Douglas Carswell's Blog

Monetary policy is failing. It will eventually be seen to have failed. What then?

Back in the 1970s, a Conservative government tested the idea that fiscal stimulus could produce prosperity to destruction. Ted Heath, and his chancellor, Antony Barber, did what the economic experts of the age recommended. They gave the economy a massive dose of stimulus spending.

The result? Failure.

Fortunately for the Conservatives, it was the Labour party that happened to be in office in 1978-79, when the Winter of Discontent provided irrefutable evidence that the orthodox approach was not working. Even though it had been a Labour leader, Jim Callaghan, who had first denounced the fiscal stimulus approach, the Conservatives, mercifully, ended up on the right side of the argument. 

I fear that Conservatives today are on the wrong side of the monetary stimulus question, much like we were on the wrong side of the fiscal stimulus approach for most of the 1970s. 

Just as like Heath-Barber Tories once believed that fiscal stimulus could make us rich, the Conservative leadership today seems to buy into the idea that monetary stimulus will produce prosperity.   It won't.  The fact that Labour has also bought into this washed up orthodoxy in favour of low interest rates, cheap credit and QE does not make the Conservatives any less wrong.

I believe that this monetary stimulus approach will fail – and will be seen to have failed as comprehensively as the fiscal stimulus approach was seen to have failed in the late 1970s. What then?

The Conservatives will need a fundamentally new approach. We will need to not merely reject the Keynesian approach, but monetarism, too. 

Ever since we ditched high monetarism in the late 1980s, Conservatives have had a muddle headed approach to money. This saw us drift; first into the ERM, and then float along with the Brownian notion that an endless supply of cheap credit could make us rich.

Our confused, poorly thought through approach to money and credit has prevented us from developing a coherent alternative policy since the credit crunch first struck five years ago. Instead of offering an alternative that works, we have pursued pretty much the same easy money approach that Gordon Brown pursued.  It is not really working, is it?

The new Conservative approach needs to reject the Keynesian-Monetarism muddle, and look instead to Austrian school economics. It needs to recognise that government is no better at controlling the supply of money and credit than it is anything else. We need to understand what a macroeconomic policy based on sound money would look like.

We are witnessing the failure of a soon-to-be discredited monetary orthodoxy.  We need to prepare for what lies ahead, and that means having a radical alternative.  Like in the late 1970s, it is vital not to be seen as the party of a bankrupt status quo.

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