The effect of the present combination of policies has been to cut off the decline after four or five quarters. It hasn't brought a definitive recovery yet. In Britain the last quarter's figures still show a continuing decline, a small one, and we don't really know how vigorous the recovery will be. So there's still a lot to do.
What this shows is that, despite very substantial boosts to spending, when you get a shock like this, when the banking system implodes, you really are in a very deep hole, and it's very difficult to get out of it. And it would have tested all of even Keynes's ingenuity to know what the best method of escape is and what the restoration of normal levels of activity — that is trend rate of growth — would take.
TC: There are a couple of things there that I don't agree with. Robert is a great economic historian, so I should defer to you . . .
RS: But you won't!
TC: No, I won't. The first thing is that it's absolutely right that the problem in the 1930s was the banking system imploding. But I would say that you can interpret what happened in the 1930s very much in monetary terms, and that the problem, particularly in America, was the collapse in the quantity of money: a roughly 35-40 per cent collapse in the quantity of money, according to work done by [Milton] Friedman and [Anna] Schwartz in their great Monetary History of the United States. And actually, what turned things round wasn't fiscal policy, it was an aggressively expansionary monetary policy that became possible when America left the Gold Standard in 1933.
And if you look at the numbers you'll see that there was very rapid growth of US money from 1933 to 1936. The banking system had its problems and credit to the private sector was very weak. But the government borrowed on a vast scale from the banking system and created money. So this was a case of managing the currency to boost the economy in a recession, something I very much would have agreed with if I'd been there then. By the way, Keynes advocated similar things in the UK to those done in America, and I'm advocating a similar approach at the moment in this country. So that's one area of disagreement.
The second area is that you say governments are printing money. If you look at the numbers, monetary growth in the last nine months in America, the eurozone and Japan has been nil. There's been a bit of monetary growth here in the UK, but that's because of the specific policies — quantitative easing, targeted on the quantity of money — the Bank of England has been pursuing. This is so, so important. There is a huge debate at the moment about the relevance of both Keynes and Friedman and monetary economics. Where I disagree with you is that I believe that it's vital in these circumstances to emphasise the quantity of money and to argue for raising its growth rate. That's what really matters, not budgetary policy, not fiscal deficits. And there we disagree, I'm afraid, almost totally.
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