CHARLES O. HARDY
Vice President, Federal Reserve Bank of Kansas City
The fundamental issues with which this pamphlet deals may be clarified by a brief comparison of its major assumptions with the principles of "sound finance" which were developed during the nineteenth century and almost universally accepted, at least in English-speaking countries, until the middle thirties of this century. Had the pamphlet been written between 1875 and 1930 it would certainly have argued that in times of peace the budget should always balance; and that if borrowing became necessary, the Treasury should avoid borrowing from banks, and especially from a central bank. Other recommendations would have included the maintenance of the gold standard, if necessary by credit contraction; independence of central banks from political, especially Treasury control; and a central bank policy of lending only at rates "above the market." The tax program would have been designed to encourage thrift rather than consumption. Unemployment, if mentioned at all, would have been assumed to reflect a wage scale too high rather than too low.
The nineteenth century concept of sound finance still claims many followers, but it has been displaced to a large extent, especially in academic and governmental circles, by what is in many respects its doctrinal and practical opposite. According to this newer view, budget deficits are desirable under conditions that occur frequently, even continuously, in times of peace. Managed currencies and flexible foreign exchanges are preferred to a rigid gold standard. Central banks, private banks, and paper currencies are regarded as merely convenient instrumentalities of Treasury finance. Several of the present group of essays reflect the newer type of economic theorizing.
Because of differences in unstated premises, adherents of each philosophy often find the views of the opposing school incomprehensible. A brief analysis may help toward a mutual understanding even though it does not effect a reconciliation.
The main characteristic which unifies the series of fiscal and monetary practices that are considered "sound" in the older system is that they all