3.2.1 To Borrow from the Public and Raise the National Deficit
The National Bank with the cooperation of the Treasury offer for sale some new national bonds, as well as the continuing re-issue of recently redeemed ones. These bonds, which are guaranteed Governmental loans, can be purchased like the preference shares of a new public company and they are traded similarly, until their duration has been reached and their face-value is redeemed. The new low-interest paying bonds are presently regarded as being safer than other kinds of share-investment and they attract clients who otherwise prefer to hold their savings in current "mattress" accounts. The psychological pressure from this offer assures and encourages these nervous savers to re-invest. The interest on this loan is borne by the Government and tax-payers.
The expanded National Deficit enables the Government to pay for the execution of additional public works, thereby providing the employment which the building trade can no longer sustain. This activity also has a significant indirect effect, to be described in a later part of this work.
Alternatively the Government can use these sums to relieve the banks from their risk of bankruptcy. It returns to them some liquidity and allows them to weather the storm of heavy cash withdrawal. The recipient banks pay a normal or sometimes a high rate of interest for this special loan, so the Government and tax-payers are not penalized by the interest on the credit from issuing the bonds, whilst the favoured banks are obliged to service their loans. This action avoids the personal losses suffered by its remaining clients, after the faltering bank otherwise would have to declare bankruptcy.
Providing that these loans are obtained neither by greater taxation nor by inflation, they do not seriously damage the macro-economy, although it does slow down until the debts are cleared. It allows the banks to get past the difficult period, but if they default on their interest or fail to return their loans as arranged, then the public purse is raided once again. When the slump is past its worst point, confidence returns and the savers re-invest in shares. Then the greater flow of money through the banks allows them to return what they borrowed from the Government, which subsequently reduces the magnitude of the National Debt.
In the situation where big industrial concerns receive similar help from the Government, these companies may be aiming only to continue their operations--to employ large numbers, whilst still remaining inefficient and ineffective in their production. This is unacceptable and before this bale-out is executed the industry must show that it is not taking the credit merely to postpone its financial failure. Also it must present realistic plans about how it aims to become a stable and viable concern. This loan delays the alternate beneficial effects that would occur elsewhere in the system, although the situation may not be so critical there as within the specific industry that is being helped. Consequently this action and its overall result is worthwhile to a limited degree.
These solutions ease the effects of the slump only amongst certain industrialist's, worker's, and banker's critical states. The Government should balance the distribution of these relieving effects throughout all of the system, other parts of which also badly need its support.
3.2.2 To Change the Amount of Taxation
Often it is thought that a reduction in the amount of taxation on earnings and purchases can stimulate the demand for produce and its consumption, thereby encouraging more employment. However this view is only part of the whole picture, because it simultaneously reduces the Government income and decreases the public expenditure elsewhere. In a reciprocal manner, the effect of greater taxation on personal income and consumption is that the demand for these goods is reduced. But instead of the sales income mostly going to the production sector, more of it would pass through the Government to its various ministries and newly installed employment sources. Thus for either kind of change, the distribution of the work output is modified but the total sum used for payment of its wages has not. Comparing both of these opposing policies, the altered demand for goods must be balanced against the modified supply of social services and public utilities. Hence, neither policy can stimulate (nor retard) the current overall rate of macro-economic activity; all that it achieves is a re-distribution of what each participant does.
3.2.3 To Reduce the Governmental Expenditure
The outlay of public money to the Government ministries is not a waste. Apart from tax-collection, these departments and offices provide a variety of necessary services, such as those for education, public health and various emergencies, without which the average citizen would not manage properly. He/she would need to pay more for the service than what the national (social) insurance covers. As implied by the above description, a new frugal approach on the part of Government does not change the total amount of money flowing around the system. It has about the same overall effect as that obtained when reducing the taxes and the progress of the national economy as a whole is no different. It is only the distribution of activity within certain of its sectors, which is affected.
3.2.4 To Deliberately Inflate the Currency
The national economy may be regulated in more than one way by this action. During normal times when only small changes to the rate of progress of the system are required, they are obtained by adjusting the National Deficit. Then some money either is withdrawn or is made available, the choice normally following the degree to which the national budget has been met. In years of prosperity, larger amounts of taxes are collected and there is a budget-surplus. Then this extra money can be withdrawn from circulation, with the cooperation of the National Bank who store (or destroy) the bank-notes, having reduced the National Deficit by selling back to the Government some bonds or Treasury Bills. However when there is reduced economic activity and the lower amount of tax collected results in a failure to meet the budget, the deficit is made up by the issue of new bonds or Treasury Bills in exchange for the stored money (or by printing new bank-notes). Here its influence enables the banks to increase their amount of credit for investment, thereby encouraging industry to be more productive. Normally these budget surpluses and deficits are a relatively small proportion of the gross domestic product (under 5% of the total) and when taken over many years, the average of the various resulting inflating and deflating effects is small.
However, when a slump prevails, the printing and distribution of larger amounts of new money also can be used for the courser regulation of the macro-economy. Then the Government directly spends this money to stimulate the level of macro-economic activity, without intending to introduce any later deflation to counter the effects. (Even after conditions improve, this opposing action would be likely to cause another slump.) There is reluctance to use this monetary instrument, due to the scale of the correction being much greater than when adjustments to the budget are being made, as described above. The effect of the inflation on the system no longer remains small and it is a dishonest way for the Government to temporally obtain greater spending-power and lower debt.
Inflation effectively taxes savers by reducing their long-term purchasing-power and spoils the amount of real interest that fixed-rate savings yield. It also cheapens the money that is already owed, so the Government, mortgagees and other creditors benefit after the inflation has caused the prices and wages to rise. (This applies to most forms of credit, unless the loan was linked to the cost of living or to a more stable currency.) The inflated prices also reduce trade with foreign countries making it harder to sell goods abroad, whilst the cheaper local money makes it easier to import them. This effect on international trade worsens the production situation at home, until the exchange rate of the local currency is eventually devalued and the amount of trading may return to its previous level.
The Government can use this income in the four direct ways for relieving the effects of the slump. These are for subsidizing pensions and/or production and keeping low the price of certain basic goods, for national projects by hiring building-constructional and other unemployed workers (their incomes minus taxes to exceed their previous doles), for keeping its ministries at full strength or for lending to the banks. The new money is injected at a steady rate and on a scale where it regularly covers the losses from some or all of the hardships listed above. Unless the effects of all four of the problems are restored in a uniform manner to their former conditions, the slump will not be fully relieved. Even so, the adverse and unstable effects of the inflation itself remain to be tackled. After the inflation has ceased, the additional money in circulation eventually causes the prices and wages to catch up. Consequently, this form of slump relief will not endure without it creating further distress.
