In Wednesday’s Financial Times, Nicholas Crafts, Professor of Economics at Warwick University, writes a superb op-ed “Fiscal stimulus is not our only option” explaining how an easy money policy worked for England in the 1930s, generating a 20% increase in real GDP between 1933 and 1937 despite fiscal retrenchment. The op-ed summarizes a report (Delivering growth while reducing deficits: Lessons from the 1930s) just published by the Centre Forum, a liberal think tank based in London.
Here is the opening paragraph:
The lessons of the 1930s are not well understood but are important. Britain enjoyed a strong recovery from the depression, with growth exceeding 3 per cent in each year between 1933 and 1937, despite a double-dip recession in 1932 and continuing turmoil in the international economy. Until 1936, growth owed nothing to rearmament. Indeed, as now, in the early 1930s the government was engaged in fiscal consolidation at a time of very precarious public finances, while from mid-1932 short-term interest rates were close to zero and could not be cut to deliver monetary stimulus. The parallels with today are clear, but today’s policymakers are unaware of the successful economic policy that revived growth. How did they pull this off 80 years ago – and could we do the same?
Crafts answers his question — correctly! — in the affirmative.