G. L. S. Shackle, When Capital Goes on Strike (1938)

Shackle’s book review examines A. Dahlberg’s proposal to counter unemployment by making money costly to hold. Its movement is from sympathetic exposition, through monetary complications, to reservations about implementation and responsiveness to a slump. Shackle regards the scheme as theoretically informed and worthy of university investigation, but his endorsement of further inquiry does not amount to assurance that it would work.

THIS book puts forward a bold but carefully considered scheme for preventing liquidity preference from causing unemployment.

The central problem is the preference for retaining liquid money rather than investing or consuming. Dahlberg would tax individuals’ and companies’ current-account balances, averaged monthly, while making banknotes depreciate at a corresponding rate. These measures would put continuing pressure on recipients of money to purchase securities or consumption goods. Shackle’s distinctive conceptual move is to interpret this arrangement as producing different effective interest rates for money holders and borrowers: liquidity becomes expensive, while borrowing becomes cheaper as people seek alternatives to taxed money.

Thus those who insist on holding money would have to pay for their liquidity at a rate equal to the tax plus the potential interest, while anyone would be able to borrow money at the low rate of interest resulting from the general desire to escape the tax by holding securities or goods instead of money.

The proposal therefore does more than encourage expenditure directly. It changes the relative attractiveness of money, securities, and goods, potentially bringing forward purchases of durable consumption goods as well as lowering borrowing costs. Shackle presents this mechanism clearly while acknowledging that Dahlberg has recognised and attempted to address the objections likely to occur to economists.

The principal technical difficulty is a possible contraction of the money supply. Debtors with positive bank balances could respond to the tax by repaying debts. Where recipients are overdrawn, those payments would reduce aggregate positive balances. Higher prices for bills and securities could also induce banks to sell their portfolios to the public, again reducing the quantity of money. The attempted escape from hoarding could thus produce monetary effects that complicate the scheme’s intended stimulus.

Not much consideration is given to the problem of overcoming opposition to the experiment.

This practical reservation leads into questions of bank profitability and policy calibration. Dahlberg suggests that banks could offset lower lending rates by lowering the interest paid on time deposits, but Shackle finds the treatment brief. The absence of proposed numerical tax and interest rates further limits assessment. His concluding objection concerns the difference between a relatively constant incentive and a slump’s self-reinforcing momentum. Even with a hoarding tax, authorities would need to foresee—or at least detect—an approaching downturn and increase the tax to counter it. The review’s enduring conceptual interest lies in this distinction between altering the standing incentives to hold money and adapting intervention to an intensifying crisis.