When a soldier is seriously injured on the battlefield, the medics take urgent action to stop him dying of shock. The global financial system is still in shock; the risk of mortality is still there. There is one hazard which is alarming policy-makers everywhere, partly because it cannot be factored in to mathematical models: social unrest.
In most countries, there is a great deal of public anger. That is still unfocused: for how long? With the exception of Germany and the US, heads of government have rarely stood lower in public esteem, and this dissatisfaction has spread to include the entire political class, not to mention the financial one. Apropos of public esteem, the European elections have never enjoyed much of it. With a guaranteed low turn-out and a general feeling of "What's the point?", they are the perfect vehicle for populists, poujadists, neo-fascists, old leftists and other political excrescences.
Then again, it does not really matter who goes to Strasbourg. If the June elections become a spittoon for public bile, they may at last perform a useful function. But the discontent could easily spill out from the polling booths to the streets. It will be a pleasant surprise if there is no disorder in Europe this summer. We can only hope that the almost inevitable protests and disturbances do not trample the fragile green shoots of returning confidence.
Not that they are yet visible. Again, the shock is too recent. The restoration of confidence requires two sets of measures. The first is short-term: inject liquidity into the system so that the banks start lending again. In that respect, the British government has been inept. Gordon Brown has made a lot of noise. Anyone who listened to him would surely have assumed that words would swiftly become deeds. That has not happened.
As George Osborne reminded us yesterday, Peter Mandelson launched a "Working Capital Scheme" in January. Not only that: he declared that it would be "going live today". Shades of Churchill's "action this day", but only shades. Two months later, nothing has happened. Despite all the talk about going live, some businesses are now dead.
Before Christmas, the Tories proposed a National Loan Guarantee Scheme. It has been extensively discussed, not least in this column. Thus far, it has stood up to scrutiny. It would do everything that Peter Mandelson promised but has failed to deliver. Yet Gordon Brown will not adopt it, because his government did not invent it. Vital help stifled, purely out of vanity; remember that, next time you hear Mr Brown prating away about his values.
There are also long-term tasks which require hard thinking. As well as re-capitalising the banking system, we have to recapitalise the intellectual system. All attempts to divide history into eras involve over-simplification. That said, it is possible to divide post-war economic history into two periods: Keynesianism, which predominated between 1945 and the mid-1970s, and monetarism, which replaced it.
I remember hearing J.K.Galbraith begrudgingly announcing the end of the old order, to a small group in a room in Cambridge. He said that he had been examining doctoral students for thirty years. If at any moment during those years a candidate had asserted that it was possible to have six per cent inflation simultaneously with six per cent unemployment, he would have been flunked: too stupid even to teach in West Virginia. But President Nixon and Prime Minister Heath had now confounded the models. It was characteristic of Galbraith to blame the change and decay on politicians he disapproved of; others were wiser.
There are caveats. The excesses of political Keynesianism cannot be blamed on Lord Keynes. As for monetarism, it is a doctrine both simple and elusive. At its core is a commonsense proposition. As well as being a store of value, money is also a commodity. As with all commodities, if the supply increases or falls, so does the price. This means that changes in the effective money supply determine the inflation rate.
There, the simplicity ends. Apart from the immediate problem of measuring the effective money supply, matters were complicated by the tendency of the political right to apply the term "monetarism" to anything that they approved of – and of their critics on the left to use it as a catch-all term of abuse. Again, the monetarist masters cannot be held responsible for political monetarism.
Doctoral students could spend many hours arguing whether Ronald Reagan was a monetarist, without any danger of arriving at a consensus. Margaret Thatcher was less unorthodox, but she was attracted to monetarism because it appeared to confer intellectual cachet on the housewife economics which was in her DNA.
Historians tend to fall into two categories: those who believe that history is a succession of dramatic changes, such as "the Tudor Revolution in Government" and those who favour continuity: it all started under Edward IV. When it comes to Keynesianism versus monetarism, there is more to be said for the continuity school than is generally acknowledged. Both sets of economists were trying to solve the same problem: how to harmonise economic growth and low inflation.
Ever since the death of the Gold Standard, this has been a recurrent difficulty. When paper has to be backed by gold, it is easy to control inflation. But when paper is only backed by more paper, that task is much harder. There are compensations. It is much easier to secure growth in a paper-based economy. Yet there is the constant risk of excess, especially after a long period of steady expansion. Then, men forget that there is nothing more terrifying than the sound of crashing paper.
We now need a new economic paradigm; a general theory of money, growth and credit which will explain what went wrong and how to avoid a repetition. Any economist who emerges with such an oeuvre will not only win laurels. He will be a universal benefactor.
In the grim years of post-war recovery, when people wondered if they would ever escape from austerity, the knowledge that a supremely clever man had devised a new economic order did help to build confidence. In the late 1970s, when that order seemed shattered beyond repair and its progenitor was widely abused, especially by those who had never read him, a different set of clever men helped to rebuild confidence. In the public mind, the monetarists came to be associated with harsh remedies, a process which was assisted by Margaret Thatcher's body-language. But at that stage, much of the public was ready to believe in the necessity of harshness. The monetarists' self-confidence led others to trust them.
Trust, confidence, belief: there is little of it around at the moment. On Friday, David Cameron made an important and overdue speech. The coverage concentrated on his apologising for past errors, but the Tory leader went further. There was the impression of a man who has been thinking things through. Mr Cameron ought to go on giving that impression, and deepening it. A reassured public means an enthusiastic electorate.Reuse content