Reform, Recovery, and the Budget

Abstract

LAST November, following the lifting of the restrictions upon foreign exchange, the President advised caution in the enactment of further reform legislation and gave a distinct intimation that, for the present, industrial recovery should be given the right of way. The effect upon industry and government credit was not only immediate but so striking that it might well have encouraged other moves calculated to increase confidence and thus improve the economic outlook. Instead of this we have had drastic action to force reduction of public utility rates, farreaching proposals for security legislation, and a budget which, to say the least, is not reassuring. Moreover, the new Congress, probably more radical than the last, has convened; and it is probable that the innovations of the next few months will by no means be confined to the program outlined by the President. These developments cannot be without effect upon economic conditions in I935, and are likely to retard, even though they may not prevent, the progress of industrial recovery. For such improvement, sustained even though gradual, the prospect would be excellent if it could be given the right of way, that is, if future governmental policies could be favorable to confident enterprise. Even though no small part of the business activity of I934 was caused by government spending, some part of it was due to a natural rebound from the low levels prevailing during the depth of the depression. The passage of the so-called devaluation act, which was widely accepted as evidence that depreciation of the dollar was at an end, and the lifting of the restrictions on foreign exchange, which is hard to understand except as a move toward permanent stabilization of the present dollar, both met with a quick response from industry; and there can be no reasonable doubt that like effects would follow like causes in I935. But it is now evident that economic recovery is not to have the right of way, and must take its chances in a maelstrom of political developments some of which may do no harm while others will certainly hinder. This is unfortunate because since the excited speculative upturn in the second quarter of I933 the United States has not enjoyed a sustained economic recovery. Our B curve sufficiently attests this fact, and is confirmed by the great majority of the other indices of the volume of trade or industrial activity. The last half of I933 saw a sharp recession from the levels prevailing in the early summer of that year, the first half of I934 saw much of the lost ground recovered, and then the last half of that year brought another recession which continued until November. It is encouraging that the recession of I934 was less pronounced than that of the previous year; but, nevertheless, from July I933 to January I935 the general movement has been horizontal and not upward. And this in spite of all the efforts put forth by the government to stimulate and even force recovery, and in spite of the undoubted gains, for example in retail trade, made by those industries most directly benefited by government expenditures. Our showing is in striking contrast with that of most of the other countries for which we have indexes of industrial production'; and it is a significant fact that the comparison results so unfavorably for the country which went further than almost any other in its efforts to end the depression. It is not strange, therefore, that the year I934 seems to have disillusioned the Administration with respect to many of the experiments upon which it entered so confidently in I933, or that, at the opening of I935, it proposes to concentrate its relief and recovery activities in a new plan which it hopes will work better than previous plans have done. That I935 is not a good year for further political experimentation is further evidenced by the budget recently submitted to Congress. For the fiscal year ending June 30, I934, the net deficit financed by borrowing was 3.6 billion dollars. For the current year it is estimated at 4.3 billions; while, for the year beginning July i, I935 and ending June 30, I936, it is estimated, more or less conjecturally, at 3.9 billions. These sums may not be beyond the country's ability to finance, if all or most other things go well; but they will certainly strain its credit to the danger point unless a natural and sustained recovery of 1 This REVIEW, XVI (I934): 256.