Important lessons can be learnt from the Thirties. Then, as now, the Treasury was pilloried. The difference is that in the Thirties, the Treasury did have a strategy to deal with the prolonged recession.
The key structural problem of the economy was a financial imbalance in the form of an inherent lack of company profitability. An active industrial strategy encouraged companies to form cartels protected by tariff barriers, enabling them to increase prices and restore profitability. Spending on investment was thereby encouraged. The policy was successful, and unemployment was halved between 1932 and 1937.
In the current circumstances, severe financial imbalances extend beyond the issue of the profits available to the corporate sector, to the balance sheets of the personal and banking sectors.
Evidence mounts daily of the debt problems facing individuals, and in particular both the number of people with negative equity in their houses, and the number unable to keep up mortgage
Because of these factors, the balance sheets of the banks are in a very unhealthy state. To try to rebuild them, banks are compelled to maintain wide margins on corporate loans, and both to increase existing and introduce new charges for services. The small enterprise sector, on which the dynamism of the economy depends increasingly, is damaged severely by these policies.
The Government should act to help to resolve the banks' bad debt problem. A Housing Bond should be issued by the Government on the terms of a long-dated gilt, and swapped for the bad loans of the banks and building societies. This would enable bank margins and charges to be contained. The loans then held by the public sector would be renegotiated at payment levels that could be met, with corresponding adjustment of the home-owner's
equity in his or her property.
The corporate sector is equally in need of relief. Specifically, the Government should borrow from the legal systems of other European countries to make contested takeovers far more difficult in this country. This would relieve management of the present absurd pressure to maintain dividend payments for fear of a drop in the share price and consequent hostile takeover. In a number of instances, management has chosen to save costs and dismiss skilled workers in order to maintain the dividend. This is the true economics of the madhouse.
With this protection, companies could spend profits constructively in investment and research and development, not only moving the economy out of recession, but providing a firm base for future growth and prosperity.
As in the Thirties, positive government action is needed urgently to restore financial balance in the economy and bring the recession to an end.
21 OctoberReuse content