Modern Fiscal Theory and Policy

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Modern Fiscal Theory and Policy

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ThMls pre##nt#d to the Ueport* nent q £ Coaneroe of the âohooX of Arte k dclenoee of Uie Aaerioen Unlvereity of Beirut In pertlel fulfilment of the requirement* for the decree of Mut e r In Duelneu Admlniatrntion September, 1950#

ProQuest Number: 27550747

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f A JL/ A ^

This study d##l# with fiscal theory bofora and after Keyneaian economics and tl ' influence of modern fiscal theory on fiscal policy* The object of the work is to integrate and appraise the leading interpretations and inferences of the exponents of Keynesian theory, as It applies to fiscal theory and policy, with a view to setting forth the principles on which marked agreement has been reached* A section has been devoted to postwar fiscal policy in Uie United Btates and dre&t Britain in order to show tne extent of the influence of modern fiscal policy in practice and the difficulties encountered in its application* I cannot sufficiently express my deep gratitude to Prof* â*B*Uimadeh under whooe guidance and supw vision tliis work had been prepared*

1 can only say that any credit that tiiia

thesis may deserve goes primarily to him deep and penetrating remarks; while I hold myself solely responsible for all defects appearing therein*

1 am also indebted to Prof* Albert

Badre and to Mr* Iseam Ashour for occasional valuable suggestions* Musa I* Hussayni American University of Beirut, Beirut, September 27, 1950*

111. TAia or c o f T s Pr#f»o#*

..... ........... ................ ............ .........

Table of.......... .......... .......................



...................................................... r m rucAi m o p


m m - rucii, thkokt

iMt pouci

isrow thi kktmhia» m o t P t i a

A. Cluileal ••flaoRle theory emd orthodeoi ftoeol theory 1. Mele pronloeo of Cleooioel eoemomlo tbeery


t* Derived fleeel theory end method of emelyele................ IS S. The Botorel eerelleryi The moetrel budget............


Imfluoaee of erthedex oeeoomle theory am flteel pelley 1. Peblle ezpesdlturee emd yelieyt The doetrlme of retreachmoat. IT I. Tublie reveaee emd pelley# The theory of freetlfleetlem...... tl S. Attltede teverd publie berremlmg#....... .................. rucAL THioCT a p youcT A r m m




A. Curreat eeeaomto theory emd rnederm fleeel theory 1. Oheagee la beele premleee of generel eeemomie theory......... t# t. fleeel operatleae vleeed la mem perepeetlve....... .... .....


S. fleeel etrueture emd method of eaelyele e. Quemtltetlve emelyele# Telime of rermiue A eapeadlture..


b. Quelltetlve eaelyele# 1. teureee of (everameat reveauee., .,. ..... .... ..... 4# t. Camel# of ymbllo eapeadlture#................


S. Wrdea emd limit of the publie debt ........ ...... St 1. Imfluoaee of modéra fleeel theory em modéra fleeel pelley 1. fleeel peZleleo rlemed ee effeetlve derleee of eeeaemie oemtrel a. Tea pelley.........................


lv« J5U£ b« Publie •xpeadltvree pellelee...... e. Debt pelley fer fleeel oeetrel.

«.......Tl ....


t. Dlffereat reetee te ettele fleeel ebjeetlvee e. Adjeetleg the reveaee emd expemdlture etruetwree b. The belemeed budget eppreeeh

«... ST


e. Coipemeetory flnemoe.......

SO .. .. ... 91

d. Theery ef fbmet&emel flmeaee. .


9. Fleeel pelley beteeem extreme edherente endeppemeate...

99 109

4# Fleeel pelley la proper perepeotlee....................... 100 0. Seed fer eeerdiaetlag fleeel emd meaetery pellelee.. PAIT TOO »




FISCAL fOUCT 11 huotici

A. The Problem Stated.................


S. Fleeel Pelley la The thiited Steteei 1. Fleeel pelley lapreeeeeef fermetlem ........ ............ 199 t. The rnepleymemt Aet ef194S................................ ItS 0. Bepleyaeat Pelley la Greet Srltelai 1. Wltela'e Keememle Pregrem.



8» The White Paper Bepleymemt Pelley ef 1944... 140 soMAir AID

....................................... .

lUUooitAPnr.................................................. isi

MJiiuah mxivouijj^iiuiix % a t#rm "flacmX poXicy* h«a only rooontXy c o m into ootmaon UM^#.

Xa esswnca, it i# a now concopt oi' tno scopo and objective#

of fieoal operations tnat has emerged as a result of tne trend towards expanding t&te funetlons of govemiaent; the change In the belief In the unproductiveness of public activity; and the growing recognition of govemMnts as positive forces In the economic world* Like many other economic doctrines, it owes much of its origin to the influence of 'emergency* and 'personality'*

Professor D* H*

Maogregor, of the University of Oxford, has arrived at the follow­ ing deep and penetrating conclusion after having reviewed a century's literature of financial debates In the British Parliament.

"It is

notable", he says, "how the influence of a growing opinion upon the law has depended for its final impact on two factors of human progress, emergency and personality*

It is throu#^ emergency t rnt

the principles of the classical finance casM to be established and, ninety years later, overthrown*

In each ease the advocates of the

new outlook disentangled themselves and tueir case from tne emer­ gency itself, and sou^t to show tnat tne remedies iiad inde;*endent and permanent validity",

A parallel but more specific remark )&ad

been put forward by k#b.Swanson and K*r*Sohmidt when they eaidt "The decade of the I W s

was uoparallelsd in two respects*

It gave us

the Mnit depression on record and it brought a world of Keynesian ideas".

It is possible to say with definite assurance that fiscal

(1) Maegregor, D.H., (3) Swanson & Schmidt,

Clarendon Press, stmJKtioa or Presrsss IWcQraw-HiU »i, p* 1#

• a« theory and It* offspring fiscal policy owe auoli of tuair origin to the severity of the depression of tiie tiiirtieo and to tiie per­ sonality of Lord


There is no doubt that thinking takes

time but, as PoXayni said, "it Is accelerated if you are piessed for the resultI and the crisis of the thirties was bound to (1) speed up the process’** This in no way should lead to the hasty conclusion that fiscal policy had been an overnight invention; nor la it meant to say that a free enterprise capitalistic society had ever existed without important governmental activities suppui-tii^g, auppl«aetiting, or limiting private econooio activities*

"All throu^i the

history of economics af*d economic policies", writes Uertiard Join, "we notice the search for tiiat device of policy w%iich could be t2i used as a lever fox* influencing economic developments as a wn^le"* To the Hercentaliste, for ex&aple, tJie accuijulati m of money in the fora of precious metals, was ooz&sidered to be Uis importent element in economic expansion.

Thus, promotion of expox'ts and

discouragsment of imports "'was regarded as the key to a govarrment O) policy designed to proisote economic expansion"* then it was recocoised, however, that money could be added also by the creation of bank credit, oontrAl bank policy then took the lead in the field of economic operations*

A policy of implementing the dis­

count rate was devised and, up to the thirties, was believed to be effective in influencing economic activities*

The Great lep-

raseion of the thirties, however, shattered this confidence in (X) Poxmyml, M., ^

C— hrldR. Uniy.r-

(2) CoXb. 0., K a l n f lain* Algb X#*#X Pro4uc*i*n & fiau>lo/B«nbi T«oh< aie«I ~ V w . 59, «». 6,

(3) ihii*


* P*

- 3the effeotiveneoB of central bank policy wtilch coulu no longer be regarded aa the strategic weapon wiUi w^iicki a slack economy oould be lifted to a level of full employment*

"The conclusion

sugj^ested itself that ttie government must c o w to grips wltli a more vital element of the economic mechanism". This has forced economists to pause and reflect on the assumptions of the class­ ical economists* The latter have taught that low prices for factors of pro­ duction—

particularly wages and interest rates—

have caused

expectations of profit and inducement to expand business activity* More production meant increased payments of money in tne form of pay-rolls, and hence additional purchasing power*


business thus created its own market, provided Uie costs of production were sufficiently low, and credit was available to bridge tne gap until tne maikets had been expanded*

Luring Uie

depression of tne tiiirties, nowever, notwithstanding Uie fact t^mt costs of factors of production were low and plentiful credit was available, business did not expand* 'expectations'*

hence emerged Keynes'

Businems did not dare to oxpand except when

orders came in or when favorable market expectations oould be anticipated with a high degree of certainty*

If government wanted

to influence the volume of business activity without directly telling business Wiat to do, it must increase the amount of effective purchasing power*

This it could do, for instance, by

additional government expenditures on public works or on develop(1) dole, 0», Amor. Kol. Science dev., loc.clt*, p# 1126

•4• Mental projects idiich put idls raaouross to useful work wltile, at ths same time, it augmented wages and purouaaing power and created markets for business; or by reducing taxes thus free­ ing purchasing power and helping to revive markets* With the recognition of these interrelationships a new weapon was added to tne arsenal of democracy: Fiscal Policy* Fiscal policy has been defiied as "government expenditures, revenue, borrowing and debt management, consldored^witu a view toward their impact on tfie flow of purcliaeing power"*

In essence,

it is an aggrSto^te approach based on recognition that tho methods of raising and spending public aoneya may riave imi^ortant effects on the economic prooees as a whole; and tnat "the wtiole business of taxing, spending and borrowing by the state should be directed consciously toward controlling the econota/, and especially toward (2) combating business depression* and maintainiz^g full employaient". It is concerned wltn the mainteiumce of gross monetary expendi­ tures or total effective demand at a level appropriate to a satisfactory high volume of economic activity throu^ Influencing the stream of money payments by mean* of the fiscal operations of the state.

The emphasis is that the various fields of govern­

ment activity must be seen in their Interrelationship with economic developmenta such as national income, consumption, business investments, and otuer transactions of a domestic and international oharacter,

fisc JL devices may operate directly

on the stream of money payments, or may attempt to influence it

IW X w k , 1947), p. M S .

- 5Indirectly through their effect on tlie expenditures of individuals end business.

It is clnlmed that fieenl policy does affect t)te

general level of business activity and job opportunities without interfering with the basic principle* of free enterprise or the freedom of choice in consumption.

It is also claimed that it can

be used for deflating a boom and for stimulating a slack market. To atout adherents it appears that finally, on the basis of more refined economic theory and the experience of the depression, the long sought lever of oconosdLc policy has been found. One of the most ardent proponents of the new view, Alvin Hansen, states that "it is sound policy to control public expendi­ ture, taxation, anu borrowing so as to promote economic stability and continuously higu levels of business activity and full employ­ ment".

He looks to federal budgeting "as tiie balance wnssl in

tlie economy and, in a sense, as a fiscal engine pulling, its

(2) economic freight up tne inclines to ever higfier levels of living". A.P.temer goes further to say that ”t)ie purpose of taxation is never to raise money, but to leave less In the hands of the tax­ payer.

The government can raise all the money it needs by print­

ing it If the raising of money is the only eonsldsratlon"| and that "the purpose of borrowing Is not to raise money, but to make the public hold more bonds and less money".

Here the ultimate

in the conception of taxation as a fiscal control device has been expressed with the ia^lcetiw that "those who suppose that (1) Hansen, A., (k. (3) Bushier, A., ird, &d., (Moûrawlaîu Book Company, Hew Terk, 1 W \, p. 5 i . (3) ternar, A.P*, A # B m e m e ^ e g

ferk, 1W4), pp#

^^ t r o l . (Macmillan Uempany, Hew

- 6-

taxation existe to provide a meal ticket for govomment ar*;

(1) eimply betiirtd the tines".

Under this new school of thou^t

also it became no longer necessary for the governrwint to balance Its budget.

The govemnent should borrow freely when

necessary to keep the total volume of expenditures in the eco­ nomy large enough to provide full employment.

As one author (2) put iti "today budgets may be unbalanced on principle". "The iesue is not related to public debt policy.

It la a question

of the relation of government finance to the wfiole economy". Taese views nave developed snarp controversies amon^ economists and authorities on public fiiwnce.

Tne older view

wiiich maintained tnat govermaent expendituies should be restrictea and ttiat goveinwent should be kept as free as ^joosible from debt iü stili weld by many, but a trend toward increasing acceptance of thO new pniloso^diy is evident. it may be purtiaent here to state tnat tne fundamental Issues witii which the topic of Uiin Utesis deals may be clari­ fied by a brief comparison between its major aseuf^iptiona and ttiose principles of 'sound finance' developed during the nine­ teenth century; and practically universally accepted until tlie middle thirties of this century.

It seems to me that because

of differences In unstated premises, adherents of each philoso­ phy often find the views of the opposing school incompatible. Charles 0. Hardy suarterises these Issues in Uie following words# (1) Orov.g, H., T V o o M . gnot. (2) Newcomer, H . ,

(3) i h U w p. 12.



(Ü e m b r W g e Unlverelby



, p.


- 7"The nain cheraoteriatlc Which unifies t(ie aerie* of fiscal and monetary practices t^iat aro considered sound In the older syeten Is that they all tend to prevent Inflation; In the new proj^raa the unifying purpose Is the avoidance of deflation. The historic cods of balanced budgets, gold standard, and hig^i interest rates is a proven bulwark of stability against infla­ tionary pressures.

T!ie principal contents of the new orthodoxy—

encouragement of consumption, deficit spending, artificially low interest rates, flexible exc.ian^ee—

are effective ways of

resisting a tendency of the money flow to ehrlnk in volume, with downward preesure on inoo.^ production, employment, and prices. There is little dispute about Utis; the quarrel is really about tne relative importance of permanent precautions against upward and against dowesmrd disturbances of the value of money. "In part the oiian^e of objective is a reflection of tits tendency of mankind to be influenced most by ti%e experience that is most recent.

:^et wars of modern times were frequent enough

to keep the inflation danger fresh in peoples' minds as the standard sequel to unsound fiscal policy.

But in the thirties

of this century, deflation was so severe that soundnesB came to mean anti-deflationary, especially in the Bnglish-speaking coun­ tries where the postwar Inflations of the twenties were compara­ tively mild. "However, the conflict involves more than a change of flnanoial #*eotioe in response to a change in tne phase of the business cycle; it involves the underlying economic analysie. The classical


economics of Uie nineteentli end the first quarter of tlie twen­ tieth centuries was a realistic description of a society opera­ ting as it actually does operate at a peak of prosperity, with full employment Of resources and automatic clearance of markets through the operation of the price system.

That syntem never

succeeded in fitting depre sion neatly into its own framework; it treated them as mere episodes, temporary deviations from a normal state of prosperity. depressions to be Impossible.

IndSitd, it came close to proving It rationalised a system in

whicn financial practice was geared to the expectation of con­ tinuous growth of capital (financed by thrift) ana hence of productivity, income, and living standards.

The rival body of

theory which has developed since about 193^ (rapidly since about 193o) points as noRaal a chronic failure of the price system to keep market demand equal to production wiW&out a large volume of unemployed resources,

it is a rationalisation

of t^ks beiiaviour of a society suffering from chronic deikreasion. Prosperity is the temporary deviation from normal tiiat requires a special explanation In each case". A more striking evidence of the transformation in economic thinking and the Influence of emergency on public policy In a single decade is given by George Terborf^.

He says: " 'Our

situation is fortunate, our momentum la remarkable'.

Thus con­

cluded tite report of the Committee on Recent Economic Changes ef the President's Conference on Unemployment, written in the

• 9• spring of 19*9, scarosly six months before the onset of the greatest degression of all tine

They found the economy in

an excellent state of 'balance', a 'dynamic equilibrium', the preservation o' which was not to be taken simply for granted, to be uure, but was nevertheleoa to be confldertly expected*••• The Committee added: 'The conclusion is tnat economically we have a boundless field before us; that there are new wants Which will make way endlesaly for newer wants, as fast as taey are satisfied*.,#.*e seem only to liave touched t.he fringe of our potentialities, "Ten years later, a nation profoundly anaaen by econosdc catastrophe, dispirited by a taltikkg anu broken recovery, was listening to a very different revelation, proclaimed, like the first, under tne auspices of tne federal Government.

It heard

from Administration witnesses before Uie remitorary Natlotial Xconomic Jommittse t)ie sad story of the 'mature' economy,..... "Rarely if ever liave economic thinking and expectation undergone in a single decade so radical and so postentlous a transfomation..«.Obviously a product of prosperity, the rosy projections of the Committee on Recent Economic Changes eeemsd at the time consonant both with history and with sound doctrine. The theories of 'economic maturity' or 'secular stagnation', on the other hand, unkno#m at the time of the CMaittes, were deve­ loped In the dark valley ef the thirties In an effort to ration­ alise and interpret an unprecedented ex^iorience for^ which earlier economic aualyeis seemed wholly inadequate". (1) Terborg):, G#, tha bmeev of ^ o qoylc Maturity (Machinery & Allied freduets institute, Unicago, 1945), pp. 1#3.

- 10 —

Nowadays, after having paesad through two decades of dép­ ression finance and wartime expansion, with a multitude of debates and authoritative argumentation on the subject, it is possible to say that there has definitely been a glowing recog­ nition of fiscal policy as a j^ewerful iastzument for maintaining a hi4^ and stable level of income.

The claim that fiscal policy

is an economic panacea, to be applied indiscriminately w^ienever anything t^ets wroiu^ in tne economy without regard to the nature of Uie laalady, is considered to be an oversimplification of the issue and a simple delusion.

A distinction is nowadays drawn

between tlie proper use of fiscal policy, together with policies calculated to minimise the need for it, and its Improper use as a panacea.

Applied in the latter sense it is oonnidored to be

a dangerous device.

Although Itn usefulness is recognised and

its existence is considered to be necessary for counter-balancing maladjustoents, "It would be the grossest self-deception to titink that we have at present either the knowledge, the experience, or the institutional mechanisms to apply this weapon in a closelycontrolled and scientific

To conceive of this device

as a simple and all-sufficient meotianioal solution for our economic ills is simply naive.

At best it is only one treasure,

among many, to be used as a supplement to others, not as a substitute fer them". It is

Intention in this thesis to analyse and appraise

IGie basic aspects of uodern fiscal theory and policy in the (1) Terborgh, Q.. op.cit., pp. 223-224.

- Il light of current contrlbutione by eonteaporury économiste to tïiic virgin field of aooial economics end its application In two of the leading oa^)italistio societies, luuoely, tne United States and Great Britain.

. 12 .

üAifl-affi jf rufiAh nggRi à m a c i Il FISCAL THSQRr AND POLlaT tlRTORK ■THF. KRriESlAJ U::V A.CLASSICAL ECottOma TllnORY k QliUOUOX MSGAL V i r m l

Bme&g PrtSgM

££ Qtaanl


Classical aconocaiats have always contended that wide-spread unemployment for any very long period was on impossibility. This belief has eteemed from their conviction in the existence of a flexible economy %d&lch prevented a general overproduction of goods.

"Private enterprise, it wee aaeus^ed, tended always to

employ all available factors of prod^tlon, provided that wages and prices were sufficiently flexible".

At tiie worst, ttiere

oould never be more than frictional unemploytscnt or sectional overproduction,

it is true that some olaasicals have visualised

Instances where too much of any one article may be produced In the short-run, but, they argued, this was a temporary situation, since anything produced could be sold at g price provided of course %^e price was low eneu^.

bhen the price of an over­

produced ooowodity falls, additional units of it would be sold and the situation would autosmtically correct itself. owing to the mobility of resources— flexibility in the economy—


anottter assumed element of

factors of production would move

out of uaprofitable enterprises into more yielding ones.

As a

result of thiu free flowing of factors of production, and the ready adjustment of prices, production would be facilitated and full employment promoted.

Institute ef Staiistioe, s a s u Uaettwell, oxfore, 1944), p. #5

• 13 • Kurtikormore, it was oontsndeii tliat wages and interest, i.e., ttie price# for labor and capital, were mobile.

Anyone wt>o oared

to work, they argued, oould find ecq>loymont at some wage rate. Une mployment under certain circumstnncee, if and when it occurred, was voluntary in nature. the rate of interest.

The same was considered also true with

To the ciassicals, oversaving was impoeeiMe#

hen people saved a larger proportion of their income than eetial, the rate of interest would fall giving incentive to entrepreneurs to absorb tne addltiofml finance capital offered and use it to employ more labor.

If the volume of savings were snail, interest

rates would rise, tnus diecouraging investwmt which meant little demand for labor,

as a result, wage rates would fall to timt

level wtiiolk would allow entrepreneurs to borrow money even at higu interest rates#

WiUiin tiiis fraoeworK of reasoning: when

all savings were invested a W all laborers, except those Wio voluntarily abstained, were hired—

it followed t)iat the economic

M*der would tend to maintain itself in atiullibrlun and at a state of full eeqiloyment.

In other words, according to orthodox view,

the economic order was a self-adjusting mechanism* BtrtTW

Ihwnr *trf. Hffttwd ,gf AnUyriat

"Every general theory of ooonocdes", sayn Schumacher, "has as its natural corollary a theory of finance idiich translates tlie principles of tho former into money teres and Into practical financial principles.....Financial theory can never be more than the 'reflected image* ef general economic theory"; and that "the

• 14 (1) logical corollary of orthodox économie# la orthodox finance". When it ia aaeumed, me the claeeicale did, tiiat all factor# of production were nortoally and inevitably utillmed by private bueineee, it followed that "the etate can obtain t)ie uee of euch (2) factor# only by preventing private busineaa from using them". Khettier the state prints additional new money and compete# with private business for the use of available resource#—

with con­

sequent preesure of demand and inflation, or it cwmands part of the income of oitisens by way of taxation— expenditures are balanced by tax revenue—

in which case

a definite harm in

first instance, and a mere substitution of public for private exp enditures in the second, would follow.

"From this

it follows that the first principle of sound public finance is that the budget should be balanced",

doiiuaacher also draws the

following inferences Wiich he derives from Uie above line of reasoning# "First, that t)%e state cannot increase the level of business activity,- a truism tdien we start from the assumption Uiat private buslnesa automatically maintains that level at full employment.

Becond, that the best budget is the enallest budget,-

since taxes always to some extent impinge on private saving; a reduction of private saving being assumed to imply a reduction of private Investment, taxes have to be looked u,:on as an impedi­ ment to the accumulation of private capital.

1) y«num.«h.r *.f._ 2) Ibid.. p. 86. 2SSa

«f ft.ll

Third,...#,that the n^. QB.ett.. pp.8).#6.

- 15 most undoslrablo and daatructlva taxaa aro those that if^inga moat heavily m

private saving, namely death duties, super tax,

business taxes, in fact all taxes on the wealthier olasses.


direct taxes on the other hand, could be taken as impinging primarily on oonsuraption and could thus be oonaidered eoonomioally harmless—

alblet socially, perhaps, somewhat objectionable*

Fourth, that a budget deficit—

necessitating state borrowing—

leadc possibly to inflation and certainly to a reduction in the accumulation of private capital.

It leads to inflation if It is

financed by the issue of paper money or of ohort term goverzsaent debt, becauee then Uie rate of interest does not rise sufficiently to produce a fall in private investment W&ich offsets the increase in state expenditure.

And if it is financed by tho issue of Imi^"

term govs Lament bonds, such bonds are simply substituted for the bonds or shares which private business would otnsrwieo liave been able to place.

Fifth....that a budget ùeficlt, even tiiough

fiiuuioed in a way which avoids inflation, must lead to a reduction in the rate of protpress (because it derives from the savings of the conaunity which would otherwise all have produced new real capital) unless the government uses borrowed fUnds exclusively for the oraation of capital equipment at least as important as private capital.

These pBrinciples follow logically from the

original proposition of classical economic theory, namely that private business automatically maintains full employment".

(1) Schumacher, S.F., op.cit., pp. 86-67*

- 16 *


Th. «Itoutral

In the li^ÿxt of the above reasoning, it beeoises evident that in the field of public finanoe, the legacy In^ierited from the 19th. century stipulated thnt govemmert activities should be held at a minimum; and that individual initiative, regulated by conpetition, should be allowed a free hand.

From reasoning

out that governmental activities wern mainly unproductive in nature followed tiie inference Wiat Utey siiould be held as low as possible.

At beet, taxes were co sldered to be a necessary

evil; and that the best tax system was Uim one that taxed least. It was recognised naturally tuat tiia financial operations of the state would have sons effects upon such matteza as production (the effect of taxas upon the selling prices of coBxxKUties for example) and Uts distribution of wealUi and income among oitisens ; but the line of analysis followed was mlcrosoopic in nature.


main objective of a tax levy was to raise revenue; and in the field of public borrowing, it was believed tiiat tho govemraent, like the individual, should not ^ into debt if that were poeeibla. These traditional conceptions of govenment policy would presisaably have recognised no need to resort to fiaoil measures for the purpose of influencing the volume of business activity. Aa long as there was assumed the automatic tendency in the economy toward equilibrium at full employment, the inference followed that government action in controlling public revenues and ex^fondim tures should be determined primarily by narrow considérations, for effects of a gMoral character, principal reliance was placed

. 17 ~ I in central bank policy.

It atzould be added furtiier tiiat since

ttie task of goverrusent had been essentially, in past decades, one of asintaining internal ordnr and external defense, "govern­ ment revenue and expenditures were not in a range of miss where they could significantly afreet costs or Incomes over the idiole economy (federal government expenditures have been only a small proportion of the gross national pi'oducti #

in 1909.


1913. 3.4^ in 1926)1 nor^ws any stinuluo to ex{>enditure in the economy felt to be needed".

The plausible conclusion followed

that the govarzment budget should be as neutral as possible in its effect on the allocation of resources as determined by private enterprise.

Public AÜLfAmnditurmm ^

¥ hetreqch.^t,

fftUqffl Ifaf

The tendency to uarstkal economic arguments in support of enlarged government outlays is a coc*paratively recent develop­ ment.

"While certain categories of public expenditure, such as

direct relief and work relief programs, ^lave typically risen in periods of crisis or depression, they have rarely, until recentl^^ been thought of as positive aspects of government eoonomi policy*. Because of the assumption of full employment, discussions of public expenditures in classical literature have never given adequate thought to the relatlonsiiip of changing levels of outlay to the general economic situation.

The maxims of Adam Smith,

(i) Morgan, Th., lacoaMi 6 itnolowutnt. (a) aim#, ÜM.,

1947), »• 2U. ^ varsity rress, Mew 1

Inc., Haw Tot*, (GolUMbU

- 18 —

that the role of tho atato %ma reatrlctod to tïio proaarvat on of law and order, of national defense, the establishment of Jus­ tice, and the erection and maintenance of certain public works remained long unchallenged in theory, althou#i the scope of govsTmmental activity expanded greatly during the nineteenth century.

"Not until the business cycle had come to be recogni­

sed as a characteristic phenMenon was it pertinent to find an


economic Justification for enlarged eaer^^eney expenditures*.

P.J.Strayer comments on tliie by saying that "tUie typical dis­ cussion developed tlie do^oa tnat tne least government was the best (a Jeffersonian maxim) and tnat the bunlen of proof for increasing govem^jsnt axpanditurss should rest on the advocates of expansion.

No rules tnat would permit the translation of

Wiese generalisations into definite figures were devised.


was assumed that expenditures would not change radically in the short-run slWiough much comment was devoteu to the long-run (2) trend toward hi^er outlays*. The alar&t at expanding government expenditures and counter-arguments submitted during the classical era are ^ s t illustrated by the following statements quoted by Maegregor from debates In the British Parliament % "This great, rapid, and menacing e3q>enditiu?e. If those in office do not mend their ways, a financial crisis will take place in this House, which will render It impossible for the public business to be earried on." (Gladstone, 1668) "There are three principes on which all good finance should be based. The first is, that there should always be a certainty (1) Fine, 5h., op.cit** p. 6. Stny«r, f.j., -Public a*p«ndltu^ «nü ftagr. kcwi. Uw. V«X. 39, *#, a, M*rch, 1949, p* 385. (3) N*0|(r#gpr, V*M., at>.clt«, pp. aa»24.


- 19 *

that, whatever the charge may be, it can be paid. The second le, that In tine of r>eaoe and proaparity tSie country etiouXd reduce their debt; and the third, is. that t!iey should reduce their expenditure". (Gladstone, 1883). "The figures make a return to more thrifty and economical expenditure the first and paramount duty of the government". (Asquith, 1906). On the other side there were such stAtemente similar to the following: "Mere abstract and declatory opiriions in favor of reduction and retrenciiment are of no use lAatever. I liave so often maintained it in tills House that I am almost asliaaed to repeat, but unfortuiM ately it is not a principle which has yst suffici.ntly entered into public opinion— ax^enuiture depends on policy". (Disraeli. 1863). "We know tnat it nas been said, and extremely well said, that expenditure depends upon policy. X hope that we shall not Invert tlie sentiaent and say ti&at our policy ou^Jit to be deter­ mined by tike expenditure wtdch we make". (Horthcote, 1879) # The opposition of ideas continued even after >/orlti War 1. la 1937, Mr. Asquitii held tiiat "tne only effective way of dealing with econoc^y under existing ooaditioin> is t tOt tite Chancellor sikould ration all t^ie Lepartmenta,

it must be tone all rounu";

and hir Robert aorne replied tnat "%éien we come down to bedrock, the cause wîiioik is chiefly responsible is the policy of the goV'jmment.

It is policy upon which axpem'iture is founded".

The doctrine of retrenchment, however, was the one destined to reign until the early thirties of this century.

Row, it

stiould be asked, what is to be said in support of such a polioyt Aooording to Kacgregor, retrenchment has had two cieanlngst one specific and the other more general and lasting.

"In the

first place, it has been a postwar appeal against the tendency of ex;>endlture to be stepped up after a war and to remain on a high level", with consequent increased debt charge and rising (1) Ü.H. M a c g r e ^ , op.cit.. p# 4J«

— 20 •

prices, besides the feet that "war causes the principles of exiisnditure to become demoralised and to give way for a tine to sheer affordability»•«••A great war both increaees the funotior of govs! Dttcnt and creates familiarity with larger figures of expenditure"»

In its more permanent as;>eot, "retrenolment (2) has been a well-intentioned theory of eaplo/stent"» Its line of i*eaBonii>^ ran as follows#

The beat way to relieve tna burden

of laborers was, of course, to give taea employment#

The latter

could only be insurml by reducing taxes which pi eseed more im^ediutely on tJie productive industry of the country#


ment, heavily dweliin*. on tiie elasticity of demand for goods and for labor, ar*^ed from lower taxation to sore ewpioyment, from more employment to more eonsuinption, hence more revenue, and to still lower rates of taxation#

"Any surplus was to be at once

given away by remissions of future taxation#

(in British finanoe

the income tax was brought in to bridge the interval between tlie fbll of prices and revenue and the compensatory Increase of consumption and of future revenue"# Such a line of reasoning is perfectly compatible with the principles of orthodox finance#

It is symbolic of the extreme

individualism which finds little or no good In government! and considers public spending as almost puro waste*

This ia in

sharp contrast witit the other extreme of easy optimisa that would sanction unlimited public spending, because the letter's I) Macgregor, L.H#, op.cit#, p. 4) 1:1

- 21 •

ld#a that publie #pending may generate the income which eneblea it to be carried on is opposite pole to the former*# Ides that public expenditures should be so restricted that existing incomes should be left with a sufficient margin for ej^istin^ needs. Public a«v,nu. and PallcY: Th« Theory oC Fructification: To the classics, ttie principle accepteU conoemlr.g revenue taxation was tnat it siiould produce t^e maxi&wm revenue witli the least disturbance to tiiS economic organisation.

"This is a

negative principle", writes^buohler, "Wwt taxation should work as little injury as possible".

«UKiern economists, on Uie other

hand, ràio believe In the eiXectivensbs of regulatory taxation, would employ taxation as a positive force of social progress, reform, and stabilisation. TliS early writers on public finance nave usually frowned upon the exercise of Uie taxing power for r«on*-revenue purposes because they believed "t)tst the effectiveness of taxation for (2) revenue may be undermined when It is turned to other uses". In tlie oase of a protective tariff, for example, they argued that if protection were to be adequate, no revenue would result; and that the best revenue tariff was one which gave no protection. Taxes should fall mainly upon consumption; and progressive taxa­ tion was criticised as impinging upon Industry and the formation of capital; besides "leading governments to embar^ upon tlie un­ certain seas of social reform witiiout redisse or compass, tiiereby endangering the revenue system by weakening Ute pillars of Uie capitalistic systesr#

There were instances, of course, wtiere

1) a.d.buetiler. op.eit., p. 573. ,2^ p. 574.

- 22 -

•upiXMTt had been given to taxation on non^reveuue grounde, but theae were Incidental* During the 17th and l&th centurien, many uritere In Kngland argued that tnxoe have a tendency to stimulate those paying then to greater industry and frugality, and tlint industrial Inprovemonta sprang oat of the effort to Increase production in an attempt to lower the burden of taxation, but the more cautious writers have observed that such favorable consequences could only follow if tixes were only moderate.

A century later (1852),

J.U.HoCuUocU, an (English ecooomist, argued that increased taxa­ tion in England and t^'rance during the late 16th century was aoooopaniod by increases in wealth and ixMluutry, but he warned his readers that such benefits were assured only if taxes were increased slowly, otherwise enterprise and saving would be stiffled#

In his words: "taxation, acoordin^ to its ma^^tude

and the mode in which it is imposed, either makes men industrious,

(2 ) enterprising, and wealtiiy, or indolent, dispirited, and iupoverishsd". The German eoonocsist, Vagner, has urged the use of taxation for social purposes*

Us advocated progressive taxation as a means

of equalising the distribution of wealtli and income*

On this

latter concept Schumacher remazits: "The concept of taxation as a method of Income redistribution is forel^ to the theory of public finance that derives from classical economic thouf^t* is forei^ in the sense that it has no economic merit—

(2) Ibid.. p, 225*



. 23 . It may have merit* on the grounds of social justice#

To use taxa­

tion for the purpose of transferring income from the rioli to the poor appeared to the classical economist as tantamount to sacrifi­ cing pro^jTesB to current enjoyment,

docial reformers were in a

dilœnai greater social Justice appeal eu to bo obtainable only at W&e price of retarding the accumulation of capital, and any plea for it could be answered by tiie question; Is is not better to cease worrying about the distrlbutloa of Uie cake and to concern-

(1) trate on increasing its sise". The conservative view nss been Utat non-flscal uses of taxa­ tion were objectionable except under special circumstances and for specific purposes; the sole purpose of taxation being the raising of revenue.

Sir Joslah Stamp referred to "taxation for revenue only"

as the Victorian slogan; maintained that ulterior social purposes are permissible only if they are secondary; and mentioned few instances in which Aden Smith proposed to erpioy taxation for the 12} regulation of economic activity. Tiia conclusion suggests itself t)mt U;e iiistory of taxation demonstrates that, while revenue nad generally been the purpose of taxation, regulation was frequently an incidental purpose.

Kven the collection of revenue should not

be excessive particularly from progressive taxation suci) as tiie income tax whose effect "is to dry up tne streams which fertilise (3) the whole field of employment and industry". Aoney ought to remain in the pockets of the people, tiiere to fructify by use, to stimulate the efforts of their industry, and to add to the resources of the state


i f fiill BMilnnwnti ^ « o it., p. 9i«

(2) 8tamp, J., ^indemejpai

Rsv. Ed., (Mso-

(3) Lord Asquith, quoted ey mofregor, op.eit., p. M .

— 24 *

Àt&itud# Tanard Publia t»arrowln«i

The earlieet writers on public debts have situer held excessively optimistio or pessimistic views concerning their effect#

The former considered the debts of the state as " a

mine of gold", owed by the right hand to the left and, if pro­ perly made and emi>loyed, enrich#* Uie country and did not im­ poverish it.

The latter argued that public borrowing caused

undue concentration of population and wealth at the capital, caused injurious inoroanes In taxes, and enabled fundliolders to live a "useless and inactive life" at the expense of the industrious taxpayers.

The controversy io best illustrated by

the views of Karl Uietael, a German economist, who raised a vigorous protest against the opinions of Adam boith and his disciples who condemned public borrowing.

Uietsel said;

"from Adam 8mith*s time down to the present (1655) a one­ sided view of public loans i&as prevailed in financial tueory, and is encountered in Uie worx of most w& iters.

It is based

upon dmith*s erroneous conception of capital and income#


brief the substance of this doctrine is as follows; "Taxes are paid out of income; loans out of capital#


therefore, the funds needed for extraordinary expenditures are raised by taxation, the people, as a result of their natural dislike of weakening their economic position, will restrict tlieir consumption and endeavor to pay the taxes out of their net income.

In this way the capital of the community is net

diminished and Industry is not disturbed; while the whole effect

- a> -

of tho extraordinary expenditure ie to oauee a simple retrenclinsnt in consiroption*

if, however, tne extraordinaiy outlays

aro met by loans, the funds will cwoe from the ospital of the community.

By trtis process the supply of capital will be red­

uced, and future production of wealth will be decreased.


this way society is permanently injured; for the capital thus expended is lost beyond recovery since it is destroyed in un­ productive consumption Wiich the state undertakes throu^ its agency.

If this view were correct, tae practice of public

borrowing would thereby be unconditionally condemned, ately the case is altogether otherwise.


In Smith's view we

encounter various fundamental eirors of prevailing financial theory; a false conception of capital; a one-sided notion of productivity; and the arbitrary aeuum^tion of Uiu existence of such a thing as a distinct net income" • After expanding on the above-mentioned criticisms, uietael then proceeds to argue the advantages of public loans; that tiiey enable governments to raise large sums of money very quickly; make it unnecessary for governments to increase taxation to an injurious extent; encourage thrift; enable govemmont to place part of the burden of an extraordinary expenditure upon future generations; increase production; and add to the wealth of the (2) country.

It may be added that ever since tlist date, the heat

of argument for and against public borrowing among economists and public men has never subsided, (X) Quotad from Oh. B u lle e k . S .i.e tm d R «#d ln x. in Publia Flnmmam. . . o p .e it ., ppTTR ZdW # (2) Ibid.. pp. 245-851.

- 26 —

hen a ooontr/, however, wîietlier wisely or unwisely, ooanits itself into debt, Uie desirability ol redeeming Uiat debt has generally been urged by classicals,

Adam bnith, iicardo, and John

Stuart IU.11 have advocated such a policy.

After crossing out as

irapractiosl the possibility of a general contribution assessed on property alone to pay off the national debt in one lump sum J.3. Mill suggests the second alternative of paying it gradually by a surplus revenue.

He says*

"The desirableness, per se, of maintaining a surplus for this purpose does not, I think, admit of a doubt.

We sometimes,

indeed, hear it said that the amount saould rather be left to 'fructify* in the pockets of the people.

This is a good argument,

as far ap it goes, against levying taxes unnecessarily for pur­ poses of unproductive aai>enditure, but not against paying off a national debt,

for, what is meant by tae word 'fructify'7 if

it meana anything, it means productive employment; and as an argument against taxation, we must understand it to assert, tliat if the amount were left witli the people, tiiey would save it, and convert it into capital*

It is probable, indeed, that Wiey would

save a part, but extremely improbable that they would save the whole* while if taken by taxation, and employed in paying off debt, the whole is saved, and made productive.

To the fundholder

«die receives the payment it is already capital, not revenue, and he will make it 'fructify', that it nay continue to afford him

an income.

The objection, therefore, is not only groundless,

but the real argument is on the other side; the amount is much more

• 27 • certain vf fructif/iag if it ie not left in tlia pockets of the (1) people". in tae light of Uie above analysis it can be Inferrsc U&at, as a matter of public policy, Uie problams of govamcient finance seemed relatively simple.

To ration public expenüitures and to

lower taxes and still be able to ;*ay off debts, if and should they be contracted, wms an ideal situation.

A useful rule of the thumb

developed was that the budget should be balanced annually although this rule was often violated.

Theodore Morgan says that "in the

154 years from 1792 through 1945 we (in the U.Ü.A.) have had ^3^ years of surplus and 61 years of deficit in tie federal budget". But the idea of a balanced budget "remained as a convenient check on the propensity of legislators to vote new expenditures (generally politically popular) without voting now taxes (politically unpopu­ lar)"#

finally, under the assumptions of Uie claauicals, a

national debt did represent a burden—

not necessarily in the sense

of a mortgage on posterity, but in tne sense of a wasted opportu­ nity.

"it did measure tue extent to wUicii the state iiad...prevented

the hard-earned savings of the community from augmenting tiie real capital of the nation. on these assumptions—

And a reduction of the national debt was— logically tantamount to a making good for

the extravagances of the past* an artificial augmentation of current savings and thus of current private".

1) Charles Bullock, pp.cit., pp. 654-55. 2) Morgan, Th., op. cit.. p. 211. A Ibid.. p. 212. 4) Schumacher, B.f., op.eit., p. 68.

. . 26

U t flflGAL TilKunï A;,U i'OLiCÏ AfTER THK K&fNBJlAM A.cuRiiLm uc.\m


Chang». in HMle Pr«al«M of Q*n.rml goonuiale Th«orvi The preceding discussions have fairly demonstrated that the self-equilibrating philosophy of the orthodox school had been the generally accepted theory until a recent date.

During the thirties,

however, when popular confidence in the eelf-adjustlng capacity of capitalism was at its lowest, lord Keynes stepped to challenge most forcibly the classical assumptions and to provide a tliaoreticol framework for popular current acononia belief "wtiich left classical theory discredited by the scholarly criticise of one of tho most outstanding of the world's economists^ as well as by the practical experience of the great depression*. in contrast to tne ertaodox view, Keynes argued tnat general overproduction can occur in the sense Uiat there may be a lack of effective demand for all goods produced,

ieople may have tits

desire for commodities but, unless this desire is coupled with adequate purchasing power to support it, there will be a deficiency of effective dei^and.

Here Keynes developed t)ie concept of aggre­

gate demand, a demand, not for a particular good, as in the analysis of market price, but for goods in general.

He also

attacked the traditional doctrine that the volume of saving and investment is nicely adjusted by a fluctuating Interest rate; and maintained that abstention from consumption meant not an (1) The emphasis in Uiio section is placed upon those aspects of contemporary economic theory which are directly related to the field of fiscal theory. (2) dolm, 0., "fiscal Policy", The Mew laanomioa^ deymour Harris, £d., (Dennis Dobson Limlte37^îsndin, ifW), p. 4)2.

- 29 -

automatic accumulation of capital.

He substituted for the dictum

"what wa don't consume, tho business man usas for investment" the opposite statementI "unless we consume, the businessman refuses to invest".

To him the real cause of unemrloyment seamed to be a

disproportionality between the desire to save and the desire to invest or, to use his own terms, when the propensity to consume and invest runs short of the propensity to save. While the tsaonings of Lord Keynes oad been challenged vigorously by many writers, it is generally agreed he ham made great contributions to the fields of economic theory and policy.

He called attention to ways in which alterations in the

volume and value of money are usually associated with other changes in the economic system.

He demonstrated, for example, how varia­

tions in tliO quantity and use of money bring about changes in the volume of production and the extent of employment.

He pointed out

that our economic system was not the flexible, self-adjusting mechanism which orthodox economists described.

Rather, there

were inherent in it elements of rigidity such as sticky prices, inflexible wage rates, and influential pressure groups, which interfere with the readjustment process in the market for produ, ears' as well as consumers' goods.

In view of such impediments

to an adjustment io the cost-price mechanism, aggregate demand as well as the else of the national monetary income are matters of great significance. According to the theory initiated by Keynes, a larmier effective demand, leading to a higher level of employment, will

- JO -

depend, given e cartnin propensity of tho comnunlty to consume, on the snount of current investments.

In turn, the amount of

current Investment will depend on the inducement to Invest; and the inducement to invest will depend on the relation between the schedule of the marginal efficiency of capital and the com^lM of interest rates on loans of various maturities and risks.

By lowering the interest rate, investment and effective

demand may be increased.

If, however, tne forcing down of

interest rates does not bring about sufficient investment, as it probably will not, compensatory government action in the form of deficit spending is recommendsd.

In Keynes' wordss "1 expect

to see the state, which is in a position to calculate tlie margi­ nal efficiency of capital goods on long views and on the basis of the general social advantage, taking an ever greater respon-

(2) sibility for directly organising investment", "Autonomous decisions to invest in privately owned capital goods or the government plant are, according to Keynes, the main factors determ&lning the level of Ineone and employment.

An auto­

nomous change in Invsntment, whrni there is unemployment, causes a change in income and employment which ie larger than the initial movement; the relationship between cause and effect ie determined by a 'multiplier* which in turn is detenained by the 'marginal propensity to consume'.

Under the institutional

arrsngments of the csfitalistic economy there is no mechanism that induces investments of Just that amount necessary to maintain (1) Keynes, J#k., _ |temmv (2) Ibid.. p, U e «

- 31 full employment of mil available resource*.

Inveotments may be

80 large as to create an inflationary pressure or so low as to result In ciironic unemployment.

Classical economics (with few

exceptions) regarded full employmont as the 'natural' state of affairs and nad to loon for specific causes for explaining actual under-Sijploynei.t.

froui he/nes' analysis, it follows Uiat

tne economy may be in equilibrium in eituer a Aiigti or low level of e^loyoient, so tnat contin*.int, full eaployiMtnt of all resouroes can be^sj^laineu only by reference to specific historical circum­ stances".

furtaei'more, of tae tares psychological propensities;

the liiari^aal efficiency of capital, liquidity preference, and tae propensity to co,&suu*e, waich, to^etaor with tna quantity of money, determine the level of income ana employment, teynes accords tne third factor a special significance.

"With Uie aid

of Keynes' consumption function, a tneory of economic oscilla­ tions containing Uie acceleration principle as a central feature (2)

was readily developed".

Unemployment, according to Keynes, may

result from action of any of the three propensities: a rise in liquidity preference, a drop in the mmi\;inai efficiency of capital, or a decline in the propensity to c msume.

The level

of incoLis and employment can be determined if we posseas the knowledge of the marginal propensity to consume, the marginal efficiency of capital, and Uie rate of interest, Uiat is, liqui­ dity preference plus the quantity of money. "The answer, following Keynes", writes bherwood fine, "for


UoU, Q«, m a t , p*

op.eit., p. 454.

- 32 -

technologically advanced and wealthy countries like England and tae United States, is to be found in the disposition of the pro­ pensity to consume to decline or, to put it in another form, the propensity to save to rise.

With the accuuiulation of wealth, a

decreasing portion of a coouAunity's funds are directed into con­ sumption channels.

IL* volume of suvin^o la consequently an-


And in Keynes' words: "....tho richer the community,

tue wider


tend to te tue

between itu actual and j*oten-

tial production; a w therefore tne more obvious a w outrageous the defects of the economic system,

yor a poor coAiinunity will

be prone to consume by fax' the greater part of its output, so tiiat a very taodeat measure of investment will Le sufficient to provide full omployoant; idiereas a wealthy community will have to discover much aapler opportunities fox investc.ant if the saving propensities of its wealtliier members are to be compatible with the employment of its poorer members,.,.But worse still. Not only ie the marginal propensity to corxune weaker in a wealthy conjiaunity, but, owing to its accumulation of capital being alxeady larger, the opportunities for further investaent are leas attractive unless the rate of interest falls at a (2 ) sufficiently rapid rate". Aggregate d#aand is, according to hik&, the ultimate force determining tne alae of employment opportuni­ ties; and "consumption is the end and object of all economic (3) activity". Aggregate deuano can be derived only from present |1) fine, ÜÜ., op.eit.. p. 32. — f— *, J'"", liinorv. ep.uU., P> 13) p. iU4.

- 33 conau ptlon or from present provision for future oonsuuption (t:iat Is, the creation of oapit goods).

Consequently, t!ie

greater we provide for consumption der?ie;iU of tne future, the lesB room there exlatB for fortiior activity in Uiis direction, Slid Uie more do,:endont we becoi:.* upon cax*rent conauuqitiun as a source of douane,

/ux'tneruure, tüe lax\^er our incoue grows,

the gx'eater tends to le Uie difference botwee^ income and con­ sumption outlay, a^u. tne greater tiie di&proportionality between productive capacity and effective Tîie above lino of analysis brings us face to face with an important contribution of Keynes' theory of o/'ployoent to busi­ ness cycle analysis wiiich is diecuased under the oversaving and the under-inveutment theories of business fluctuations. John H.


illlama awmoerises and com^nanta b: iefly on botii tiieorioa

in the following words; "Keynes's oversaving theory", ha says, "is Uarivod from psychological laws opei'ating in the institutional fmmework of modem private capitalisa,

lîoat iupoi^ant i^ the propensity to

consume, according to wtiich as income riuas u part of the increase is saved.

Keynes believes an increasing fraction is

saved, but tliis iie says ia not part of the law.

To prevent

reduction of income, output, and euplo^iaent, investment must increase equally with saving, but investment is limited by Uie marginal efficiency of capital (dioolnishing productivity as interpreted by exfjectations) ; and Uie coat of investment cannot be reduced sufficiently by lowering the rate of interest because

• 34 at some minimum rate w# prefer liquid funds to tne risk of investmerit*

Wet idle saving forces income and mapio/ioant down to some

level at which, tiiroug)i Uie decline of saving, investment and saving becoiue equal#

To get mure income and employment we must

have deficit spending to offset idle saving or must tax away and spend tae idle saving,

Xnis fisc. 1 policy should be acoorajjanied

by monetary action to reduce interest rates and overcome, so far (1) as possible, the effects of liquidity preference". Fraf. ^illiame remarks that tiiis theory merely tells us that ae we profp-eee to hitter inco: e lovele, economic progrees becomes harder.

Although Keynes' statement abuut the propensity

to consuBe Is a plausible hypothesis, its application is limited by the fact that it cannot be applied to pr^iducer's saving, at least to cor{>orate savings, wtiich are an important part of the wtiole; and it fails to account for the opposite tendency in tlie business cycle, which Keynes had previously described as the excess of inveutment over saving In the boom period.

He adds further

that in discussions of fiscal policy, Keynes' hypothesis about saving has been too readily accepted as law or as fact, altnougli no one has yet given us estimates of saving of a kind that really bear upon this argument* Turning to the under-investiaent taesia, Hrof. killiaas says tiiat it "has a better factual foundation W m n Uie oversaving theory, and presents a stronger case for Uie long-run deficit spending#

It is based on the view Uiat as Uie capitalistic

(1) . m i » . ,

• 35 economy progreesee. It reuUieo a stage at Wiich Uie opportunities for investment decline.

Ttils mature euonosnr tnesie i& too famil-

(1 } 1er to require elaboration, it uwea, in general, tue same analy­ tical apparatuo as tae overeaviub theory, otartiiig fiom tiie saruo truism Uiat inveuUaeiit plus consumption equal income, the same criterion of prosperity* full euplo/mant.

it nas

but the ueo-

line of opportunities for investment ie not in Uie other tneory, ami Uie tendency toimrU oversaving is not necessarily a part of Uiis one, though, as 1 have said, in much of the recent discus(2) Sion the two Iiave been combined".

Prof, Williams concludes by saying]

"Tho reasons wliy, as

an economy matures, Investment opportunities decline, have bean presented with great force and much statistical support.


of them carry considerable conviction, particularly as regards their bearing on amploysient.

Thi& is especially true of the

technologioal changes from capital-using to capital-saving devices*

1 am less convinced by tiie reference to declining rate

of growth of population, not only because it relates to indivi­ duals rather Uian to families, but because it unduly subordinates, X believe, the possibilities of changea in quality (standard of living).

The argument about Uie passing of tiie frontier seems

(1) The so-called stagnant economy Uiesis is usually associated wiUi Uie name of Alvin hansen idio argues tiist declining inveetment is due to a decreasing rate of ;w)pulation growth, the jaoeing of the frontier, a deartii of great new industries, ano the increasing ability of business to finance itself by depreciation reserves and reinvested earnings. (2) Williams, J.H., op.eit.. p. 75.

- Jb .

to ne not otm of the strongest, largely because X an Influenced b/ my earlier studies of International trade, which showed that trade was greatest not with the frontier countries but between the industrially developed countries having higher living stan­ dards and greater purchasing power.

But aa M^nrds employment

there aay be no easy subotltute for free land". Nowadays, it is fairly accepted among economists that saving is responsible for a t^ood deal of trouble in tlie economic system. If everybody were to spend all nla incwae as he received it, the happy state of affaire described by tne classics— creates its own deiaand—

Uiat supply

would |>revail; and we should not meet the

danger of a faUin^-off in production through a failure of demand. But we should be wrong if we concluded from tuiia Uiat saving is in itself an evil.

If Uiere wexe no savings we ooolu never increase

our capacity to produce by adding to our stock of capital goods; neither could U w govex nment ever spend more tiien It received by taxation, if we exclude the idea of printing money. Tlie real source of trouble Is that saving and investment are done by different nets of people from quite different motives.

As an antidote to the above

conditions, Keynes prescribed: progressive tax measures to decrease the propensity to save; the creation of outlets for new investment througtk public capital investment, to be financed by borrowing; and the pursuit of a policy of low interest ratee.

Besides these

direct contributions to the field of fiscal policy, Keynes* equally important indirect contribution should be emphasised: he has greatly stimulated thinking along fiscal lines. (1) Williams, J#H#, Op.eit.. pp#75"76.

- 37 ~

Fiscal üoeratlona Viewed In New P*r#D#GLiv#i Tho cr/atellieation of the idea of employlng^ fiscal policy as a balancing factor in tlio economy may be said to date from the publication of Keynes' General Tlieory of Employment in 193&. Keynes' ideas, there presented, were extended and elaborated in books written by scores of economists as well ao in a voluminous body of periodical literature.

The distinguishable feature of such

discussion has been Wie growing recognition of tue economic effects of government finance.

"Uoverument expenditures and revenue,

government borrowing and debt repayment are studied, not for tneir impact on Uie Treasury, but fox Uieir iapact on tne econosgr. It is now recognised more tnon ever before tiiat each aspect of government finance may be used as on instrument of economic policy to influence the sise of the nation's incoi^e or alter the character of the nation's output.

At first, the problems of

the depression, and then, the necessities of the «rar, iiave con­ verted government finance into fiscal policy". Tne preceding discussion has clearly demonstrated that in a private enterprise econosy t)ia volume of production, employment, end hence of income, depend upon the existence of the necessary markets.

Unless prospective demand ie sufficient to pay for the

costs of production end leave on adequate margin of profit, production will not be forthcoming, one resources will be un­ employed.

similarly, unless aggregate demand remains wiUiin

the limits of available supply, once a high level of employment

(1) a-r..

(The dlakiston

— J8 —

Is rssehsd, prices will be driven up and inflation will threaten. The thesis that supply always creates its own demand is now considered foundleau since income, once received, moy or may not return to the expenditure stream.

In addition, in an economic

s^ stem Hiiere millions of people and business firms make free decisions about how much of their incomes they Intend to spend or save, there is no guarantee that t/iere will be tnat exact balance of total spending wtiich ie requireu for full employment, deliberate policies becotae, therefore, necessary to keep the rate of spending at tnat level, anu, if tnat is not possible, to coflq>ensate for its deviation from taat level. But although the general requirement ie clear cut, its fulfilment, however, Is by no mesne simple.

Policy considera­

tions must start with the basic fact that there ie no selfadjusting mechanism, In a private enterprise economy, wftich assures a high and stable level of employment.

To set the rea-

poneibllity for attaining such level on Individual consumers or individual businessmen is also absurd, since "each is cau^t in the upward spiral of inflation or the downward spiral of deflation and....buys and sells too little to affect the sweep of events


over the whole economy".

The main responsibility for maintaining

a high end stable level of activity must lie with the governments, since they alone possoss the powers necessary to fulfil this res­ ponsibility.

The coopération of business men and trade and labor

unions ie undoubtedly essential for the success of this policy, but the latter alone cannot determine the general level of omploymmat* (1) Morffui, Th., Incoma k juaployngnt. op.eit., p. 167.

- 39 The vital Importance of fiscal policy for avoiding a stats of deflation or inflation will now tocoae evident*

Tite ;^ovsrn-

mant, in order to meet its responsibility, "must see to it that tne total expenditures on tne national output is neit ler laore nor lets than tiiat uuich ic juüt sufficient to tei;a off the


ket, at a stable price level, all of Wie ^jods anu esi vices tii^t (1) con be raade available wuen the population is fully ei.ployed"* The four componentb oi total monetary outlay beia^: private con­ sumption, private iuvestGont, public ir veatntent, and t:.e foreign balance, it is wainteinwd tiiat sccoau and tae fourth, which are subject to autonomous fluctuations, are the main sources of instability in national inco e and the level of employment*


is also admitted that government la unlikely to be able to succeed completely in preventing fluctuations in private invest­ ment and the foreign balance; an^l that these should be offset by compensatory movement# In demastic private consumption expendi­ ture and /or expenditure by public authorities. It become# evident, from this line of reasoning, that fiscal policy may and should be used to expand or curtail total effec­ tive demand for good# and services, waich ever ie needed.


government can effect Uie necessary increase Ir; total demand either by increasing public eXjienLituies, wluiout any concurrent restriction of private exg,enditures, or by inducing increased private expenditures through remission of taxes or in other ways. Similarly, it can reduce total demand either by reducing public (1) Graham, P., Rlauniiy. 4 Paying for


University Press, Princeton, 194b), p. 40.

• 40 • expend!tures, without any concurrent c/ienge In private ex*)enditoree, or by reetrictin* private expenditure# Wirout^ increased taxation or in otiier ways,

"it is thut> within tne government's

power to set tnu levs! of total ex,>eiuiitores (private plus public) wherever it will#

it follows, as an inevitable consequence, that

guwernuent cqn set it at tnat optimuzm #uount which will provide full eiaplo)T#ent on a stable price level"# niMt


Quantitative Analysis: The Individual instruments of fiscal policy are: public expenditures, taxation, public borrowing, and debt repayment#

In a purely meohanicml sense, the quantitative

line of analysis would proceed to look, ae a first step, into the flow of purchasing power as related to government operations# Goviarnment exi>enditures bring about an IncresDO in production and enploymunt, it argues, unless there are Indirect effects which work toward contracting private consumption or Investment outlays# The stimulating effect exists Irrespective of whether the expendi­ tures had been directly on output or in the form of a tranufer payaient.

Taxation, on Uie otner hand, withdraws money from the

eeonœv and, Uirougîi contracting Uia volume of private expendi­ tures, diminishes pruduotion and employment#

But tne goveiriuient

is not confined to spend tdiat it raises by taxes only.

It can

itself borrow and spend; and government borrowing and spending adds to total effective demand#

It can, tiierefore, use its

HI h fttr gull op.clt., p. U . (2) 1 sjs indebted for much of the analysis in this section to Harold Somer's ohapter (23) on Uie fiscal impact on national

- 41 —

power of borrowing and spending deliberately to ada to effective deuanu and inoreane enploymaat#

if, therefore, governi?mnt policy

goes too far in the direction of ueavy taxin^ and borrowing, and lii^it spenaiug and debt redeiaptijn, total expenditures, pro­ duction and employn^nt will be curtailed; and tlie opposite would hold true if the nou ianiam were reversod.

It is posi;ible also,


ae we shall see later, to secure a net stimulating effect tiirough increasing equally both public expenditures and revenue from taxation# All the individual instruments of fiscal policy have, to a varying degree, been subjected to close examination by economists# An enormous literature dealing with tax Incidence, shifting and effects; the multiplier effect of public expenditures; and argu­ ments for and against public debto is now available but, as Somers said, "although the Individual li.otrunients of fiscal jiollcy have been studied oarufuliy, tae Lioory of flacal policy as a whole lacks Integration##•■•As a result, it is difficult to make adequate allowance for the effects of taxation, borrowing, and debt repayment in trying to detcrwinw tiie consequences of any particular volume of government expenditures#

Instead of

being an integral part of the analysis, these effects usually take the unsatisfactory form of modifications or qualifications"» As a first step, it is proposed here to examine the struc­ ture of fiscal policy; and to consider tlie Interrelationships between public expenditures, taxation, public borrowing, debt


See Section on Balanced Budget Approach, Infra# Somers, H#, PuWULeTiaagk^^ op.eit., p# 466#

— 4% —

repayuteut, anu tnu national incuuc.

Xtiuu wo cun see how flacal

policy oay be ueed to acnlevo coeii bU onda.

liUfr coulU be done

if wo stud/ each j.nutrumunt of fiscal policy accoi ufn^ to SuL.e couparable bariu beiuro constructing a cocprohonslve pict-ue of tho fincal icipact eu e whoiSt

Altnou^ii tho aim ixei o iti otic of

integration, eacli eloaent u, govoriiiaent finance will, au a f.rot step, be atudlod ea tarately in isolation anf its broad t/:.>os of effects conulUorcd.

furt wrmoro, Dindo our ciItorlon iu to sou

how fiscal ^.olicy irfluencoa cjiiLaaptlon, investment, and the national aa a .«nole, "we muLt cjnuider t u extent to r/iiuli eacii instrument of fiucxl policy involves uOwo 1 pact on tno nation's supply of co auxaptiou fonde and ihi extent to Wiivh it Involves some iapact on tuu nation's supply of loanable funds, The impact on consoraptiou funds serves as a startiu.^ point for tile study of subsequent effects on coitsuuur spoiidla^^, and the impact on loanable funds soives as a starting point for tho (li study of subsequent effects on inveutuent", Tarougn tne uiedium of public expuadituree, wiictner for %'ollof, adoinietrative expense, public works, national defense, or the outrigiit purchase of goods and services, govo-anont rulua^ea both consumption and loanable funds»

For tho noct part, a release of

conouaption funds is involved; "but tliere has recently grown up anotner type of government disbursement of funds wîieroby blic goveiriment merely lends its money (nomixially at least) and doos not give it away or purchase outright any goods or servicoo. (1) 3om#ia, H., i’ubU.c Fiaanc* t. kaLlonal litcoKa. op.eit., pp. 486-7.

- 43 This has beon^true of a number of credit cor^foratlono set up by tiio goverumoab"*

In this latter senca, government expeni-lturea

tend to au^yaent tUa supply oT loanable funds, to increa%o tho availability of capital, and to oaae the tercju jT i: g.

rlvats bor.o:*»

But the exact offects would, of course, do.>ei d upon the of the induceawit to invo&t prevailing ami t ie availabi­ lity of credit from other sources, particularly fr>m bar.ks# Thus

ijfi/ carry ov*r into our later diacuaoion taa provision­

al ar«^uuent taat govarru::ent disbursement of funds involves the release of both conou^:ption funds and loanable funds. In Uie caa# of revenue by taxation, we nave or: ab orption of fwiKla by tho „ov«iuiient in one of two ways: wiion taxes transfer to the Treasury fonda waicix would have boor: spent on cui.oxiiption, (aa In tixe caso of a salsa tax oi an incomo tax un low inco.xe grou.'o), or, whon tiuy impinge on saving wiil-jh may have a ^yuented the uupply of loanable funds#

In the firsI case, a direct i'educ­

tion of consumption expenditures and riatio aX inco::0 li involved; Miiilo in tiio second, unless bank credit is freely available, the availability of private capital would be reduced and the tenic of borrowing for private investment would bo -mde les. favorable than they would otherwise have been.

Taxation, vlion, Involvoa,

prima facie, both an absorption of concunptiou funds and loanable funds# When we look to public box'rowl

we again encounter an

instance of govennent absorption of funds. (1) Soaara, il., Publia /iiMtaa- -

Depending u,>on the vy.OlL., p. W7,

- 44 use to which the funds borrowed would have been put had they not been lent to tlie government, depends the nature of tie funds sbcorbed.

Hot all funds lent murt necessarily be loanable fund#,

E^ooe bonds issued and sold during tha last war hnd been of tae nature oi compulsory savings which would, to ^owc extent, have boon Spent on coneuüiption *^oodt. out oi. Binple hoai'ds*

are likely to liave cor'.o

but. In general, it Lisy be said tint

goveriwunt borrowing 1*, likely tu reduce private consumption and, de,lending on W.u state of the uyntam, to curtail private iuvei tucnt*

in tuiu case of taxation, we oan aesi&ae

the likelihood Uuit public borrowi.g involvet an absorption of ooaeiL ption funds ana of loanable funos. finally we WioulU take Into account tne release of fonde tlirouf^h debt repayicaat*

A debt redenpti ;n iu likely to release

mainly loanable funds whicli would be put uojolly on the capital market for Uie purcliaoe of securities.

But tho poouiblllty of

debt repayment tending to etizu&late consumption should not bo overlooked.

Tliis ic particularly true in cases wtiere Uio pur-

cliase of govumwont boida represents a definite saving prograra on Uie part of tlie individual with retlremtuit marklrg; Uie end of the profjram and tiie spending of the money involved.

Debt re-

payuont nay then be considered to involve a release of consump­ tion and of loanable funds. The above tentative analysis sufferc, of course, from lack of integration because the aeveral instrunanta of iiscal policy always operate as a unit.

Tne neat step suggestod ic to sum up

- 45 * the various consutiption and loanable fuixLt alumantu, and tiiun to analyse the ecaj osite erfoctt*. As far ac goveriUMOnt roXeaoo of cc» fundo ic concorned, It siiould be roctaikeu Lnut not t^iu wiiolo ui güVoi(Jün«

i'inaliy, debt ropayi;a;at

QCtlvitieo of tho tW^sriment ehould be accounted for.

"In uiiort",

cou-onta Hooeru, "ua stioulu add together thooe imrtu of oxi;endituroc and debt repayment ndtich involve a reXeauu of conuuuption funds; and deuuct tiioue parte of taxation and borrowing wiJLch involve on aUuorption o^ co!*su4)tion funuu.

in Uiin way we cun

take aocount of the ooneuuption effectu of each instrument of fiuGSl policy anu obtain a meauuis of tne net govsi luaent I'oleaes

of CO suMption funds#

fhis, not the saiun«ditux*vs nor the deficit#

ib the appropriate msasu&e of the governweut 's direct oontribwtioh to the nation's pui'chasing power and is the appropriate

uultiplioand of tiie nultiplier principle#

It way conceivably

* 46 »

be negative in aome clroimetancee, t^wt, ia^^^tiiore oay bo a net goveneient abeorj>bion or oonowiption fundo**» Tumlï'.g to Wie effect* oC Inatraoontu of fleoal policy on tbe abeorption of loanable furartu ol i,overmjont expeitaiitoiœ ami aebt red#Lï;)tiou wuiub iiivolve a roleaeo of loan» able faxwe, in oruer to obtain a oeaeo*# of tae net a lount of fund* tn# ^overmaent witnürawo frou Uim mono/ ano capital lauketei *fo take only tbe awoont 01 ^vei ntoeut Uon'OMiu^, a* in u* ally done, ie iiicorrect becauue taxe* aleo involve a wlUidrawal of loanabl $ fund* to eoae extent; anu at Uie ea^e tirae ti&e govern* aent put* cos» of thee# fund* back into the capital market t irou^i it* eacpefWituree and re^vA/oent of debt#. There oay be a net releaee ratiwr tiuw abeorption of loanable fund* on the (2) part of the government in eome oiroumatancee**» In attempting to figure out the oo!?poaite effects of govern* mont operation» on ooreuKption and loanable funds, we may eay that because borrowing am taxation aboorb both consumption funds and loanable funds while expenditure* and debt re;«yment involve their release, the former tend to have restrictive effects while the latter have expansive ones.

"Where taere ie no change in

the government** ossh balance and no government printiiig of money to finaooe expenditures, tuie net government abeorption ol loan*


MMM-a, a., P..hlt« Kl"."". *


Op.Cit., p. 490,

• 47 able fuxxie 1b idonticelly equal to tao net governtiaut rsleaee 01 ooiioamption funds#

Tno flso is esBantlally a riscaanlAO

which converts loanaule funau into eoK^sun, tiof) fuiWs#

in deter»

mining the extent of tnis conversion we oust not confins our attention to deficit eyenuin^, as is so often done,

hach inatru*

aent of fiscal policy** exponditoree, taxation, borrowing# debt repayment** affects Uio availability of boLt ioanablo fonda and CO suaption fonde and plays a part in tne govomient^s con* version of loanable funds into co suction funds'*#

rî»s qualitative aspects of i;ovom*

Dent's fiscal operations, that ie, from where and when the

jjove -ncwmt obtains its revenue, and to Wiers axid when it spends it, may be more important than the caechanlcal quantitative aspects arguing In teme of the volume of revenue and expendi* ture#

"The fundamental rule of government finance, to iriich

only minor qualifications exlct", writes Tiieodore Morgan, "ie tJiat nothing entail be aecided on financial grounds.

The basic

realities of tli* economy are rewources (labor, Management, raw materials, plant, anu equipment^, anu tiio wants of the people of the econooy (for a ^ligh standard of living and for useful #,3ploymant). Honey is sii^ly a tool for tne effective utilisa* tion of tnsse resources toward fulfilling wants#

Like otiior

tools, money may get out of order, and can be used skillfully or badly#

government oaa, Uirou^i its monetary authority and titrough

its revenue and expenditure policy, exert a considerable influence (1) SoBors, il., Public rinmae# & liationfll Incaaa. op.olt., p. 491

* 45 • on the flow of money In t!io oconcH^, and «0 upon the allocation of reso+roe# to one use Oi anotiiur eioi utWi how rmny of Lhem oi'o 11 )

used and how man/ left unet_ployed" #


ai linTnnunTi Mxumi

te have eeon tnat t!ie government can obtain fonda in one of two weya: it con tax and it can borrow,

^naidored frut* tlie

point of view of their oavoroe effect ui>on private ex}>enditoree| t- e uoet depreaoing would be taxea on cuiiouaption, followed by poreonal and bueiaese ioGotie taxes, followed by boriowii,^ from individuals, followed by b o n d i n g from coiaraercial banka wiiicli Id tlie least depressing#

The taxes levied on ooneuBNir ^oods

are depressive because they lead in the main to higher costs of commodities and to lower real

and hence they out Uie

volume of conoumption purchaeea of the poorer oroupa of the com* ■unity who spend the bulk of their incomes on consui>ption, that ie, those ^10 %)oseeaa a high oargliial propensity to coneume# The personal and buoioeaa income tuxes are depressing to t^ie extent that they absorb funds which would otherwise have been spent on consumption or ou investaent.

The ooro progreooive

such taxes are, the less tutey tend to reduce oousumption, but the more they tend to cause wsll*off people to reduce tiwir saving#; and the more progressive taxes are, W%e more they die* courage iuveetmsut.

In the latter case, the potential investor

faces tlie dilemma; if tiie investment is ;xrofitable, tXi9 govern* ment taxes away much of the profit; and If it is unprofitable, (X) Morjtvt, Tb., Incoam & Kgulovaant. op.clt., pp. 213-31).

* 49 -

tue Investor bears tiie lose.

It io possible, of course, to devise

personal incom e taxes heavy enougli on bota the low ami tae high income groups tiiereby cutting sharply both coasouption and invest* ment outlays; but witli noderate tax rate*, a personal income tax appears to be less depressive than consumption taxes.

Some taxes

similar to the excess profits tax anu Uie corporate income tax are usually considered to bo more depressing than a personal income tax because, it is argued, "they especially discourage the risky investments of small enterprises in new processes and products** a kind of investment wnich Is very useful toward increased employment and productivity, and toi^d diminished concentration of production and economic power". When it comes to borrowing from Individuals, there is hardly any depressing effect on private expenditures since people lend to the government out of their savings; and they ordinarily do not lend to the government for the low rate of interest which It offers unless they are unable to make investaefits elaewaere giving better yield.

Hare one simple qualification is needed.

During tne last war, some governments (e.g. the U.S.A. and Britain) have carried on savlng-bonda campaigns with tne idea of inducing people to out their consumption expenditures and assist in tne war effort.

These campaigns may have probably succeeded in per*

suading some people to cut their consumption; but suoli a dep* ressing effect on consumption expenditure is very unlikely during peacetime,

finally, borrowing from commercial banks will not

(1) Morgan, Th., Income fc KmoloYment. op.cit., p. 225.

- 50 * have an adverse effect on private ex;>endltures ao long a# the central banking aut/ioi'itiee, Uiroug-i their open*«*rket opera­ tion# and other monetary policiea, continue to supply t)ie body of coonereial bany a wlUi sufficient reserves so tliat they can continue to lend to the govenvaent.

Under such circumstances,

ti;e individual baiub will not be faced witn the idioice between lending to the goveiniment or to private business# Before leaving tixia topic of governuynt revenue X would like to state that in tits foregoing analysis 1 Imve been sur­ veying the sources of government funds from oiw angle onlyi the extent to which revenue from a given source tends to contract private consumption and Investment expenditures*

The merits

and demerits of a given taxing or borrowing policy are not exhausted, of course, by this kind of analysis; and will be given further treatmei.t at a later section* flf fMhUfi totntfniMTtii Again, as in the discussion of sources of government revenues, reasoning on pure mechanical monetary level is less significant, when we come to discuss public expenditures, than reasoning about tne utilisation of real resources in Uie economy# The principle holds true even tiutugh it is less pressing whMi there is heavy unemployment, because then if the resources used in a doubtful channel by the government were to remain idle, society would be worse-off as a eoiuMqueuce of the failure to spend#

If any government expenaiture is to be Justified, Uierefore,

(1) See Sections on Tax and Debt Management below#

* 51 *

the gain accruing to the economy muet exceed the lose which reeolte, Wðer directly or indirectly, from the pi'ooese of getting the funds.

TUe real gain ie of course the Increased

production and hence eu^iloyment which results from the expendi­ ture; and the real cost is tlie loss of possibility of private use of Uie resources in question plus tne bui\ien of the public debt which results if the expenditure is financed by a loan.

Vrendi* tures must be Justified on the grounds that government can use the resources In question more effectively for the general good than private individuals could, (b) that they should be for socially useful goals and be administered witli the utmost effi­ ciency to obtain the iiaxlmum of output; and (c) that they should not compete with private enterprise, unlese for specific purposes such as tne control of a monopoly or some critical social activity as military research for example,

furtaeruore, govemritent expeivdl-

tui-es should, as far aa possible, be canalised into channels which will induce more private expenditure.

"If this la not true”,

argues Theodore Hor^/m, "then stimula» to employaient mu»t, instead, be sought through reduced taxation and ot/ier measures to stimulate


private consumption and investment expenditure",

fiorgan'e view,

it seems to me, is rigid; and tlie case is more realistically stated by Mus^^ave in Uie following words:

"While the require­

ments of cycle policy are bound to be reflected in the expenditure pattern, expenditures should be based primarily upon considera­ tions of need and usefulness of the projects as such. Differences (1) Hwaan, Th., Incowa k Kgployaont. op.cit., p. 226.

- 52 *

in the leverage effect* of various expenditure project* exist, but they should not b& over-emphaeieed.

"here relief expendi­

ture* are a more effective way to relieve dietree» in the depreeaion, they ehould be preferi#d to public work# outlay*, even taougîi a Bomewiiat Bwaller leverage nigut result,

there public

work* are needed or ate preferred a* a matter of public morale, they should be given preference over relief even thou^ they aigrit involve a sociewiiat hi#ier outlay per unemployed.

At Uis

same time, expenditure planning must account for tlie longer-run as well ae the more immediate eerlte of alternative expenditure projects.

Thu* developmental programs will not only be useful

In an immediate sense but have an Important bearing upon the eecular level of private investment and the growtli of real incooe". "The real controversy", argues Kewoomer, "has never been over the usefulness of some government expenditure.,...The question ie, ratiier, how much government expenditure ie desirable, and for what purpose.

To fora an Intellii^ent opinion on this question,

it io necessary to consider first of all titu af.ïOunte, the aims, (2] anu the rate of increase of government expenditure*". A more detailed analysis of tiiose issues will bo made at a later stage in this thesis. Hutti.n «nd Limit nf U.. P.ikllr h-hfc.

In tlie section on sources of government revenue it was stated that Wie government can obtain funds either by levying (X) Muegrave, R#, "Fiscal Policy in Prosperity k Depression", Amer. Rcon. n*y.. Vol. Jfl, No. 2, Kay, 194&, p. 366. (2) Howcomor, p. 2. (3) See Section on Public Expenditure Policies below.

• 53 taxes or by borrowing.

The latter method, it was argued, has

direct effect* on private expenditures lee# depressing Uian the former,

the conclusion easily suggests itself that Wten more

expenuitures, with a view to emtanoe production snd emplpyawnt, are needed, the aaf>imoie in government revenue Should be placed ou borrowing.

Out such a hasty conclusion fallo to consider

tixat borrowing nsans nore public debt; that public debt nay bo exceusivs; and that it any have a real or psychological burden under which clrcumstanoee the indirect effects of public borrot*» ing on private exi^endlturee may more than offset It# stimulating direct effects,

A critical appraisal of the latter views will

now be attempted. One of the most ardent supporter# of public borrowing among contemporary economists is Alvin Hansen.

It ie projX)sed

here, as a first step, to put forward a summary of his views, and, later on, to analyse tuem critically. "Hifitorioally", Hansen points out, "opposition to public dobt....^pradually broke down by reason oX exigenoies which appeared more or less uncontrollable.

T h u s , state borrowing

entered as a by-product mainly of tlie increasingly costly outlays incident to modern warfare.

It was not a question of tlie theore­

tical principles but of practical hard necessities.

Tlie tradi­

tion against borrowing was set-aside when grave emergencies, such ae wars, forced the issue".

In his book "Fiscal Policy

and Business Cycles", Hansen attacks the traditional tiieoretical (1) Kuisan, A., giaoal FoUcy «nd Bua^aaa g y p M (v.V.Morton & Company, inc., new York, 1941)» p# 135.

- 54 *

argumenta aiui popular pi-ajucilcea a^alna^ public debt*; and propoeee to utiliee public borrowing as a meane to aeuure fuller utllieatloa of resources*

In hie words: "Public debt io an

instruucut of public policy.

It ie a means to control the

national inootue and, iu conjunction wiUi the tax structure, to regulate tde distribution of Income".

He contends Uiat (ai an

internally held public debt need not entail an economic burden; and (b) tiiat we need not be concerned over the itariiinence of reaohixg a ceiling on the uatioi^al debt.

With re&pect to (a),

Hansen points out tiiSt the answer depends upon tiia cliaracter of the tax structure, and upon the objects and rooult* of public expenditures.

If thuro oxiatu an identity between the tox^>a/er

and the bondnoldcr, no burden nay be aai- to accrue umier such circulastances.

Xo u*e extent that tiie tux structure iu non-

progressive, a real burden for tlie low-incomo -7
on after they earn it". The taxpayers witxi large inuofoes, on tne ot«iei hand, tend to save proportionately mure tlian do tiiose in tlie lower brackets. It follows, tiierefore, tliat an estate tax or a progressive income tax paid mainly by the hig)ier income groups is superior in this respect to on excise tax, a pay-roll tax or a personal incOTiS tax severe ae to affect those in the lower brackets. That progressive taxes fall less heavily on consumption is clear; "but the amount by which taxes may actually be prevented from curtailing consumption is easily ovur-estimated", argues Musgrave,

He says: "if the required yield is large,

it will

be necessary to extend taxation into the middle and middle to lower incoie groups, where consumption expoaditures absorb a large snore of income.

This is necessary because the largest

part of total income ^/zes to families in tiie lower ana middle income groups,,.,,a substantial fraction and, in fact, a lar^dr part of the tax burden will be reflected in reduced con­ ta) sumption Outlays", Âusgrave arrives at tlie conclusion tiiat "no reduction in tax pressuie-s on consumption can be scnieved by pushing the de@?ee of progression witiiln feasible limits once exciae, payroll, or other high consumption taxes liave been (1( A.. flMlBlni; |.faiABflLXK.eHU on.clt., p. 13. (2) Muagrav., R.. EuhHc , full gaplowwnt. op.glt.. p. 26.

ôê —

•llninsted and a reasonable degree of progreasion In income taxation uae been obtained*

Dils, of course, does not ren­

der it unimportant to utilise progreosion for curtailing tax pressure# on consuiaptiun; nor does it weaken the proposition that pro&ressiun is desirable on equity grounds*

It appears,

however, tiiat increased progression cannot be expected mater­ ially to alleviate the deflationary effects of taxation siiould a substantially inuruased level of consumer expenditures be



Uur rational tax policy next considers minimising tax deterrents to Investment over and above minimising pressures on consumption*

It is in tlie spliers of investment that great

fluctuations occur, and it can therefore be argued that a main tax problem is not to deter would-be investors by too hl^i taxes*

There are two main aspects to this problem, argues


"Taxation stay curtail investment by reducing savings

and hence the supply of available funds, or it may reduce the attractiveneas of investment and hence the extent to idiich (2)

available funds are clianneled into Investment outlets".


regard to the first possibility, a distinction must be drawn between tlie level of saving in general and tne bupply of parti­ cular kinds of savings altiiougb the practicability of this possibility is remote since very little is known about tne com­ position of saviiiga by income groups,

it is very unlikely also

tiiat for sometime, at least, there will be a general shortage h«, R., Pi^h^le Flmtna. & Kuli S«Dlawi«lt. Op.clt., p. 26. 2) Ibid.. p. 29.

• 69 -

of Mvlnge, assuming that no drastic changes In tho community's consumption habita take place.

More important become then tax

deterrents to the investment ox' available funds.

"If expected

investment yields are out tlirougli severe tax rates, investment tends to be discouraged, particularly in risky ventures, udiile tne holding of cash balances tends to be encouraged.

As a re­

sult, taxation of investment income may depress expenditures foi' plant and equipment by a multiple oi' tne tax yield".


concern, it aeems to me, siiould center around three points: tne level of tax rates, tne degree of progression, and the way in which taxable income is defined.

As far as tax rates are

concerned, we face the conflict between various objectives. Investment considerations urge lower taxes on tlie upper income groups while consumption considerations call for modernte rates in the lower income brackets.

When the need for yield arises,

some compromise must be reached.

The ease for steep progression

at the very upper end of the income range seems to be insigni­ ficant from the standpoint of tax yield since the number of taxpayers affected is relatively small; altiiough equity consi­ derations in favor of steep progression may be decisive.


regard to the definition of taxable income, tae provision for offsetting losses to determine net income for tax purposes is of vital importance, since witaout such offsets, risky invest­ ments would be prejudiced as they involve the greatest like­ lihood of losses. (1) Husttrav., K., Pfhi*'

k full SnolowMMit. op.olt., p. )0.

- 70 -

W# now t o m to consider the major aspects of incentive taxation as a part of our rational tax policy.

The entire

approach is based on tne taxpayer's natural desire to avoid paying taxes by offering him tne clianoe to do ao if he com­ plies with certain legal requirements,

Bwaers cocc ents on

tiis aspect of tax policy in the following words: "Taxes may be so designed aa to stimulate production and employment wi­ thout regard to considerations of ability to pay, benefit, and eamedness. category

The idea of incentive taxation falls into this the undistributed profits tax was intended partly

as a stimulus to consumption by forcing the distribution of profits to shareholders.

The taxation of bank deposits is

sooetiaes proposed as a method of stimulating spending.

All of

tiiese plans are aiming at some high level of employment..... There seems to be a trend in the direction of giving taese principles a greater anu greater part in framing tax policy. The aim may sometimes be to curtail ratnur tnan^promote spend­ ing.

War time policy had tiiis aim in lar^e part".

In a def­

lationary setting, tliere are two approaches to tfie use of incentive taxations first, tarougit ttie taxation of idle balances and, second, tiirough favorable tax treatment of current income spent on ooneimptiun am, investment as against income not re­ turned to the expenditure stream.

Tax réductions, for example,

are proposed for people who employ additional workers, or who hire maids, gardeners, drivers, and ether domestics.


(1 ) S o M rs , H ., P u b lic M nanc* . R a tio n a l liicocw. o p . o l t . , p p .l)) - 1 3 6 «

- 71 • it i# true W m t bota approach##, and partioolarl/ Uie first, offer oxtroBo adaioiauratlve diffioulties in Uim f o m of en­ forcing a ueoXarati^n of aaeets held or tax ovaaion tnroa^t transfer of aaseta, etc*, yet tiie whole approach heaervea more careful oonaideratiun U u m it haa been #iven to date. The above framework for a rational tax policy, plausible aa it la, aeona to me to be difficult to apply.

1 am inclined

to repeat with Charles U. Hardy that "the factual baaia of t)iie whole acheva of tax management la highly speculative"; and tliat "I know of no attempts to carry it throu^ in practice**. Tax manacmgent, however, is a promising field for further study in the direction of encouraging proipress; but it la unlikely to contribute much to the solution of the short-run stabilisation problem.

There are broad social, political, and equity consi­

derations Which impose important limitations on the literal translation of ecortomio arguments In taxation to practice. PuMtti tePtiSU'ini ['aU«tMi Our next aspect of a rational budget policy involves the proper administration of public expenultures.

Public expendi­

tures have increased greatly in Uim last few decades,


as a percuntage of Ute gross national produce, taey have risen in the United states, for example, frojs. 7«13» in 19)2 to 10.6^ in 1939 to roughly 1 # in 1947* (The percentage always rises in wartime yearsi in 191^ it was 2Ugt, and in 1944 and 194) _,!2) roughly 5Qp)« The reasons for this had been increased outlays (1) Hardy. Ch., ^fiscal Operations as Instrumente of Zconooio Stabim P — tien", Auer. Scon. R e y Vel.W, Bo,2, Majr.l9lrf, p.396. (2) Morgan, Th.. income ^ Saployaent. op.eit., p. 212.

- 72 -

on defense, additional functions aesuaed by the j^ovemioent, and the servicing of an expanded public debt.

These expenditures

have of course far reaching effects; and the relationship of the gove.nraent budget to production and employment forces itself upon our attention. Public expenditures affect tJie national Incorae by influen­ cing its two componentc: tne volim&e of consuiption expenditures ana the volus» of businesL Investments,

The two are closely

related, since consumption expenditures influence the amount of business investment wtiich, in turn, affects the flow of inowne and thus of consumer spending.

It is su;;geBted, as a first

step, to deal In a general way with these Interactions and their implications, and then proceed to apply them to iwractical problems of policy. Government spending may be assumed to have the initial effect of increasing demand for goods and services.

If wo assume

the existence of unutilised resources in the economy, tiie primary effect of government spending may bo assumed to be an increase in the amount of goods and services produced,

Uur next step

in the analysis deals with the disposition of the income gene­ rated by Bucit government spending.

Part of it will, in all

likelihood, be spent on consumers goods, and the other part saved,

ti\m part spent will again generate income of which again

part will be spent and part will be saved; and the series of respendings will contj-nue with each successive spending adding, although in decreasing amounts, to the total income created.

- 73 • This has bacome known ao tlia Multiplier prinoipla,

Ttia crucial

point in this anal/als is tiia incraaaa in Incoi:^, with a relative­ ly ariall initial expenditure, wiUiin a relatively short tii%e, Tne exact magnitude of the increase will, of course, depend upon how great is tne proportion of income spent on consumption at the time of the public ex, enditure, and tlie chonjes wliloh take place in this proportion during tiie successive stages of spend­ ing,

Due weigiit muet also be given to the effects, favorable

or unfavorable, of the expectations atxi reactions of business­ men following the axinounooment of a public expenditure program since they may offset (wtten, in the opinion of business, govern­ ment expenditures are considered to be modest and are expected to stop very soon) the favorable effects outlined above, or generate further activity.

Out of the latter expectation tias

emerged the theory of pump-priming. The portion of income that is saved, during the initial and following stages of spending, is either held Idle or Is put into investment.

Hero, in considoring tiie effects of a public

expenditure program, we siiould realize tiiat the demand foi capital goods is derived from the demand for the goods vdiich tfxey produce,

when there is increased denana for consumption

goods, as a result of *,overnaent expenuiture, tiie profitability of using other capital goods way also increase.

When tne demand

for certain capital goods is increased, U\m denuind for other capital goods may also be stimulated, and in this manner business investment stimulated.

This phenomenon has become known as the

- 74 -

Acceleration principle.

In actual practice, however, Uie re­

lative Increaee in t!ta production of capital goodu "will vary with tne degree of oikder-utilisation of equipment and the state 01 expectatiune, to aa/ nothing of the fact ttiat many outside factors may offset any favorable tendency caused by (2) tno increase in conauaption taken by itself". -

The above disousslun has dwelt isaiiily upon the expansion­ ary effects of govern* xent spending,

contemporary economic

tiisory, associated witii the naioes of t.e/nee and hansen, concen­ trates aluo on a second important function of government speiiding, nanely closing the gap which arises out of disproportionality between intended savings and Intended private investment, % e r e a deflationary gap develops (savings outrun Invectment), government should otep in and convert excessive savings into investment; and in ease of an inflationary gap (investments outrunning savings), government function should eituer curtail investments, or increase savings, thereby in boUi oases close, the gap.

But before we proceed furt^ter in our discussion, tiie

following important reservation of bouers saould be duly noted, he says;

"The fullest understanding of economic and business

cycle theory must be invoked for any adequate analyaie of the iiifluence of government expenditures on tiie national income,,,,, In oonsiderlng the effects of government expenditures on the natio««al income tiie major caution is to avoid cunsiUeriug pure­ ly aecuanioal devices such as the multiplier principle, trie (1) Such as political unrest, a tight money market, or a defla­ tionary tax structure, (2) SoMrs, H., Public Fiimno , Ineoaa. op.oit., p. 124.


• 75 •

acceleration principle, and the theory of the eavinge-inveetment gap as short-cute which make unnecessary a study of the basic controlling factors in the economy# such as consumer and busi­ ness expectations",

'%*e now turn to a specific study of public

expenditures aa effective tools of econooio control. There are many economists wtto prot>os0 tiat planned use of public expenditures ahoulu be given top priority in organising Ute efforts of society to control depreeaiona and economic in­ stability,

fhey aToue that manipulations in public spending»,

financed itaioly or entirely by borrowing, are more powerful titan tax mana^eaient when increased funds are to be injected into the income streaui,

dUan^ee in the rate of public spending

can be accomplis^ied more quickly and witn &ore ease tnan changes in taxation,

Spending is a more selective fiscal tool to deal

with specific situations in practice tiian ic taxation; and it can generate more new purchasing power than tax reductions since larger aiaounts are made available throug)i tne spending and the borrowing process.

The conclusion suggested in that

public expenditures furnish more leverage and are more effective than taxation as an instrument of fiscal control,

Tha emphasis

is placed upon the multiplier effects of public investment in pruvidluâ opportunities for the savin^e of tae peo;%le,


Hansen's views on public expenditure policy Baeiiler writes; "A reserve of )ü billion dollars of public works is suggested (for the United States)

in order to be certain of an adequate

(X) 6294.

- ao -

In our all-fiscal program* An essential feature of debt management ie that ite effects are largely qualitative, taat is, not easily subject to quanti­ tative determination*

Variations in tite character and distribu­

tion of the debt do make security holders inclined to change their rate of spending, but It can hardly be predicted how much. This Is in sharp contrast to revenue and expenditure policies proper wtiich deal primarily in quantitative terms; some moneys are Injected into the income stream and others are taxed away. When the acts of government borrowing and spending are fused together, however, the quantitative aspects become more apparent* It is intended hare to conulder both tiie quantitative and quali­ tative aspects of public debts.

Tkiis, of course, would necessi­

tate oonaiderina, besides revenue raised for the purpose of eei-vicing the debt, the effects oX tiie act of borrowing upon the capital and money markets, the effects of the expenditures made by tiie funds obtained, and the effects of repaying tiie debt* Because the economic system is very coiuplicated and there are much interrelations among variables in it, i expect, at best, merely to indicate tendencies which are likely to manifest themselves under varying sets of conditions. To begin with, I should like to state t)iat a view of current debates on the effects of government borrowin.' gives the induced inference that some conclusions concerning the consequences of public borrowing are faulty, either in whole or In part, while others are logical.

The absence or existence of unemployed

— 81 —

resource* In th* economy seem to be of decisive significance In evaluating public borrowing.

This neane that the possibilities

of expanding production and employment are very crucial when we consider the effects of a public debt program; even though the relation between public debt and economic activity may suffer from definite limitations.

As long as there are Idle resources,

government borrowing-and-spenulng need not divert savings from industry but, on Uie contrary, it may adu to the total rate of spending and cause an increase in eiapXo/aent and in national incOKie,

in support of titiis argument, we need only refer to the

tremendoufi effects on economic life public borrowiiig-and-spending has had in the course of Uie last two great wars,


argues that "it may well be sounu policy to finance a large part of a public investment developmental program frw^ borrow­ ing, ttius causing a long-run rise in tne public debt".


Justification is that by promoting investment in housing con­ struction, the development of natural resources, and other public works, private investment opportunities will be opened, employ­ ment increased, the national Income and the nation's purchasing power expanded.

Such a view, however, plausible as It Is, does

need some qualifications.

To be more certain In estimating the

probable effects of public loans, we need to know further how and vdierefroa aze tne funds obtained, and how will they be employed. Internally, govamaents may borrow from the central bank, from oosmercial banks, from corporations and firms, or from (1) Hansen, A,, federal debt Policy, Proceedings of the National Tax Association, 1943# P# 263#

— 82 —

individual investor*.

The funds so obtained must either come

from savings out of past or current income or from newly created money.

When the funds come from savings, tliey may liave been

diverted from other investments, or come out of idle hoards, Kxoept wiien idle funds aie directed into the incoue stream, no immediate increase in the purchasing power of the community need follow as a result of government borrowing,


by means of credit expansion, on the oUier hand, tends to increase, when spent, purchasing power and, to some extent, raise prices.

This borrowlng-and-spending nay be inflationary

or non-inflat1onary depending on the sources of the funds obtained; and whether it Involves the creation of new purchas­ ing power or Its mare transfer to the government for spending. The mere act of borrowing, without spending, will, In all like­ lihood, bring about a decrease In purchasing power, % e next point to consider is the purpose of public borrow­ ing,

This is very vital.

Assuming tJiat public expenditures

are to be devoted to projects which would directly or indirectly increase the productive resources and t!ie community's income, spending proposals may be preferred when financed by borrowing than by taxation if additional taxes are estimated to be econo­ mically painful and/or politically nonfeasible.

It is now

almost generally reoognlsed that public borrowing is Justified only when the expenditures sustained by borrowing are socially warranted because they will presumably increase the social Income by more than the social cost involved; tïiat it should be

— &3 —

employed only when Inureeeed taxation 1 b Impracticable or tluit Uie reporcueeione of heavier taxation would create greater social costs than borrowing; and Uiat tiie direct ana indirect affecta of borrowing as a part of th* program of financing expen* (1) ditures should be estimated carefully in advance by governments. Another factor still is Uie interest rate paid on loans and tiie broader effects on the currency and Uie banking aystem. Interest rates not only determine the cost of borrowing, but have significant effects upon the banking system and Uie level of private Investment and buGlness activity in general.


hl^ier is the rate of Interest paid on govei-nment bonds, the stronger will be the pull on funds devoted to private invest­ ments with serious rapsrcusslons on marginal enterprises and business activity.

If governments also attach tax-exsmptlon

to tiieir securities, this easy attract investments to tatim and prejudice private borrowers,

Furthermore, should interest

rates advance on new borrowings, holders of securities now outstanding would Suffer a decline in the value of their invest­ ments and this may oiioke confidence in public credit and iiave serious consequences,

Expansion and contraction of government

borrowing ie also aocomponied by changes in tne volume of bank credit o&u tne general price level,

inflation tiireat would

have to follow a large borzv>wing*and*spendiug process unless commensurate expansion in output takes place to absorb Wie ex­ cessive purchasing power; or that the retirement of the public (1) Daoha«r, A., Public Flnmnem. op.oit., p. 725.

— Ô4 •

debt goea ver/ fast to reduce tne cirouXetlng medium by retiring securities held by tae central bank.

Tiie present det>endenoe of

cwLierciai banns on ireasur/ policy for tiieir eariiin«^ (aa Uie great liquidity created by tiie oebt haa removed many enterprises fron the need to borrow frou banks since tney can finance tliam* aelves internally), and tiie banka* heavy ^overnctunt portfolios which made them lees amenable to monetary control by the c entrai banking authorities need only be given pausing reference* Finally the general eoonoGilc conditions prevailing should be properly estimated*

Any fall in Uie gonoral price level

will increase the burden of the debt; wliile the possibility of reducing Uie debt burden by raising the price level Is likely to encounter opposition from certain groups.

Goverranunt borrowing

duz*ing boom periods* if it occurs* will neceseitate paying hi^i interest rates* and Its expenditure may generate inflationary effects; wliile at thu beJUuting of a recovery it may help to pronote business activity*

The repayment of loans during dep­

ressions and falling pi'ioes will be burdensome on account of declining tax resources* the drain on Uiu econoit^* and the rise in the value of money.

bebt redemption during prosperity on

the other hand* thou*ji discriminating In favor of the goveinment* is likely to be beneficial* With regard to tlie specific effects of debt repayment Uis act may* In addition to reducing the tax burden by eliminating the debt charges (provided* of course, redemption Is conducted in such manner as not to burden the economy) * actually release

• 8) •

fund# tiiat Bay be employed for new inveeUments or add to con­ sumer spending*

Th# present holdings of liquid assets in tiie

form of public securities are considered to be a valuable asset wtiicn may readily be converted into casii if tne need for liquid cash ariees with a view to stimulating investment and conaunq^tion* Debt redemption, on the other hand, is considered to be defla­ tionary to the extent that funds abnorbed for debt retirement by the government would have been spent or Invested, that those receiving payment fail to restore the mon ^y into the incfaae stream, end that deposits with commercial ban)s are destroyed to pay for taxes ma public loans are redewied.

When deposits

are destroyed, changes in the velocity of circulation of deposits before and after debt redemption should be accounted for.


conclusion is that walls repayment of debts is generally defla­ tionary, it does have some stimulating effects.

It is considered

to be particularly wholesome in a boom period since It helps to slow down tiie inflatioi&ary trend and bring tne economy more under control* Bearing all these (ana otaer) qualifioations and limitations in mind, it should now be asked: what have we to say for and against debt policy as an instrument of economic control? First, we siioulu notice that there are definite limits on the rate of increase of a public debt irrespective of the magnitude of Its absolute height*

Government debt stiould not

Increane so rapidly am to cause inflation*

The borrowing policy

of the government fcanaa only a part and not the whole of its


m 86 —

fuXX •uipio/nent program*

bine# Uie government's task is to

attain and maintain full suipioyMut, it munt keep purcnasing power in balance with production, preventing tne volume of money from falling so low aa to result in deflation, or from rising 80 high aa to produce inflation* üecond, we can safely say that public borrowing, if wisely done, will enable a fuller use of resources.

It is evident

that national development should not depend entirely on taxa­ tion, particularly Wien the country suffers from unemployment or when it is economically under-developed*

Besides the quanti­

tative effects of public borrowing-and-spendlng, debt management can affect the expenditures of investors, and hence national income, by inducing or obliging them to change the form of their assets*

What is needed is to induce those adjustments which

are in accord with current economic policy and to prevent those adjustments which are not* Third, because it takes time to effect substantial changes in the types of securities floated ana in tneir distribution among classes of bondnolders, an effective debt po^cy requires a fairly oleor formulation of long-run expectations*


should take into coiisidoration the unlikeliliood tiiat it would be possible to balance the budget in periods when private invest­ ment is loww* indeed a deficit may be required to prevent a uluiq>— ; and that when inflation threatens, a budget surplus should be acouBulated and a part of the debt retired* (1) Wallich, H*| "Debt Management as an Inatrunent of Kconomio Policy*} leo.clt*, p* 295#

• 87 * Finally, it is vai'y necaaaary tiiat debt policy, if it ia not to lose much of its effectiveaesa or t o m to be hai‘ uiful, must be wisely mana^eu and coordinated with otuer credit and monetary policies* Ro u f

lo Attain yimaal Jbi.utivmm:

X. Adlumtln^ ÜI. K w n t i . .mi lûXMnditur. fihructurMi

Assumifig Uiat adjustments are needed in tlie economy in order to attain our fiscal policy objective of a hi^^ living standard a W full employment, it nay be well to consider first tlie possibility of increasing the flow of private expenditures throu^ improving the existing revenue and expenditure structures* In doing so, the goveriment should aim to encourage private con­ sumption expenditure and private outlayo on investment until both are elevated to the desired level.

This, the government can do,

if existing tax pressure on cansuaption and deterring effects on investment are reduced; and if government modifies the channels of its public outlays in such mannsi* as to effect a redistribution of income anu bring about increased effective demand*

It follows

tnat to tne extent tnat tne fiscal structure ia already sound, only limited results are to be expected from this approadi* The volume of consumption expeuditui'S occupies a vital position, as may be remembered from previous discussions, in tiie central problem of full employment ^since it involves the Asjor part of total outlays in the economy*

The major bulk of consump­

tion is also done by the lower-incwne groups.

Hence our concern

(1) Theodore Morgan estimates that it forms two-thirds of gross expenditures* See Income & Kaplovnant. op.eit., p. 1&5#



Should be directed toward expanding total consumption by rais­ ing the level of consumption of tne poor*

To do so, there are

open before us two possibilitiesi (a) to get a larger sliare of the national Income go into tho hands of tïie lower-lncome groups, and (b) to encourage high oonsumption out of a given pattern of Income distribution*

The second possibility is

beyond the scope of our discussion* The underlying idea behind the redistribution of Income is that wlian a larger share of the national Inco e Is shifted from hlgner to lower income groups, total consumption will be increased because tae latter have a higher propensity to oof wume taan tiie rich*

Pressure on cjnsumptlon, therefore, may be reduced sub­

stantially if our initial situation is one wtiet'e the larger part of the tax yield is drawn from consumption and other reg­ ressive taxes*

These taxes are borne mainly by the poor idio

eohsume Uie highest portion of Uieir Income; and wiiose tax payments are maiiifssted in reduced expenditures on consumption* By shifting the tax burden to higfier brackets (Uiose Uiu save more tiian they consuue), the pressure of taxse on consumption can therefore be reduced* Again, the volume of savings are much affected by the dis­ tribution of income*

"All available evidence goes to sliow",

says Schumacher, "that a more even distribution of Income would increase the average propensity to consume and thus reduce the danger of investment outlets being Insufficient to absorb all the savings people plan to make at full employment*..*! govemmmt.

- 89 •


#muBt eo redistribute the nmtionel incoi:^ that

the com amity will never attempt to save in excess oi current

(1) inveetment opportunities"*

But, the question need be raised:

are there no limits to redistributive taxation? All evidence seems to show also that the very process of releasing consumption expenditure by making the tax syntem more progressive tends to deter investments by making them less attractive*

Surtaxes create the inducement for owners of busi­

ness to leave their profits undistributed or in the form of reserves; and hij0 income taxes promote tax evasion, both legal and illegal*

Tuis is besides their adverse effects upon

the incentive to Invest since tney reduce tiie reward of risktaking witaout reducing tiie risks tiiemseXves*

the way out,

according to Kalecki, is to have a sufficient part of the incwse tax put on a isedified basis (viilca eliminates its adverse (2 ) influence on profitability), or to replace it by a capital tax; (3) and Morgan argues for heavy taxation on inheritance* The point sliould be emphasised fbrther timt if tiie tax yield objective is hiyh# there ie no escape that a substantial part of the revenue should come out of indirect taxes with depressive effeets on private spending# There are similar limitations on the expenditure side of the budget, argues Husgrave*

"No great reliance can be placed

on raising the level of spending through changes In the conposi-


l 2

Schumacher, &#, ge^nof^^s gf op.eit*, p* 90$ Kaleokl, K», toomomips of Full amplovmeot. on.cit.. p. )4«


Morgan, Th*, incarne &

an.cit.. pp* 198-2U0#

- 90 -

tlon of m given total of public expenditures unless the budget is very large*

Different expenditure items, to be mure, will

differ substantially in their effects upon private consumption and investment outlays.

But within the framework of an eotab-

liaiied budget pattern, there ia relatively little leeway for reshuffling exi>enditure iteoe from this point of view.


contractual obligations and indispensable expenditures for basic govermental functions are reached, only a relatively narrow range remains in which adjuatmonts can be made". The foregoing analysis should not lead us to conclude that improvements in tiie revenue and expenditure structures are not essential, or that tney are not valuable for our pur­ pose.

What is meant la merely to emphasise tlieir limited

scope and partial effectiveness, particularly if a well-adjusted system of revenues and expenditures has alzeady been eotabll&hed.

2. Tht B i U t w W BmLstt ABacatfih» The second possibility open before ue la to consider raising both public expenditures and tax revenue by sufficiently equal amounts with a view to increasing the level of productivity and employment. budget approach.

This !ias come to be known aa the balanced I wish to point out that 1 am not considering

here whether the budget should or should not be balanced* Rather, my purpose is to find out whether sufficient expansive effects could be secured in the econoeiy tlirough augmenting equally both tax revenue and public expenditures so aa to lead to fuller (X)

R., M r i U "

op.ctt., p. é.

- 91 •

utilisation of rasourcas and hiÿiar anployreant. The line of raaaonlng bahlnd this approach ie that its stimulating affects coma from the fact that aon# of the funds which are taxed away would otherwise have been saved; and that a dollar or a pound absorbed by taxation may reduce the volume of expenditures in tae country by less than a dollar or a pound, whereao its spending by the government adus one full dollar or a pound to total demand in the economy.

Naturally the increase

in govemnent expenditures required by this route should be very large, since part of Uie taxes levied would reauce consump­ tion exi>ezMiiture, ratu, r than savings, and to tnat extent will offset the stimulating effects of the government exponditureo. Tills is particularly true wiien taxes fall nalnly on people in the lower brackets. We can start by saying titat witen public expenditures are Increased, and tax revenue is raised by the saste amount, available income for private spending will initially regain unchanged# IncoM added on the expenditure side ie absorbed by taxes on the otli «r.

But this does not exclude the possibility that as a

result of income redistribution private consumption expenditure may be increased.

The balanced budget approach dwells heavily

on this latter possibility of a net govoivinent release of con­ sumption funds— national income—

with favorable multiplier effects and increased through expansive effects of public expenditures

financed by moans of certain t>'pes of taxes Uiat fall mainly on savings#

If, for instance, tax revenue is raised by dlOO million




(80ÿ of which representing absorption of consumption funds and absorption of loanable funds), and public expenditures are increased likewise (but Uiat the latter process involves a 9%* release of consumption funds and

of loanable funds), then

we siiall have a net release of ooimumption funds of 15 tilllion pounds with expansive effects ar*d, at tae saisie time, a qqtontlftl, restrictive impact of a similar atount wfiich represents Uie net absorption of loanable funds»

Whether the latter restrictive

effects are actually felt will, of course, depend on the state of the banking system and the availability of credit* Borrowing Uie same mathesmtical figwes frtm Morgan, suppose we try and translate Uie above lino of reasoning into practice* We assume as our original situation Uiat the government budget is balanced at )0 billion dollars of tax revenue ant expenditure; that gross production is running at about 188 billion dollars, with 8 million people unemployed; and that ^roms production at full onployaent should be 206 billion dollars, that, we have a deficiency in aggregate demand of 18 billion dollars*

We consider

now the possibility of raising both taxes and expenditures to the extent of the deficiency*

If the saving-oonsuinptl-jn ratio

of meWbers of the community is correctly estimated as li2, thm it follows that Wien taxes are increased by 16 billion dollars, savings w o l d be six billion dollars less and consumption 12 billion dollars less*

Mhen the government spends the 16 billion

dollars, tlie imedlate increase in expenditure would be 6 billion U), 7b., Inaaim à.

op.oit., p. 219.

- 93 •

dollars which, with a multiplier of 3 (assumed), would give us the desired rise iu total expenditure of 18 billion dollars* Tills approach, wliile intriguing at first sight, seems to be highly unreallaLlc#

It is assumed here tliat the negative

multiplier effects resulting from reduced spending by taxation cancels out against tne positive multiplier effects of additional govurncaent expenditui's, a tiling which may not liold true in prac­ tice*

Contrary to asauuptions also, the Marginal propensity to

consume may change; and different types of expenditures may have different multiplier effects, both necessitating continu­ ous modifications in the volume of revenues and expenditures wliicU is hardly feasible In practice*

Again, althou,:>i it Is

true that, apart fro?- consunpti >n effects, private investment and the level of total demand may be raised by direct additions to public demand, provided for in the expenditure Increase, beyond a certain point of budget expansion, private investment may react unfavorably and fall rather than rise, thus reducing the t >tal leverage effect*

Musprave ia led to the logical

conclusion that "given a substantial deficiency, the balanced expenditures and tax yield increase, if feasible at all, loay wejJ. require a budget so large as to be of little practical interest"* 3. lîauiinww/ flnvwi! The third type of fiscal approach which has been most discussed in recent years, and which has gained ground in face of strong opposition, is compensatory finance*



Wuagrmv#, R.,

here the question

& m i l UaolovMitt. op.eit., p. 1),

- 94 -

of A budgetary bidance I0 made subordinate to tne more basic decision of establishing the scope of gov rnment operations. The implicit ain being to attain and maintain full amplo/aent, tills approach requires tiiat government snould exert expansionary or deflationary pressure as conditions warrant, in order to close any ^ p left by ^irivata enterprise.

It in considered to

be superior to the first two approaches on account of its more flexibility, Btron^^ur efficacy, and better adaptability to deal with changing tendencies in the economy wtilch Is rarely In balance# \'fhea discussions of compensatory finance first started during the depres sion of the thirties, co'^pensatory action wos visualised mainly in the form o! deficit spending, implying the need for an absolute increase in public expendltui'ee.

By now,

it is recognised that anti-deflntlonary measures may also take the form of tax reductions; and that Inflation nay be met by lowering expenditures and/or by raising tax rates.


the sise of deficit or surplus in the core of compensatory finance", writes Muagrave.

"If there is ne^d for checking

inflation, the deficit sliould be reduced or tue surplus should be raised; if tnere is need for checking deflation, the surplus Should be reduced or tiie deficit be increased# •• .bhetner the question is one of moving in the direction of greater surplus or deficit, the required com,ensatory effect may b@ acoomplished by aeting upon tiie level of public expenditures or the level of


tax rates".

(1) Musgrsve, R*, "fiscal Policy In Prosperity and Depression", loo,cit., pp# 383-384#

- 95 •

Proponents of compensatory finance ar^ue tiiat automatic compensatory devices Oi^eratli g tiirougii tne .r.echanlotn of builtin-flexibility will not be sufficient to offset unbalancing tendencies.

"Changes in business expectations can come very

quickly, ami in a fr%;e-market economy the cumulative forces can becuae very powerful within a snort period of time. Accordingly, a i>olicy of conscious and controlled co ipensatory action is (2) absolutely essential". The function of Treasury policy should be to provide a balance wheel, tliat is. "to soi^ve a» a starter (3Î at one time and as a brake at another"; and fiscal policy should be looked upon as a continuing rather than a temporary expedient.

The aachanisxv of operation suggested depends upon

whether deflati nary or inflati&mary tendencies manifest them­ selves to which discussion we now turn. Compensatory ;x>licy of an expansionary nature Involves increased governmental s/endin^ througti borrowing mainly from the banking system, and reduction In taxation.

The choice is

to have public expenditures increased sufficiently, with tdio (1) The mechanism of built-in-flexibllity iu tliist "If national income changes, tfie tax base and hence the yield derived from a given set of rates varies in the some direction. Moreover, tlieru are certain public expenditure items, unemployment insurance in particular, which vary inversely with income. As a result, automatic and compensatory changes in surplus and deficit occur wiienever income changes and tuwreby fluctuations in income are cusnioned". (.-ius^XAve, U«, "Fiecal Policy in Prosperity A Depression", loe.clt., pp. (2) H«ns.n, A., Seanft^, KeilgY k fnSi (HcUraiMiUl. book Company, inc., New lork, 1947)# p. 249, (3) Whittlesey, Clu, op.eit.. p« 514#

• 96 •

rmt«B of taxes remainlno unohan^aU, or to kaap taa levai of puulic axpanuituras uncliaxi^ad» with taxas raduoaU sufficiently, Govemaant spatidlntia as we wave seen In previous discussions, tends to raise national Incom# boWi directly, throu^k Wie Immediate market It provides for Idle resources and men, and 1in­ directly, tiiroa^ the multiplier effects,

llie latter effect

will be larger to the extent tnat people spend more of their Increased Incomes on consumption; and it will be checked by the clrcumst'mce that people have to {>ay more taxes as a result of their larger Incomes,

Moreover, financing borrowing; for expendi­

ture from comnerelal banks results In a not addition to the volume of money, and wtien It Is financed frooits and currency". Tlie above figures of liquid assets, money, and credit avai­ lable should serve to magnify tiie complications to any restric­ tive fiscal policy, if adopted, since individuals and businesses can draw on accumulated liquid assets and credit to supplement their current incomes.

Riey should also emphasise that the powers

of credit authorities to resist further credit expansion had been impaired by the wartime increase of tho federal debt. Another complicating factor, wtiich resulted frou Treasury domination over the Federal Reserve dyatem, has been tlie maintenance, by tiio federal reserve banks, of stability of yields on govei-nment securi­ ties at low levels despite the upward rise In tlie general price level#

Tlie reasons put behind such a nova were to minimise the

interest burden on the public debt; and to protect private holders of existing securities from suffering capital looses on tlioir investments, Utus guarding against panicky selling and loss of confidence.

Tlis most obvious effect of such a policy is, of course,

to hold down interest charges on the federal debt, anu thereby reduce the amount of taxes collected for the purpose; and to protect holders of securities from capital losses In terms of money, thou^ not in terms of purohasing power.

"But much more

(1) Shere, L.. "Taxation and Inflation Control", Amer, ^ u n . Hev.. vol. 36, No# 5, December, 1946, pp. 848-fivÿ#

• U7 «

Important", romarka Lao tar UuaxUar, "are the effect# on monetary policy, tiie behaviour of tie money supply, and tiie cost and avai­ lability of funds for private investment and c^jnsumption purposes* Vitik the adoption of this policy, the functioning of the Federal Reserve has been radically altered* case of open-aarket operations*

This Is most apparent in tiis

Traditionally, this was the one

instrument over wtiich Ute Federal Reserve had complete and accurate control; the System could buy or sell precisely that amount of securities Wiich it considered appropriate in light of existing and prospective economic conditions*

But under its

present policy of stabilising government prices according to a selected pattern it has lost almost completely its initiative and its accuracy of control over its holdings of governments*


must as residual buyer purchase all the govermsents that others are unwilling to hold at the sslectea pattern of support prices* it must purchase them not only from commercial banks but also from all other types of holders; and purchase tlium regardless of the purposes for Wkion the seller will use the money...*This new policy has made federal reserve discount rates practically in­ effective as they are raised above the level of the lowest yields on government securities held by member banks.*,..Thus, discount rates below the yields on governments may tend to ease credit, but rates above the yields on governm nts which banks can sell freely to the federal Reserve are likely to be largely meaning­ less.

Even the efficacy of increasing member bank reserve

- 116 -

requirement# le eerioualy reduced.•••An increase of reserve re­ quirements can retard the expansion of bank credit for private purposes only to tiie extent t^iat banks are reluctant to reduce (1) their holdings of goVemmonts in order to acquiru otner assets". These observations undoubtedly force one to pause and reflect. The present position is obviously incoaiiatible with

tne discharge

of recognised responsibilities of the Federal deserve Gystem, at least by the traditional means at its disposal.

But it ie also

evident that a most difficult Job tiaiï been entrusted to central banking authority.

Xt is to prevent the public debt from becoming

an obstruction to tiie accomplishment of the main objectlvee of central bank policy and, at the same time, to Insure continuous easy money and easy terms to the Treasury wïieiiever it needs. This may necessitate a change in the mechanism of central bank­ ing credit control; more direct Interference with private commer­ cial banks; and a complete transformation in banking theory and practice.

It is beyond the scope of Uiia ;*aper to review the

conflict over authority between the Treasury and tae Central bank; but assumin*i, Uiat monetary authority and flocal authority t*eioaln separated, Uie fact rmmains true more than ever before that Uie closest of cooperation and coordination between both authorities and their policies is the corner-stone in Uie success of any full employment program ana the maintenance of equilib­ rium in the economy.

(1) Chandler, L., "Federal Reserve Policy and Pedoral Debt", kmmr. Keon. R#v.. Vol. 39, No. 2, March,1949, pp.417-20,

- U9




The maintenance of high-level production end mnployment la widely recognised today as a desirable objective of government policy*

Tue idea of using fiscal policy to provide full employ­

ment was first incorporated in a formal sense in tne Jharter of tlie United Rations adopted in 1944*

In the text of tne Charter,

the member states have comitted themselves to "promote higher standards of living, full employment, and conditions of economic (ii and social progress and development"* between 1944 and 1946, dweden, Orest Britain, Australia, Canada, Franoe, and the United States, among other countries, nave adopted comprehensive économie programs ranging from tiie use of fiscal policy to maintain full employment, to tiie adoption of a more generalised program for economic stabilisation*

In all cases, practically, the enacted

legislations were influenced by the experiences of the depression and ths war with respect to economic and fiscal policies*


specifically, in the case of Great Britain and the United States, which are selected for detailed discussion in this thesis, the emphasis is placed upon a govomment declaration of policy of full employment, and upon the establishment of a legislative and administrative procedure for formulating a coordinated program of policy designed to attain full maployment*

In botii countries

also, government expenditures and tax policies are treated as one instrument of policy to be used in combination with other (ij Article I*!"

« 120 -

price, wage, end credit policies to provide full employment in A epeoifie period; and taat government expenditures end revenue provide s policy device most adaptable to shoi-t-run fluctuations in bueineas conditions and particularly useful as a flexible element In the whole program# As early as 1942, the popular question then raised and dis­ cussed was whether full employment could be insured for all those who were willing and able to work.

Hie war, wfilch had generated

the quarry, provided ample evidence that it was technically possible.

The next question raised was witether the objective

could possibly be attained at a caeaper price than was borne during the war# and reflect#

Tula forced eooiuxsisto and public men to pause

There was one tiling that become clear.

The masses

of people in all countries nave come to rate full employment, and the individual security it brings, hi^ier tnan almost any otner political objective.

Furthermore, all evidence tended to

point out that what was needed was tiie assurance of a program under wtiich the government would cooperate with business and undertake to create confidence by holding forth a guarantee that there will be no widespread unemployment.

It was also apparent

that such a program could be developed only by the state, since no other economic group could assume the responsibility.


the state la in a position to look at the economic scene as a whole, locate the trouble spots, and take effective action to forestall inflation or deflation. finally, it has been recognised that fiscal policy programs

• 121 -

ahoula not b# d«ceroin«U befor# knowing whftt otu«r objeotlv#* memberB o£ tb« comimmlty favor be#ld#e avoiding dapraaalona and inflations»

Ttila haa nacaaaltateu choosing: a combination of

(1) fiooal operation# which match with various social objectives; and which may or may not be necessary coacoiaitants of a full employ* ment profpran»

Within tliis framework, a compromise bmcarie necessary

between considerations of compensatory finance and other objectives# Public expenditures, for exan?ple, are nowadays generally planned on the basis of their usefulness relative to alternative private outlays; and tax rates then adjusted so am to provide such deficit or surplus as is needed to maintain high employment and prevent inflation»

As to the distribution of the tax burden and of

transfer expenditures, tlie attempt is being oade to make them abide by the community's preferences regarding Uie distribution of income.

Under present programs, no make*wor^. projects as such

would be needed; and, depending upon the availability of flexible projects planned in advance, cyclical adaptations of public expendi­ tures become possible»

The fact that actual policy may not

coi^ly strictly with Wie rules of our model is duly recognised; (I) The main objectives customarily advocated as guiding principles to Sttape an integrated full employment fiscal program ares **A high national dividend throu^ improved efficioncy and ell* mlnation of waste; less inequality in the distribution of income; the consuiaers free choice to buy tiie goods they prefer; social security through freedom from want; social opportunity providing educational facilities and economic advancement; and good-neighbor relatione with foreign countries» These objectives should be achieved in a free society without loss of the basic political and economic liberties*» (Halasi, A», Ving for fuJl lî-nïav-anfc. op.cit., p. 2.

* 122 -

but goTornnent action, It la assorted, altould not ba postponed until perfection Is attained#

due weijtt is given, however, to

the urgent need for exercising tiis greatest care and guarding against the application of some ready formula on tlie basis of its naWiematlcal merits without considering the degree of its accept­ ability in the social and political c(m;lex of tlia moment#

a. aaGAi pguüT il: rjü: ui.v.yiti; siatssi 1. Fimoal Policy In I'rooema of Formation: Tli# H m U#ml giDTlaant and


Qovarnaant rinanc*, It hai ba«n

Shown, had continued to occupy a relatively minor position in the economy until a recent date.

Wien the depression of the thirties

started in the United States, the Hoover administration observed strict adherence to fiscal ortliodoxy#

A balancod budget was

visualised as an ultiuate objective; and a *^eat alarm was, there­ fore, revealed following the deficits realised In 1931 and 1932# This is beat Illustrated by the foUowinf, quotation from Presi­ dent Hoover'a last budget message delivered on beoember 3, 1932* "Such a situation cannot be continued without disaster to the federal finances*, he saiu#

*1 cannot too strongly urge ttiat

every effort be made to limit expenditures and avoid additional obligations not only in the Interest of the already heavily burdened taxpayer, but in the Interest of the very integrity of the finances of the Federal Government*#

As tlie depression

steepened, however, and an easy monetary policy carried to ex­ tremes failed to cope with the situation, recognition of govern­ ment as a major factor in the econosy started to emerge.


(1) Quoted from Flno, 3h., Pul^lle Sntidlng fc Parntmmr Kconomlo Follor.

Op.cit#, p. 67#

* 123 *

Roosevelt administration, assuming ofi'ioa without any generally accepted means for combating the depression, had to resort to various 'unorUiodox' measurao; and an expansionist public spend­ ing program «aerged, Uiough reluctantly, as a chief instrument of recovery policy.

In the words of Newcomer:

"Roosevelt was

oaught.*#«in a net of economic forces that were too strong for him,...Roosevelt did try..,,but deficits grew, and the Adminis­ tration was easily pursuaded to make a virtue of necessity, and adopt the theory that deficits were^not merely inevitable, but desirable, in times of depression". But the early New Beal spendings, which were accompanied by an annual promise that the budget would be balanced the following year, indicate tuat there ;:ad not yet developed a consistent theory or program that would permanently *^ve to government a major role in tne economic life of the nation.

The fact remained,

(2) however, that deficits continued to exist aiui to grow; and a rationalisation on the following grounds was offered to members of the public.

The decline in business, it was argued, was a

result of declining porctiasing power which could be elevated by goverrvsent action in the fora of relief ana expenditures on public works,

strong emphasis was laid on the multiplied and cumulative

effects of public spending; and the line of reasoning followed was that if lowering the interest rate did not, by itself, suffi­ ciently induce investment, then the object could be achieved

a billion dollars annually, rose to s5 billion in 1941# and to É56 billion in 1943. (Bowrs, H., Public & Hxtionel itntanii op.cit., p. 492.)

- 124 -

t^àrougli the creation of new eoneumer'e inoome by neane of deficit#» from thie analyaie of inooae-creating expenditures grew tlie pumppriming theory, wiUi empdiasie laid on tlie power of deficit spend* inga to stimulate provate investment and recovery to proceed of its own momentum.

Later on, when Keynes published his General

theory in 1936, emphasis shifted from pump-priming to the need for compensating, by means of public expenditures, chronic tendencies in the economy toward oversaving and under-lnvestraert. According to contemporary economic literature, the publica­ tion of Keynes' General Theory is assumed to have marked the beginning of a consistent theory for short-term government inter­ vention at least.

On this point, dtrayer's remarks appear both

pertinent and emphatic.

He says: "It was no accident W&at the

rise of the inner circle of 'Hew Healers' wlio advocated the con­ scious use of fiscal policy, without regaru to established tradi­ tion, dates from tiie publication of thiu book in 1936.


development of the concept and measurement of tne national income also aided In t«ie formulation of a short-run theory anu tias given statistical support to tlie belief that variation of the government net cash surplus or deficit could offset fluctuations in effective demand in tiie private economy.

Tlie appeal of t^ie

fiecal approach was that it did not depend upon an understanding of all the basic reasons for fluctuations in the private economy (1 ) but could be turned on or off as necessary". But is was not until 1936 that first evidence was revealed that the United States (1) Btrayer, P., "Public Bxpenditure Policy", loc.cit., p. 3*4#

- 125 -

government had adopted the view to regard deficits as a major means to recovery.

This came following a set-back in business

activity during 1937/36, idien a new spending profyam was hasti­ ly improvised in the Spring of 19)6 and passed by Congress# Then followed appropriations for the defense pro*yam; and with the outbreak of war in 1939, emphasis on public spending as a recovery measure was overshadowed; and war became the dominant factor in the business picture. Reviewing national economic policy in the United htates between 1933 and 194Ü, a period dominated by the exigencies of the depression, several economists have put forward tueir views and judgeswnt in a variety of ways; but all seem to agree that tae results of fiscal operations during Wu&t era were short of expectations.

There is hherwood Fine, for example, wlio said:

"It is not strange Uist Uie successive economic measures of this period, born of dire necessity and nurtured by political and economic expediency, were ciiaracterised by inconsistency and improvisation..•.Denied the security and guidance of precedent, the administration m o t o m between the need for innovation, organised resistance to change, and its own uncertainties over the policies adopted.

The outoosw, as muet be the case under

ouch cirouBWtanees, was something less than a consistent, artlC2) culate, and mg^^essive economic program". Later on he rwmrked: "The experience of Uie Roosevelt adninistratiun with fiscal policy cannot be Judged to have been very successful. (X ) W lX lia M , J., P y tif a r

(2) Pin#, ah.,


ep.cp., P* Pnllnv. Op.CU.,

* 126 -

relief end recovery outlays did absorb some Idle resources and contributed, through secondary effects, to a higher level of economic activity, the hoped for results failed to materialise. Throughout the decade we were plagued with enormous unutilised productive facilities.

The average unemployment figure for the

years 1933*40 was in the neighborhood of ten million


spending activities of the administration were conservatively conceived....the Roosevelt administration sougîit to minimise budgetary deficits....The recovery and relief objectives Itave never been clarified.

Kvidenoea of shifting goals and uncertain

policies were manifest t iroughout tne years 1933-4U by the suc­ cession of rapidly


Keversals of position

have revealed tue uncertainty surroundxng tiie ueasures adopted. The conflicting philosophies of different governmental departments have repeatedly olasiied....Tne volume of outlays has not been determined by the objective of full employment, but rather by the dictates of social and political necessity".

Newcomer, in his

book 'Taxation anct Fiscal Policy', also remarked that "government expenditures may have been useful in themselves- even necessary; but they did not bring continued busineso recovery,

v/hy they

failed is a matter for conjecture, but various possibilities may be noted.

There are some indications that savings have exceeded


Business has hesitated to expand, partly because

of future uncertainties, partly because of present high costs. The unsettled state of world affairs, with tue consequent reper(1) FilM, Sh., Public S c n d l n K t Poatwir ÜCttlMttlC

* 127 -

ousslons on international trade and finance, has not promoted the neceeeary confidence",

finally, there ie Sweeey'e remark

that "if fiacal policy ie to be used in the future to maintain full employment and not merely to check a decline when unemploy­ ment has already become severe, It will be necessary to find permanent non-relief channels for the government's contribution (2) to income". Hespite all tiie above criticisms, however, the fact remains that the experience of the great depression not only induced the develop* nt of fiscal theory, but it also served as a testing ground for the effectiveness of fiscal policy itself,

it seems

to mo that there is much reason to believe tliat Ui9 failure of business enterprise to revive appreciably lias not been due to an iniierent defect In fiscal policy, but rather to Uie adoption of an ill-advised policy which was short of tiie magnitude re­ quired for recovery, poorly timed, and lacking coordination. It remains also true that Irrespective of the results achieved, the rapid rise of public expenditures, necessitated by largescale unemployment, has forcibly raised the iosue of the extent to which public outlays constituted a dynamic element in the economic field. finally, the war experience afforded another test of the effectiveness and llodts of fiscal policy. States war experlenoe, Coin remarks: (1) M . . / i l f i U

Commenting on United

"fiscal policy was Included f a U a y . op«oit«. p« 75.

(2) Sweesy, A., "fiscal and Monetary Policy", Aflfrt Vol. J4, Mo. 2, May, 1946, p. 298.


• I2é —

In President Roosevelt's pro&na to oombat inflation ami insure economic stabilisation.

If fiscal policy alone had been chosen

to do the Job, we should have needed such sore drastic tax or saving measures than were politically acceptable,

fiscal policy

had to be euppleaented by a great many otter measures, euch as price and wage and credit policies.••.The task of nalntaioing nigh-level production and SAiployaent is too big to be accomplished by any single device,

fiscal policy can be effective only wtksn

reinforced by many otner policies....Xt sitould be used as a prompt but temporary device, to be applied to those situations in which other measures fail to bring about tiie desired result. It is therefore not onou^ to Identify deflationary trends and use compensatory fiscal measures.

In addition, the underlying

causes of such deflationary trends must be analysed and all policies available in the^'tool chest' of government must be brought to bear on Uiea". T in m U Q n M n t A s t f lf JLaU«

By 1 9 U , th * bov# w m und*«N.

taken In the United States to impose upon the government the res­ ponsibility for sustaining demand and assuring continuous full employment.

The Hurray full Employment Bill was Introduced in

1945; but its proposals evoked widespread oocs'i^ent and, as a result, the proposed legislation underwent a number of important changes before it took final form in the Kmpioyment Act of 1946. Under the fcùnployment Act of 1946, tiie Congress has declared (Bee. 2) that "it is tue continuing policy anu responsibility of (1) Cola, 0#, "Keintainln^ High-Level Production and Umploynenti feSnnioai Requirements", loc.cit., pp. 11)0-11)1.

* 129 -

the Federal Government to uae all practicable means consistent with Its needs and obligations and other essential considerations of national policy, with tne assistance and cooperation of industry, agriculture, labor, and state and local governments, to coordinate and utilise all its plans, functions, and resources for tae purpose of creating and aaintainliic», in a manner calcula­ ted to foster and proiaote free cou^>etitive enterprise and the general welfare, conditions under wliich tnero will be afforded useful employment opportunities, including solf-enployment, for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power". Under Section ) of the Act, the President Is called upon to suboit to Congress annually an Economic Kef>ort "setting forth (1) the levels of employtsent, production and purchasing power obtain­ ing in the United states and such levels needed to carry out the policy declared in dection 2; (2) current and fsreseeablo trends in the levels of employment, production, and purchasing power; (3) s review of the economic program of the Federal Government and a review of economic conditions affecting employment in the United ütmtee or aiy considerable portion thereof during the preceding year and of their effect upon employment, production, and purchasing power; end (4) a program for carrying out the policy declared in Section 2, together wiui such recommendations for legislation as he may deem necessary or desirable". The machinery set up for preparing anti dealing with tdie Bcononic Report of the President consists of two parts i in the

• 130 •

Hxeoutlve Branch, there ie tae Council of Economic Adviser* to the President, consisting of tiiroe economists who, with the aid of tne necessary staff, are to aaalbt and advise the President in the preparation of the Hoonooic he^>ort; to gatiier timely and authoritative information concerning economic developcaents and economic trends, beta current and prospective; to analyse and interpret economic developmonte; to appraise programs and activi­ ties of the government in the liglit of the policy declared in Section 2; and to formulate and recommend national ocononic policy to promote employment, production, and purchasing ;>ower under free competitive enterprise, (Sec, 4),

In the Legislative

Branch, there has been set up a Joint Committee on the Iconomic Report, composed of seven members of each House, >diose duty It is to evaluate the President's Bcononic Report anti advise Congress on broad economic policy, (See. 3). An analysis of the above Act reveals that it does not embody a specific program for full employment ; nor does it commit tiie government to the practice of compensatory finance.

In the dec­

laration of policy, the use of tae term 'full s ployment' is avoided and, instead, maximum production and the purciiasing power tiiat makes for high consumption are stressed.

The freedom

to work is protected by the expression "willing and seeking to work"} and the danger of make-work projects is guarded against by emphasising "useful employment opportunities".

In place of

specific emphasis upon fiscal operations as a means to achieve set up objectives, it is provided that government "coordinate and

- 131 utilise all ite plana, function#, and resources".

In addition,

strong recognition io given to the promotion of "freo competitive enterprise and the ge^isral welfare"; tae need for "the assistance and cooperation of industry, agriculture, labor, and state and local govemnents"; and tne importance of "ot^ er considerations of national policy". Hut wtiile greet latitude is allowed witfi respect to t(ie particular measures taken, it le evident tliat the reoponsibillty of the Federal îîovernnent for promoting, a high and stable level of bucinees activity is clecrly and explicitly affirmed.

The Act,

essentially a "planning measure", comnita the govemrvent to "a periodical and continuous assessment of the enployment situation"; and "tho procedures provided in the Act would focuo the eyes of the nation continuously on goals of economic progress and etability, on rising livings standards, and on growth in real national Income as rapidly an productivity and hi^^ levels of en;loynent (1) permit". Although it is true ti>at tho Council of Kconomic Advisers has no neane of ensuring the prompt action idiich nay be declrable to offset the gathering momentum of a downsvfing or of a speculative boom, yet its mere existence ie a long step forward since it makes possible overseeing government policy as a whole, and con­ sidering how it interacts with the particular state of the private economy.

Furthermore, euch a coordinating and recosaiemiing

agency, not being a political body, tende to lift employment policy above partial views and above special political and economic Interests.

Finally, the Congress is obliged by tho Act for the

(1) H«n#«n, A.,

& full r^nlnmMnt. op.cit,, pp.lüd-9.

- 132 -

first time to consider federal revenue# and ex^iendituree a# a unit, rathur than pieceoeal* Ever since 1946, the Presidential oeoeagos submitted to Congress under tne Employment Act have continued to lay before the country a full picture of wliat tma been tiapi>enlng to the American euonuay duria^ tii« preceding yoor; and to reconc ond comprehensive national j>olicius gecu'eo to the maintenance of pro8;>erity.

In the Sconamic *Wiport of the ''resident for 1947,

for exS' pie, a long-range program designed to strengthen the structui'o of tho Anericsn economy wns submitted along the follow­ ing lines1 "Efficient utilisation of the labor force; mnxiwem utilisation of productive resources; encouragement of free CO:pstitive enterprise; promoting welfare, health and security; cooperation in international economic relations; and combating economic fluctuations".

Among the devices proposed to deal with

economic fluctuations worst "a well-integrated program of employ­ ment stabilisation; inproveaentu in the process by wtiich workers find jobs and employers find workers; improvements in Wie tax structure; wise^management of the public debt; and a flexible credit policy". Die above prograo gives the underlying p^iilosophy of Uie Act of 1946. While main reliance is placed on private enterprise, the need for providing adequate demand to take what in produced off t!ie market, as well as the reeponnibility for absorbing excess purchasing power, is duly reeognlsed in soveral of ttie (1) Quoted froa Seymour Harris, Rcononic PlannlTLi (Alfred A. Fnopf, New fork, p7 IBf. (2) i M l w p. 111.

- 133 following Prosiûential adur#####*

Thie require# Uiet any govern­

ment policy, aiming at nigh and stable employment, must be pro­ vided with full knowledge of Uie factual context in waich govern­ ment will have to pursue its policy*

^wre apecifioally, it be­

comes necessary not only to have adequate statistics to Dsasure total expenditures, but also methods of bringing tnem together with a view to making comparisons wiUi Uit» immediate past, and with current position in otaer countries*

The argument is based

on the a;tsumption thnt policy devices can be used effectively only when the program they are to serve is formulated on tiie basis of an accurate diagnosis of business conditions. Under the circumstances, an annual appraisal of tho national economy becomes necessary in order to indicate the pro[p~ams that would be needed for the coming year, or for several years ahead, for reaching or maintaining high employment.

This can be accom­

plished by preparing two kinds of estimates: (a) estimates of employment opportunities needed for full eaploym mt, the produc­ tion of goods and services that would be forthcvming at full employment, and tho volume oi investment and consumption outlays needed for the purchase of such goods and services; and (b) estimates of the probable number of employment opportunities foreseen, tne productivity of labor in tenae of Uie expocted price level, and Uim probable aggregate exper&ditures of government, business, and consumers during the succeeding year, before taking into account the effect of any employment-crest 1nefforts by the government*

2n the event that the prospective national incwne is

- 1)4 -

estimated to be below the level necessary for full employment, government policy siioulu be designed to lift ttie national income to full employment level.

If projected Income ie found to be

excessive and an inflationary tendency is Indicated, Uie economic program should be designed to curb tne inflationary trend. It Bliould be pointed out, however, tiiat Uiis neat and logical prescription of a basis for policy formulation may suffer in actual practice from both technical and administrative imperfec­ tions,

While estimates of the labor force may be possible with

relatively high degree of certainty, more serious probl«as arise when a projection of national income and production, and a quanti­ tative appraisal of proposed policies are to be made.


issues are suameiised by Oerhard Jolm in the following words: "Projections therefore require (ai the most up-to-date actual data of income and production and their component parts; (bi an appraisal of ImMinent trends, especially in government expenditures, business investments, and consumer attitudes; (e) a knowled^^e of the responses of business and consumers to changes in economic conditions on the basis of the record of the >>ast; and (di most of all, tne exercise of good common sense in combining all the^^ieoes of information and expert advice into a consistent pattern". The President's Report for January, 1946, gives the first detailed reference to fiscal operations in the government's general économie program.

In the field of tax policy, it was suggested

(1) Colm, 0,, "Maintaining High*.Level Production and Ggmloyment# Technical Requirements", loc.cit,, p. 11)5,

- 135 that tna first fsaturs of long-rangs tax policy must b* ths maintsnancs of tax revenus which, except in years of depressi m, will balance the federal budget and provide a substantial sur­ plus for debt retireamnt.

"Every consideration of prudence wiWi

respect to future problems of the natioiuU economy and of the national credit In critical circumstances”, tne Report asserted, "requires a firm and sustained policy of reducing the public debt", The second requirement suggested was that "tae tax rates and tiie character of the taxes be suoh as to help sustain prosperity". Lowering particular business taxes may at one time be needed to stimulate business expenditures when they are Inclined to lag, while maintaining or raising them may be the tiling needed to Qlieok over-expansion at another,

Similarly, abatement of taxes

on consumption may at one time be needed to support purchasing power, whereas their maintenance or increase

r.« y

be the most

effective means of damping an inflationary tendency at another* In the choice between taxes falling mainly on consumption or on investment, the Report observed tiiat "the lessons of wartime and early postwar experience seem to indicate tiiat for tue sustaining of an economy of maximum production and a market cooKiSnsurate with this rate of production, o&ore concern will need to be directed during the years just aiiead toward easing tiie tax burden on the eousumer than toward aceelerating Uie rate of capital formation". In the field of debt management, it was remarfSd that "the vast increase in the public debt has not created the difficulties that many people feared, partly because our national debt is owned

- 136 .

by our citisono, ami partly baoauaa of the taotmioul skill with which the dabt /las bean managed Jointly by Ute Treasury He;*rtment and the Federal iweaenre hyatem"#

The most important part

of the debt-management policy in the United htatee had been tne program to support tiie market for government aecuritiee; and in 1946 it was reaffirmed tiiat "it is the declared purpose to con­ tinue active support of government bonds for tiie purpose of maintaining an orderly and stable market at a low level of long­ term intareet rates".

It was admitted that tîiis policy does not

permit the Federal Reserve Bank to make effective use of the traditional methods to lirait Inflation by requiring banks to borrow in order to obtain additional reserves and by raising the discount rate; but action taken to effect control over the bank­ ing system should not involve, it was emphasised, "withdrawing support from the government bond market". Id tne field of economic programs to promote stabilisation, the Report noted that "wlille it ib moat urgent now (1946) ttiat we combat inflationary dangers, we cannot wait until tns tide turns before ooueidering affirmative measures that will be needed in the futoi.-e,

Economic conditions way turn rapidly, but the

formulation, enactment, and initiation of economic and fiscal programs require a considerable amount of time.

Prudence demands

that we look ahead and prepare for tomorrow wtiile we act for today”. The expansion of social security programs was suggested in 1946, and later reaffirmed in 1949, on the grounds thit it would etrengthen m o t purchasing power and markets in the long-run, while

- 137 contributing ianodiatoly tu tn# restraint of inflationary praaeuraa# Die 1949 Report remarked that "by inoreaaing Uie coverage and benefits of une:apio/aoxit and old-age insurance, by introducing disability and healUi inaurance, and by providir»^ nore adequate public assistanoe, we would tnen contribute towards that recon­ ciliation of imroediate and longer-run needs Wiich is so difficult to aclileve t^iroag)i the market faechanXam",

Besides social security

programs, the 1949 Report also advocated minimum wage laws adjusted to current price levels; and future tax revisions to strengthen conoiSBsr markets but, at the same time, not neglect the need for stisrulatlng inver^taonbs, especially in areas wtiich offer both great rewards and heavy risks.

The Report of 1946 also recommen­

ded that steps be taken immediately to plan federal, state and local public works for future ÿears.

The idea la that when the

inflationary presüures mbside, govs:iment should speed up tne program of resource development, transportation, and urban re­ habilitation, and furtiier expand the social security, health, and education programs. With regard to tne last move, tiiere nas been a growing recognition, however, of the practical limits of a public works policy as a compensatory device, Oerhard Colm remarkst

Drawing f%*«c recent experience,

"The limits of an effective fiscal policy

throuj^h manipulations of expenditures were demonstrated in August, 1946, when President Truman wanted to curtail expenditures as one of the measures for combating inflatlOMory pressure.

He cut by

two billion dollars a federal budget that exceeded forty billion

• 1)6 -


The rsst of ths budget was regarded as largely Inflexi­

ble because It is determined by legislation or allocated for government purposes tnat were believed to be non-deferrable, It proved difficult to enforce even this limited curtailment program in view of resistance Si^inst tlie postponement of certain public works*

The experience showed not only that flexibility in the

federal budget is limited, but also that our legislative and administrative nachinery^ie not yet fully equipped to uae even this limited flexibility".

There is also Strayer's remark that

"except for effects on employment, public works outlay should be greatest in periods of prosperity and least in periods of dep­ ression.

Thiu follows from tae fact tiiat ex^wuision in I'sal

income and activity leads to mure extenuive use of public faci­ lities and demand for entirely naw facilities*,•.it does not make sense to tell voters that tney si^ioald postpone their demands for better facilities until the uncertain day when (2) there will be a depression". Finally, Uie President's Report of January, 1949, has put the claim that the American economy stands now in much better position to withstand shocks than during tne twenties; and it has put the following reasons in support of such a claim.


ness has become better informed and more prudent, particularly in inventory policies.

There has been lese speculation noticed.

The so-called built-in-flexibiXlty in the system—

the social

(1) Colm, 0*, "Fiscal Policy", The New JBconoaica. aeymour Harris, Editor, op.cit., p . 4G4, (2) Strayer, P., "Public Expenditure Policy", loc.cit., pp, 390-391.

- 1)9 -

aeourlty system, vetorsn programs, and tns farm prlcs-sapport program— would all have a cueiiioning offset in ths event of a downswing*

On the expendit^s side of the budget, large approp­

riations make an economy more resistant to shock, and on the revenue side, the progreesive inoot-ie tax increases flexibility* Die liquid aoeets created during the war in the hands of busi­ ness and individuals can act as an loaediate shock absorber even thou#i their real value has been reduced by inflation.


Federal Deposit Insurance system would operate against largescale withdrawals of deposits such as occurred during the thir­ ties; and the Reconstruction Finance Corporation can exert some mitigating influence. Notwithstanding the above potentialities, however, tdilch are expected to temper only wiUi the effects of fluctuations until more fundamental reforms are instituted for correcting tlie basic maladjustments, it is argued ttiat the upward adjust­ ment of consumer incomes relatively to prices will be essential in the future to establish sustainable patterns of balanced economic growth*

but because these adjustments cannot alone

Insure an increase in consumption and the loaintenonce of a high level of activity (since decreases in prices or increases in costs may lead to a recession if they occur at a time wtien markets are weak and aggregate demand is shrinking), it is considered essential that, during Uireatening times, adequate support should be given to demand while fundamental adjustnents are going on in order to remove the ejqieotation of instability.

The Report

- Uü -

conclude# by saying tiiat "with adjustments in the price-wageprofit relationship, we shall not be able to place tho economy on a basis of continuing stability.

Without the simultaneous

adoption of policies designed to promote economic growth, we may not safely rely on the adjustments.

It is necessary to com­

bine measures thot promote growth with those that support stabi­ lity in an integrated program". In light of tae preceding discussion, it is possible to draw the following inferences and conclusions related to employment policy as applied at present in tue United dtates.

The United

States ïias not advanced, up to 1946, far in Uie direction of a planned economy.

Private enterprise remained primarily respoo-

aiblw for operating tne economy; witn ^vernment announcing some public responsibility for purdutsing power anu ei^ployment, and setting up and examining Uie nation's budget whicn underlines total demand in relation to supply,

from 1946 onwards, however,

government programs did reflect a marked advance in the field of planning and government responsibility by provioiog for influenc­ ing the allocation and distribution of resources and of demand by public action, and by suggesting the broad lines of economic development.

Nevertheless, it Is significant to note t^iat the

growth in government influence has not been the result of a pro^^ram of Increased goveivment ownership of the productive resources of the nation, but rather the result of tremendous increases in the extent of transfer expenditures, in war and defense outlays (still in the hands of private producers), and in the level of commitments

- U1

to foreign govemmmte.

Within the preeont framework of economic

policy, it is hardly ponnible to Judge the effectlvenese of fiscal operation# undertaken by the state since they are not applied In isolation.

All thnt can be said, to quote Hansen, is that the

United States is "soving more and more into a dual economy In which tite state plays an important role in the prooees of itiuome creation—

through it# capacity as provider of comciunlty services;

throu^ public investment in public facilities and the improvement and development of natural resources; tlirough those many monetary and fiscal activities (lendin*, operations, management of Uie public debt, fiscal operations including taxation and borrowing, control of the rate of interest and of tho money supply) U m t influence indirectly the rate of private expenditures In a market economy; and last but not least, Uirou^^ tl.e maintenance of a well-functioning prloe system involving wage and price adjuntoients consistent with the requirements of Increasing productivity end teclmologioal ctumge*.

g ajB ffi^ag . rouLgi iP.Qr,u% a&m ü; 1. Britain* « Econoialc Pragrmi

The natlunal economic }vo,yam,

as ^plied at present in Groat Britain, has, in broadest outline, a three fold objective*

(a) A stabilisation of the domestic

economy through selective nationalisation of key industries, combined with extensive direction of the flow of private investment and economic development ; (b) a rebuilding of the country's export position; and (c) provision for a (greatly expanded system of social (I) lUuUMn, A.,


A rul^

op.clt., pp.l5>34«

- 142 -

and health benefits in line with the main proposals of the Beveridge Plan. In the field of British economic planning, three official documents are wortuy of note.

They ax*e: Die Wilts Paper on

Bnployaent Policy, wliich inaugurated officially tïie endorsement of full employment as a proper end for government policy, and which was adopted by Uie Coalition Government in fïay, 1944; the Economic Purvey of 1947, tdiich summeriaeu government's findings and aehxevements during the reconversion period; and the Fourtear Plan (1949*1953) of Wi* Labor Uovernaont wtiich was submitted to Pariianient in Deoember, 1946.

Die Uireo documents reveal the

transition in attitude toward public policy from one relying primarily on private enterprise, supervised and componsated by public action to (a) a planned use of national resources tiirough control# (such as rationing, allocation of raw material#, control of building and Import# throug): licenses, and control of capital issues) designed to allocate, throng ;^vemment action, scarce and essential resources in the beat interests of the nation as a whole (a route necessitated by the assumption of power by the Labor Party and by the difficulties faced durin^ the reconversion period) ; (b) a more flexible and liberal pro^^yam compromising national necessities with a high degree of individual liberty. It falls beyond the scope of this thesis to undertrn e a dotailed analysis of all ttie component parte of tiie Britioii economic prog­ ram.

Hence, except fur a result, in skeleton form, of the distin­

guishable features of it, attention will primarily be devoted to

- 143 the White Paper of 1944 which, thou^ oonaideratoly outmoded up till now, still reaaiue the model plan literally applied (witti minor aaendmenta) in aeveral G