Duncan’s Economic Blog

Cameron & the 1920s

Posted in Uncategorized by duncanseconomicblog on October 13, 2009

Whilst David Cameron talks of the need to stop quantitative easing, the British Chambers of Commerce (notorious socialists) say otherwise:

Oct. 13 (Bloomberg) — The Bank of England should expand its bond-purchase program to as much as 200 billion pounds ($316 billion) next month to secure Britain’s recovery from recession, the British Chambers of Commerce said.

“With quantitative easing, there’s still scope for some more,” David Frost, director general of the BCC, said in a Bloomberg Television interview. “This fragile recovery we’ve started to see really needs to be nurtured, so we’re saying perhaps another 25 billion pounds could be put into that.”

As I’ve said over the past few weeks, I doubt QE is quite having the intended effect upon the economy. I worry that it’s providing support to asset prices, but not really boosting lending. Of course, I imagine the picture (in terms of lending to corporate) would be even worse without QE. In other words, the programme should remain in place (although maybe be modified).

I certainly see no case at all for stopping now.

As today’s FT notes:

“Cameron has completely misunderstood what quantitative easing is designed to do,” said Peter Dixon, economist at Commerzbank. He said that the government deserved “some bragging rights” over quantitative easing because it signed off on the policy.

I’m currently reading Liaquat Ahamed’s excellent ‘Lords of Finance’.

It is commonly believed that the Great Depression that began in 1929 resulted from a confluence of events beyond any one person’s or government’s control. In fact, as Liaquat Ahamed reveals, it was the decisions taken by a small number of central bankers that were the primary cause of the economic meltdown, the effects of which set the stage for World War II and reverberated for decades.

In Lords of Finance, we meet the neurotic and enigmatic Montagu Norman of the Bank of England, the xenophobic and suspicious Émile Moreau of the Banque de France, the arrogant yet brilliant Hjalmar Schacht of the Reichsbank, and Benjamin Strong of the Federal Reserve Bank of New York, whose façade of energy and drive masked a deeply wounded and overburdened man. After the First World War, these central bankers attempted to reconstruct the world of international finance. Despite their differences, they were united by a common fear – that the greatest threat to capitalism was inflation – and by a common vision that the solution was to turn back the clock and return the world to the gold standard.

For a brief period in the mid-1920s they appeared to have succeeded. The world’s currencies were stabilized and capital began flowing freely across the globe. But beneath the veneer of boom-town prosperity, cracks started to appear in the financial system. The gold standard that all had believed would provide an umbrella of stability proved to be a straitjacket, and the world economy began that terrible downward spiral known as the Great Depression.

As yet another period of economic turmoil makes headlines today, the Great Depression and the year 1929 remain the benchmark for true financial mayhem. Offering a new understanding of the global nature of financial crises, Lords of Finance is a potent reminder of the enormous impact that the decisions of central bankers can have, of their fallibility, and of the terrible human consequences that can result when they are wrong.

Back in the 1920s over zealous central bankers were the problem, obsessed as they were (in most cases) with the Gold Standard, aptly described by Keynes at the time as a ‘barbarous relic’. We have no gold standard today, but as Paul Krugman says, we have something similar.

America isn’t about to go back on the gold standard. But a modern version of the gold standard mentality is nonetheless exerting a growing influence on our economic discourse. And this new version of a bad old idea could undermine our chances for full recovery.

Consider first the current uproar over the declining international value of the dollar.

The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.

But if you get your opinions from, say, The Wall Street Journal’s editorial page, you’re told that the falling dollar is a terrible thing, a sign that the world is losing faith in America (and especially, of course, in President Obama). Something, you believe, must be done to stop the dollar’s slide. And in practice the dollar’s decline has become a stick with which conservative members of Congress beat the Federal Reserve, pressuring the Fed to scale back its efforts to support the economy.

And it’s crucial that we don’t let this mentality guide policy. We do seem to have avoided a second Great Depression. But giving in to a modern version of our grandfathers’ prejudices would be a very good way to ensure the next worst thing: a prolonged era of sluggish growth and very high unemployment.


Substitute Britain for America & pound for dollar and we have similar situation in the UK. The Tories are now falling victim to a ’gold standard mentality’.

Perhaps the most interesting historical parallel (as taken from Mr Ahamed’s book) is to compare British and French policy in the 1920s. Both faced enormous debts incurred in the war. Britain chose to return to gold (at the pre-war level of $4.86) and attempt to balance the budget. France instead allowed the Franc to become devalued and continued to run deficits.

The result was a UK described as having ‘sound finance & a weak economy’ whilst France enjoyed ‘a strong economy and weak finances’. I know which I’d choose.

By the late 20s however, the underlying strength of the French economy allowed the public finances to be repaired.

Is this parallel at all valid? According to Ben Broadbent of Goldman Sachs, who Osborne is apparently now very keen on, it might be:

Ben Broadbent, the bank’s UK economist, said the 20pc slide in sterling over the past year was “enough to push the UK’s current account into comfortable and permanent surplus”. Britain has not had a durable surplus in living memory.

The bank issued an alert yesterday advising clients to build up sterling positions. It said the economy was in better shape than it looked, with public debt likely to peak at under 80pc of GDP — lower than Germany and France.

The choice really is becoming clear. A Labour Party committed to helping the economy recover and a Tory Party, driven by outdated idealogy, prepared to sacrifice the recovery (and milli0ns of jobs) on the altar of ‘sound money’.


5 Responses

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  1. freethinkingeconomist said, on October 13, 2009 at 12:33 pm

    Great post (of course).

    My concerns, as I finally print Draft 0.1 of my attempt on QE, is encapsulated in your para:

    “As I’ve said over the past few weeks, I doubt QE is quite having the intended effect upon the economy. I worry that it’s providing support to asset prices, but not really boosting lending. Of course, I imagine the picture (in terms of lending to corporate) would be even worse without QE. In other words, the programme should remain in place (although maybe be modified).”

    QE is not ‘putting more money into the economy to boost spending’, as the Bank describes it – it is boosting asset prices (wealth inequality), financial sector profits (bonus season), and making borrowing for the government cheaper (so in a weird way supporting fiscal policy). But ending it might spell disaster through all three of those mechanisms. We need to make QE effective, desperately, or we are just backing ourselves into a corner. Any ideas how to do this?


    • duncanseconomicblog said, on October 13, 2009 at 12:55 pm


      A few thoughts.

      Where QE might be helping:

      (i) Keeing sterling low
      (ii) As you say, supporting fiscal policy through funding the deficit
      (iii) Actual lending – who knows how bad it would be in the absence of QE
      (iV) Inflation expectations – QE may keep them high.
      (v) Corporate bond market. Very heavy issuance this year at decent interest rates, it could that QE is reponsible through both lowering gilt yields (and indirectly therefore corporate bond yields) and providing the cash for institutions to buy with.
      (vi) Supporting requity rights issuance. Been a load in the Uk this year, QE cash might be helping.

      This is why I still support QE.
      The last two points are both decent examples of how supporting asset prices can be helpful to the real economy.

      Some thoughts on reform:
      (i) The UK corporate bond market isn’t really big enough to allow much BOE buying.
      (ii) Even if it was, this wouldn’t help SMEs.
      (iii) Maybe the Bank should start to look at direct lending to the private sector?
      (iv) Using the banks as a conduit for QE to help the real economy has massive problems, as long as they are still deleveraging their balance sheets & conserving capital.
      (v) I’m becoming increasinly tempted by the idea of financing the new National Investment Corporation through QE. That’d be direct support to the economy through ‘printing money’.

  2. freethinkingeconomist said, on October 13, 2009 at 2:00 pm

    Very useful. I agree with many of those though I am not sure about (iv) – expectations, and whether much of this financing will end up in agg demand. Also, at what point do the higher asset prices become a bubble (again)?

    I think (iv) in the recommendations is key: really keen to get on with my Richard Koo book to see how critical this is. And (v) is a stonking good idea, IMHO.

    Also, sterling low: with so many countries in this bind, I think beggar-my-neighbour (and, since the Tories are trying to rely on this to justify premature fiscal tightening, am ever more sceptical

    thanks for this

  3. […] making the excellent point that the cure for the budget deficit is economic recovery. Here’s Economic Duncan pointing out that there’s very little point having a weak economy but “sound” […]

  4. IJ said, on October 28, 2009 at 6:22 pm

    Funny how economists are happy to use other peoples money to support their ideas. How about QE is simply taxing savers to boost bank capital and lending leading to higher asset prices, lower interest rates and much lower sterling. Its not magic, its a tax on savers. Long run the savers always win.

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