I have recently read Liaquat Ahamed’s excellent book on the history of the economic crisis after the First World War (Lords of Finance: 1929, the Great Depression and the Bankers who Broke the World). Although the problems of the time are substantially different from those of today, there is a parallel, with orthodox methods being followed blindly with catastrophic consequences.
To quote just one example, in 1925 the then Chancellor of the Exchequer, Winston Churchill, was persuaded that the UK should return to the Gold Standard because that was the done thing. The implications of this police were disastrous for the country.
To return to the present time, it was announced this week that inflation (as measured by the Consumer Prices Index) had increased to 4%. This produced the usual clamour from the City of London for the Bank of England to increase interest rates because this is the usual remedy.
But is this the right thing to do in the current circumstances? It is clear that much of this inflation is self-inflicted (e.g. the VAT increase to 20%) or a consequence of external trends (e.g. oil price and food price increases). Average earnings growth in recent months has been negative so it doesn’t seem that we are over-paying ourselves.
Let’s avoid beating about the bush. The UK economy is in a very fragile state with very low confidence levels among business and the public. The economy needs all the help it can get. Raising interest rates now in order to follow economic orthodoxy could be catastrophic for the economy and the future of public services.
The respected economic commentator, Anatole Kaletsky said in March 2010: ‘Without a commitment from the Bank of England to keep interest rates near zero for the next four or five years, it is almost impossible to imagine how the British economy can return to a growth rate of around 3 per cent in the next Parliament.’
Please, please, please – let us avoid taking advice on interest rate policy from the City. It was they who got us into this mess in the first place. Let’s start using our brains not make kneejerk reactions based on redundant orthodoxy.
Malcolm Prowle is professor of business performance at Nottingham Business School and a visiting professor at the Open University Business School
