It is very easy to get frustrated about the discussion of monetary policy in today’s world. However, this morning we got something to cheer about as Vince Cable British Minister for Business, Innovation and Skills gave a speech on the UK recovery in the 1930s and the parallels to today’s crisis at the think tank Centre Forum. The entire speech is very uplifting.
Here is Cable:
“you learn far more about our recovery in the 1930s from looking at monetary conditions that you can from examining fiscal policy.”
Yes, yes, yes! We should stop wrangling about fiscal policy. What brought Britain out of the Great Depression was the decision to give up the gold standard in 1931 and what will bring the UK economy out of this crisis is monetary easing. Fiscal policy in that regard is basically irrelevant. Luckily Vince Cable seems to comprehend that – as do Chancellor of the Exchequer George Osborn. Bank of England Governor Mervyn King might also (finally) get it.
Back to Cable’s speech:
“… It is worth recalling just how brutal were the first dozen years after the First World War. Britain attempted to return to its pre War gold level, which meant chronic deflation to bring us back with world prices (what Southern Europe is attempting today). As a result, the price index which had risen from 100 in 1914 to 250 in 1920, fell to 180 in a couple of years and continued falling all the way below 150 in 1930.”
Yes again! The British economy was struggling to get out of the crisis because of a misguided commitment to the gold standard. Once the gold standard was given up it was recovery time. And luckily Vince Cable fully well knows that monetary easing also would do the trick today.
And he knows that fiscal easing is not the important thing – monetary policy will do the job:
“without a noticeable relaxation in fiscal policy, the economy surged into strong growth which was becoming apparent mid 1933. As I said earlier the obvious explanation was a sharp loosening of monetary policy”
Can it get much more Market Monetarist than that? Yes in fact it can:
“What tools does the Government have? The first is continued use of monetary policy, and stronger communication of the policy aim it is meant to achieve – robust recovery in money spending and GDP. “
Cable calls for an NGDP targeting regime!
And even better Cable seems to want a Market Monetarist as the next Bank of England Governor – or at least somebody in favour of NGDP targeting:
“I am sure that all the candidates to take over from Mervyn King are thinking very hard about how best to do this [a robust recovery in money spending and GDP].”
In 1931 the British government showed the way. I hope that today’s British government will show the same kind of resolve. Vince Cable gives me a lot of hope to be optimistic about that.
Thank you Vince, you’ve made my day!