.. and as damaging in the 2020s as it was in the 1920s
The beginning of the weekend. I am pondering some troubling comparisons between the HM Treasury today and HM Treasury a century ago, during the 1920s when the UK faced immense post-war economic challenges culminating in costly depressive impact of the return to gold from 1925-1931.
George Peden provides a nice summary of economic policy debate in the 1920s and the origins of the original Treasury View. The Treasury View of that time was that government should maintain a balanced budget and could not address the high and persistent levels of unemployment of those years by borrowing to finance public sector employment, because this borrowing would crowd out private investment.
The Treasury view was that of practical men, with deep knowledge of the City and of trade, and strong ties to the then conservative party (Lloyd George, leader of the liberals was the most outspoken critic). It was not based on any well developed economic theory. Even the sole HMT economist of that time Ralph Hawtrey, whose name is associated with The Treasury View, was not really a subscriber. He consistently emphasized in his work over many years the key role of expansion of money and credit in business cycle fluctuations. His perspective expressed in a famous Econometrica article of 1925 was that government spending could not stimulate the economy without an accompany expansion of money and credit.
The Treasury View was one of the three pillars of Victorian economic orthodoxy handed down from 19th century, together with the commitment to the return to the gold standard and to the maintenance of free trade. The Bank of England could legitimately lend to banks against sound collateral at times of financial panic, but in other respects the government should stand aside from efforts to stabilize the economy.
What I find troubling is the extent to which The Treasury View still remains alive and well today in Horse Guards Parade. The UK government response to the pandemic has been based on governments supported lending, but only to sound businesses. Chancellor Sunak has repeatedly stated that they cannot save every business and more recently that the economy will bounce back quickly on its own accord.
The furlough scheme is an important exception, it represents an substantial extension of the automatic stabilization were those on furlough to instead become unemployed. But it does nothing to directly support the businesses and other organisations that employ them (it is just an alternative form of unemployment). There is extreme unwillingness to extend grants, with only limited rates holidays and payments to the smallest businesses in hospitality and tourism.
This new version of The Treasury View will crumble. It is abundantly clear that HMT has no choice: it must extend direct relief, grants not loans, to help business and organisations of all sizes survive the pandemic. My calculations suggest that this is not even that expensive, not at all expensive when compared with the amount of government borrowing resulting from lost tax revenues and the support of the furlough scheme.
But the longer HMT wait to change their tune and provide substantial direct pandemic relief, the more bankruptcies and failures there will be and the more damaging the impact of the pandemic, and of the modern Treasury View, on British society and the British economy.