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.
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