Evening star., 1938-09-18
Recovery Depends on
Developments Abroad
By OVEN L. SCOTT.

Records both Of industrial production
and OF trade are continuing to suggest
that the improvement in business, first
sighted In June, is going to develop into
q broad recovery unless upset by devel-
opments abroad.
A period of recovery, in turn, would 10
far to bulwark theory that has under
lain much New Deal action since the late
fall of 1888. It was then that President
Roosevelt decided to test out the ideas of
John Maynard Keynes, the British
economist.
The underlying assumption OF the
Keynes theorists is that the national in
come, broadly speaking, can be increased
IN just two ways-by the larger dis
bursements OF business or by the larger
disbursements of government.
From this assumption the conclusion
Is drawn that when business slows down
its spending, then Government can over
come the effect of that slowing by an in
crease OF its own spending. The result
Is what the country now knows as pump
priming." But to prime the pump, under
the Keynes theory, the government must
not only spend larger amount of
money; it must also spend borrowed
money. or money taken from individuals
and corporations who otherwise would
not be putting the money to effective use.
y X
When deliberately enlarged Govern
ment spending OF borrowed money was
put forward as a recovery program late
in 1888, many economists and most
businessmen insisted that the effect
would be the reverse of that expected.
The orthodox thesis was that there
>r;Y
dustry itself borrowed on large scale in
order to pay for new plant and equip
ment. But in order for industry to bor-
row there had to be confidence" in the
outlook. Confidence could be inspired
only by balanced governmental budget,
To achieve balanced budget, expendi-
lures had to be reduced rather than in
creased.
This recovery thesis had long trial
under President Hoovcx and during the
first few months Of the Roosevelt admin
lstration. 1t was discarded in October,
1888, after the ce-inflation boom gen.
Grated by N. r. A. had blown up
president Roosevelt then, for the first
time, set out on a deliberate attempt to
produce recovery by unbalancing the
Federal Government budget in order to
pour money into the pockets of people
who would spend the money in a hurry.
\
Starting late in 1888, Government
spending OF borrowed money was stepped
up rapidly and throughout 1884 and 1885
was maintained at an average rate of
$25O,OOO 600 a month. This period COIN
clded with an upturn in the volume of
industrial production and of trade.
The Governments advisers on pump
prlming urged that a gradual approach
to a balanced budget and an end OF
pump priming, be started early in 1896.
The conclusion was that private industry
had gained enough momentum to take
over the recovery load.
A start was made in the direction of a
balanced budget only to run head-on
into vote by Congress to pay in full the
remainder of the soldiers bonus. In
stead OF contracting, as scheduled. the
Government for brief period stepped
up its outlay of borrowed money to more
than $780, 900 month.
There followed period of rapidly ris-
ing production that continued until Au-
gust, 1887. Trade took on boom propor-
tions, prices rose all along the line labor
demanded and received higher wages in
some industries resulting in further price
increases. Maladjustments quickly ap-
peared
Then, in 1887, came the drive for a
balanced budget. Taxes on industry were
increased, both through the tax on the
unolsrlouted portion OF corporation
earnings and through pay roll taxes
FROM high OF more than $500, ,000, 900
month, the Governments contribution
borrowed money fell precipitously until
early in 1898 the budget-on a cash basis
was briefly in balance.
This contraction of spending of bor-
roWed money by the Government COIN
cided with a period of sharply rising
prices in industry. The contraction also
conceded with the development of a new
depression.
Now again there is argument over the
effect that an unbalanced budget has on
general business.
~ +*
The reason is that the Government
is returning to large-scale expenditure
OF borrowed money. Where in February
and March of this year the Treasury
was taking as many dollars out of the
pockets of the people as it put back into
those pockets, by September it had
stepped up to 5000, 900, 900 a month its
new contribution of borrowed money.
The plan is to increase this contribution
to $500, ,000, 900 month and to hold it
around that level during much of 1899.
That volume of pump priming is larger
than the average of 1884 and 1895, but
far under the level OF the bonus payment
period that upset the calculations of the
planners.
These planners are convinced that the
present upturn in business stems from
the return of the Government to the
job OF creating purchasing power by
spending borrowed money.
The planners also say that this time,
significantly. their conclusions are not
being disputed by spokesmen for busi-
ness or by the more orthodox economists.
They stress the claim that those who said
In 1888 that Government spending would
disrupt the trend toward recovery, now
admit that such spending will encourage
recovery. Now, however, the argument
advanced is that any recovery generated
by Government spending will be tenn
porary and will collapse once the Gov
ernment support is withdrawn.
Here the Government economists reply
that all recoveries in business are tenn
porary with cycles at best only few
years in duration. They are convinced
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