How Much Worse Things Could Be
There’s a lot to digest from last night’s Mansion House speeches. But I’ve been waiting for an excuse to use this Friedman quote, and now seems like as good a time as any.
In a good year, when things are good, when the economy is booming, you will read that the Federal Reserve by its wise policy – by its efficacious management of money – has produced this fine situation. However, let things get bad, and all of a sudden the tone of the annual report is different. Then you discover that despite the best efforts of the Federal Reserve outside forces combined to produce difficulties.
Even at the depths of the depression in 1933 – when – in the Spring of that year – the Federal Reserve system which had been established in order to prevent banking panics and keep banks from closing when the Federal Reserve itself closed its doors, and you had a banking holiday for 7 days – and when, over the previous three years a third of the banks in this country closed their doors and went broke – because, in my opinion, of the poor policy followed by the Federal Reserve system. Even in 1933 if you read the annual report you will discover how much worse things could be if the Federal Reserve hadn’t behaved so well.
Let me start with monetary easing, before turning to the banking sector. The view that further monetary stimulus is, in present conditions, simply “pushing on a string” is, in my view, too pessimistic. The creation of money by the Bank of England has helped offset what would otherwise have been an extremely damaging contraction of the money supply. In the Great Depression, the money supply in the United States fell by around one-third. In Greece, broad money has fallen by over 25% since the end of 2009. The consequences are self-evident. Here at home, thanks to asset purchases by the Bank, broad money has continued to expand, albeit slowly.