Only the continued circulation of money can prevent an economy slumping into a depression. Photo / File
Only the continued circulation of money can prevent an economy slumping into a depression. Photo / File
COMMENT
We don't need to make the economic situation harder than it needs to be. It's going to be tough enough. But there are some crucial lessons from history. This is not a time for morality tales.
It's about trying to reduce the economic pain that is unfolding for peopleright now. It is about immediate appropriate policies that can reduce the suffering. Otherwise we all lose. There are some crucial lessons from the Great Depression of the 1930s.
The first lesson is that we are all in this together. The solutions lie at the national level. It can't be fixed by individuals working harder, finding another job or growing your own veges or hoarding loo paper.
There is a basic economic truth. One person's spending must always be another person's income. Large chunks of our economy have literally disappeared overnight. That means the loss of tens of thousands of jobs and incomes. This huge loss of incomes results in a huge loss of spending and further losses of incomes in the economy. Landlords blame tenants unable to pay their rent, suppliers blame businesses for not paying their bills, creditors blame debtors for not paying their debts. The economy seizes up as trust and confidence and money evaporates. Modern money is largely credits in bank accounts.
A big difference from the early 1930s is that we have a welfare system. We need to mobilise this system to maintain liquidity (money) in our economy. This also allows people to pay their basic bills. To keep the economic engine at least ticking over. We need an immediate basic living allowance for individuals and families who have taken the hit. People are then assured of meeting their basic needs. It also injects liquidity into the economy at the grassroots to keep goods and services flowing.
The biggest lesson from the Great Depression was all about money. Milton Friedman proved that the Depression in the United States was made much worse because the Federal Reserve allowed the money supply to collapse. They allowed many banks to collapse, sucking huge amounts of money out of the economy. The economic engine froze up. We can avoid this scenario.
Our Reserve Bank is aware of this. It has indicated it will create as many computer credits (money) as needed to keep the banks afloat. The banks will not be allowed to fail. But it is crucial the banks pass this lifeline to their customers who cannot service their debts due to the economic hit. If they fail to do this, it sucks more money out of the economy causing it to further freeze up.
We must ensure the money in our economy keeps flowing. Mistakes will be made. Abuses will occur. But we must ensure that there are sufficient credits (money) in our system to keep our economy ticking over.
We must also avoid turning on each other and wasting precious time and effort on blame and litigation. We cannot resolve this economic situation without appropriate policy at a national level. This was the crucial lesson that John Maynard Keynes figured out in the 1930s. We need to maintain the flow of money and spending and incomes in our economy. The Government and the Reserve Bank and the banks can help ensure this.
If we allow the money supply to collapse we will make this much harder than it needs to be.
• Peter Lyons teaches economics at Saint Peter's College in Epsom.
