Tuesday, March 10, 2015

"The Question of Confidence" According to Marriner Eccles

From an address at a Conference on "Debt, Taxation, and Inflation" organized by the Wharton Institute of the University of Pennsylvania in May 8, 1936, and held at the Waldorf-Astoria in New York. In his words:
"Leaving aside plans which involved fundamental and far-reaching changes in our whole economic organization, the solutions offered to the country in 1933 were of two main types. On the one hand there were those who contended that all that was needed was the restoration of confidence. They insisted that it was essential to balance the budget... On the other hand there were those who, like myself, felt that recovery in the present situation could only be achieved by bold and aggressive intervention by the government, largely through underpinning the entire private credit structure which had collapsed, and undertaking to restore purchasing power through relief, public expenditures and other measures.
What businessman would have added to his plant, when he already possessed a great amount of excess capacity, merely because he read that the budget had been balanced? It is difficult to understand why people would be expected to invest money in new enterprise when existing investments were becoming less profitable every day. It should not require any great insight to understand that a reduction of government expenditures while everybody else as a matter of self-protection was being forced to reduce expenditures, could only accentuate the processes of deflation by reducing buying power.
A belief that industry would have voluntarily entered upon capital expenditures in 1933 if the government had restricted its expenditures and raised taxes is unrealistic to the highest degree. It displays an utter miscomprehension of the considerations that influence a business man in planning expenditures. There must be reason to believe that capital expenditures can be profitably made before they are undertaken."
Note that this argument builds on a clear comprehension of the accelerator mechanism. Firms buy machines when  they expect demand to increase and, hence, higher profits. In this sense, the empirical evidence on the accelerator should be relevant not just to show that low interest rates are not sufficient for expanding demand, but also to put a nail in the coffin of the confidence fairy. Austerity hurts confidence and private investment.

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