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Banks (Finance)

The Vital Role of Money in Economic Recovery

Strategic Insights

— 1 min read

Money and credit are intricately linked, and policymakers must prioritize the availability of money to ensure economic stability. The recent credit crunch has led to a decline in lending to companies and households, resulting in a 5% annualized rate of decline in lending. This has created a monetary backdrop for the current recession. While some economists argue that credit, not money, is the key driver of spending and output, the evidence suggests that money remains essential for economic recovery.

Key Takeaways:

  • The availability of money plays a crucial role in determining national income and wealth, with a 40% collapse in the quantity of money being a significant causal influence on the Great Depression in the US.
  • Since the credit crunch escalated in mid-2008, bank lending to companies and households has been declining at an annualized rate of 5%.
  • The link between bank loans and money is almost umbilical, with the fall in bank credit arousing alarm in policymaking circles and leading to pressure on banks to extend more credit to the private sector.
  • Economists such as Milton Friedman and Anna Schwartz have demonstrated the importance of money in the determination of demand, output, and the price level.
  • The doctrine of creditism, proposed by Ben Bernanke, is questionable, as money can continue to grow and economies recover even if credit declines.
  • Policymakers can achieve economic stability by offsetting the decline in bank credit to the private sector with increased claims on the public sector, thereby delivering money supply growth consistent with economic stability.

Statistics:

  • 40% collapse in the quantity of money was a significant causal influence on the Great Depression in the US (Milton Friedman and Anna Schwartz, 1963)
  • 5% annualized rate of decline in lending to companies and households since the credit crunch escalated in mid-2008
  • UK money growth came to a halt in late 2008, with deposits in companies starting to fall

Sources:

  • Mervyn King, Governor of the Bank of England, as quoted in an interview
  • Milton Friedman and Anna Schwartz (1963), "A Monetary History of the United States, 1867-1960"
  • Ben Bernanke (1988), "Financial innovation and the public good: A theoretical and empirical perspective"
  • Tim Congdon, chief executive of International Monetary Research Ltd, in his article "Would all spending stop if new bank lending stopped tomorrow?"

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