Douglas Carswell's Blog

Conservatism needs a new economic script

The key, ministers keep telling us, is that banks should start lending again.  This cheap credit will be the elixir, sorting out our economic woes, they imply.  If only credit were cheap and plentiful, agree all the experts, businesses would invest, consumers would consume – and we’d be getting richer. 

Of course, a plentiful supply of affordable credit - like a plentiful supply of food - is a Good Thing.  But it is the symptom of a system that works, not its cause.

We are in an economic mess because politicians and central bankers have not properly understood this. They have tried to artificially ensure a plentiful supply of credit – and in doing so caused all manner of unintended consequences.

Imagine for a moment that politicians had decided to make food – instead of credit - plentiful and cheap by artificially pushing down the price of it. Initially, with everyone taking advantage of all the half prices bargains, there would be a glut. 

But if farmers were prevented from getting a price that made production worthwhile, once we’d gobbled through the stuff that they had already grown, there would be shortages.    

This is more-or-less what has happened with credit.

Holding down the price of credit meant a credit glut.  Because of the nature of modern fractional reserve banking, the glut wasn't short lived - it went on for almost two decades.

But all the while the producers of credit - savers - no longer found it as worthwhile to save as borrowers did borrow. Frothy financial instruments might have plugged the gap for a while, but eventually and inevitably, we have ended up with too little credit.

Yet ministers still speak – and think – as if it is up to them to ensure the plentiful supply of cheap credit. It does not seem to have occurred to them, for example, that the low interest rates of which they boast might be part of the problem. If easy credit policies helped make more credit available, where is it?   

Back in the 1960s and 70s, British Conservatives might have bickered with Labour over the detail, but we accepted the basic premise that governments could engineer growth through fiscal stimulus. Looking back, we can see that both we – and the country – were hamstrung by our adherence to a failing Keynesian consensus.

Today, we are hamstrung by the bogus belief that governments can engineer growth through monetary stimulus.  Monetary activism does not work. It is proving no more successful at engineering prosperity than fiscal activism proved to be under Harold Wilson and Ted Heath.

With monetary activism being tested to destruction, Conservatism is going to need a new economic script - one that recognises governments are little better at controling the supply of money and credit than they are at managing most things.

A great place to start would be to read the recently released third edition of this fascinating book about money, banking and economic cycles, by the Spanish academic, Professor Huerta de Soto.

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