Economic Fluctuations a Later View

The depression of 1929 was clearly fundamentally different from that of 1920. The drastic decline, following the boom twenties, was mainly due to a severe drop in the investment in fixed capital. Private construction fell off from $7.8 billion in 1929 to $1.7 billion in 1932, while outlays on producers' equipment fell from $6.4 to $1.8 billion. There followed, to be sure, a heavy disinvestment in inventories induced in large measure by the severe decline in sales volume. But the depression did not begin with any such overextended inventory situation as prevailed in 1920. In 1929 it was investment in fixed capital that had been overextended, and it was in this area that the primary collapse occurred.

As in the 1923-29 boom, particular attention was paid in the preKorean years to prospects for capital outlays on construction and on producers' equipment. With respect to (a) the world agricultural situation and the outlook for American agricultural exports, and (b) the foreign aid program, conditions resembling those following the First World War prevailed. Then the foreign aid program consisted largely of loans (which, however, were largely defaulted), whereas after the Second World War it consisted heavily of government grants.

Prior to the Korean crisis, four main areas could be regarded as precarious from the standpoint of the maintenance of sustained high levels of income and employment: (a) fixed capital outlays, (b) expenditures on consumers' durables (such as automobiles and electrical appliances), (c) agricultural surpluses, (d) the possible tapering off of the European aid program.

The crumbling of all four areas together, combined with the induced secondary effects, could certainly have produced a very severe depression if no effective counter-action were taken. But the outlook was completely changed by the outbreak of the Korean war and the prospect of continued large military expenditures for years to come.

The remarkable thing about the period from the end of the Second World War to the Korean crisis is the fact that, notwithstanding the large backlog of deferred demand for plant, equipment, houses, and consumers' durables, and despite the vast military and foreign aid programs, the American economy, after a catching-up period of only a couple of years, proved fully equal to the task. This was a tremendous demonstra

tion of how vast a volume of aggregate demand is necessary to keep the highly productive American economy fully employed.

Cushioning and Offsetting Policies

Fluctuations, even violent fluctuations, in the rate of investment can be expected under peacetime conditions in private enterprise economies. We are indeed in process of developing institutional arrangements that serve to lessen the secondary, induced effects of these primary fluctuations in the volume of investment. Programs of this sort may be called "cushioning" cycle policies. But "offsetting" cycle policies are also necessary. Business-cycle theory, from Tugan-Baranowsky and Spiethoff to Schumpeter and Robertson, has taught us that the fluctuation in private capital expenditures is an unruly characteristic of the modern economy. It is not a pathological behavior pattern. It is a basic characteristic of a technologically dynamic and growing economy. It, is a characteristic which can only be understood by examining the factors underlying the intermittent surges of private investment. If, indeed, it turns out that investment comes more and more under the direct control of the state, the cycle phenomena can be expected to change. This latter program represents a "direct control" cycle policy. But in a private economy, where the basic freedom to invest would not be directly interfered with, cycle policies must assume the form of the "cushioning" or "offsetting" varieties. These matters will be discussed more fully in the chapters which follow.

In the event that we should be confronted in the next decade or more with quasi-war conditions involving very large military expenditures, the pressing problem will be the control of inflation. And if total war breaks out, rigorous over-all controls will inevitably become necessary. But these are war problems, not business-cycle problems as such.