BERKELEY – At this stage in the worldwide fight against depression, it is useful to stop and consider just how conservative the policies implemented by the world’s central banks, treasuries, and government budget offices have been. Almost everything that they have done – spending increases, tax cuts, bank recapitalization, purchases of risky assets, open-market operations, and other money-supply expansions – has followed a policy path that is nearly 200 years old, dating back to the earliest days of the Industrial Revolution, and thus to the first stirrings of the business cycle.
The place to start is 1825, when panicked investors wanted their money invested in safe cash rather than risky enterprises. Robert Banks Jenkinson, Second Earl of Liverpool and First Lord of the Treasury for King George IV, begged Cornelius Buller, Governor of the Bank of England, to act to prevent financial-asset prices from collapsing. “We believe in a market economy,” Lord Liverpool’s reasoning went, “but not when the prices a market economy produces lead to mass unemployment on the streets of London, Bristol, Liverpool, and Manchester.”
The Bank of England acted: it intervened in the market and bought bonds for cash, pushing up the prices of financial assets and expanding the money supply. It loaned on little collateral to shaky banks. It announced its intention to stabilize the market – and that bearish speculators should beware.
Ever since, whenever governments largely stepped back and let financial markets work their way out of a panic out by themselves – 1873 and 1929 in the United States come to mind – things turned out badly. But whenever government stepped in or deputized a private investment bank to support the market, things appear to have gone far less badly. For example, the US government essentially authorized J.P. Morgan to act as the country’s central bank in the aftermath of the 1893 and 1907 panics, created the Resolution Trust Corporation at the start of the 1990’s, and, together with the IMF, intervened to support Mexico in 1995 and the East Asian economies in 1997-98.