. In the present depression we have changed all that. We eschew the sharp purge. We prefer the lingering disease. Everywhere, in the money market, in the commodity markets and in the broad field of company finance and public indebtedness, the efforts of the Central Banks and Governments have been directed to propping up bad business positions. We can see this most vividly in the sphere of Central Banking policy. The moment the boom broke in 1929, the Central Banks of the world, acting obviously in concert, set to work to create a condition of easy money, quite out of relation to the general conditions of the money market. This policy was backed up by vigorous purchases of securities in the open market in the United States of America. From October 1929 to December 1930 no less than $410 millions was pumped into the market in this way. ( US GDP was $104 billion in 1929) . The result was as might have been expected. The process of liquidation was arrested. new loans were floated... the issues in the second quarter of 1930 were of an order of magnitude comparable with the issues of 1928. This money was not soundly invested. for the most part it went to prop up positions which were fundamentally unsound. The easy conditions in the money markets then and later on made possible the carrying of stocks which would have otherwise been sold off. The fundamental causes of uncertainty and deflation were not removed. It is clear from their magnitude that they could not be removed in this way. The reflation merely helped them to persist. But this was not all. The policy of relief was not confined to the money markets. Everywhere the Governments of the world, fearing the effects of a break, intervened in one way or another to support weak positions. We have noted already the multiplication of tariffs. More direct forms of support were almost equally prevalents. The expenditure of the Federal Farm Board, the reconstruction Finance Corporation, the renewed support to restriction schemes of one kind or another, are only the most conspicuous cases of a policy which was universal . The effects we know: continuation of uncertainty, intensification of the deflation, prolongation of the depression. It is important to realise the nature of this diagnosis. It is not difficult for its critics , who are often people with something to save from the wreck themselves , to misrepresent it as a plea for bankruptcy as such. But this is not the case . Nobody wishes for bankruptcies . nobody likes liquidation as such. if bankruptcy and liquidation can be avoided by sound financing nobody would be against such measures. All that is contended is that when the extent of the mal-investment and overindebtedness has passed a certain limit, measures which postpone liquidation only tend to make matters worse. no doubt in the first years of depression, to those who held short views of the disturbance, anything seemed preferable to a smash. but is it really clear , in the fourth year of depression, that a more stringent policy in 1930 would have been more likely to cause more dislocation than the dislocation and disturbance which have actually been caused by it postponement? Robbins " The Great Depression" pp. 72-5 . |
