In January chancellor Alistair Darling, discussing the economic crisis, claimed that, “Nobody is talking about printing money”.
Yet last week the government gave the go-ahead for exactly that.
Gordon Brown’s latest attempt to turn the economy around unsurprisingly involves giving lots of money to the banks, in what economists call quantitative easing.
Put simply, this is a fancy way of printing money.
The government buys up government and commercial bonds and assets as a way of injecting money into the economy.
Free market economist Milton Friedman once compared this to “dropping money from a helicopter”.
This analogy captures the panic of the approach well – but omits the fact that only businesses and banks are allowed to catch any of the cash.
The Bank of England has been cutting interest rates to encourage the banks to lend money to each other and firms.
But that hasn’t worked so now they are trying to give the banks cash.
The Bank of England is creating new money electronically rather than actually printing it.
It then buys bonds – companies’ IOUs – and gilts – government IOUs – from the banks.
So the banks get a shedload more money. And the idea is that, because interest rates are low, the banks don’t have a reason to hoard the money.
What is supposed to happen next is that the banks lend all this cash out.
And that, with a new line of credit, this wealth will trickle down and make people and companies more likely to spend money, giving a further boost to the economy.
Apart from the obvious problem that increasing debt as the solution to the crisis isn’t exactly rational, a more basic problem is the banks themselves.
They are more likely to sit on extra cash or use it to fill holes in their spiralling debts than lend it out.
In Japan, soaring share prices and a property boom collapsed spectacularly in 1991.
Japan slashed its interest rate to zero during its long economic downturn and attempted quantitive easing, but corporations still hoarded cash rather than investing or depositing it in banks.
It completely failed to bring Japan out of recession.
A further problem is that quantitative easing pushes up prices.
While we are unlikely to see the astronomical inflation of Zimbabwe or Weimar Germany, increasing the amount of money in circulation puts up prices as money becomes devalued.
If companies are convinced to increase investment, this can lead to further problems.
Bosses compete to invest where they think they can make a profit. This involves different capitalists all trying to buy the same raw materials – thus driving up their price.
These price rises eat into their profits, so they raise the price of the commodities they produce in response.
Other capitalists, not wanting to be undercut, also raise prices. So, banks can either hoard money or lend it and increase inflation. Either way, ordinary people foot the bill.
Rightwingers don’t like quantitative easing because they don’t like interfering with the free market.
Meanwhile the new followers of John Maynard Keynes, who believed in state intervention in the economy, think it is part of lifting the economy out of recession.
Giving the banks more cash creates the potential for more borrowing in the economy. But it is far from guaranteed – and leads to new problems.
Increasing the money supply does nothing to increase the underlying strength of companies.
Banks are refusing to lend money to businesses – even short-term loans to cover cashflow problems – often because they think the companies are unprofitable and their loans won’t be repaid.
And trying to deal with the symptoms of the crisis is not a cure.
It is the irrational drive for profits that lies behind the crisis and that is why printing money isn’t a solution.
Where there are profits to be made capitalists will borrow money, even if interest rates are high.
The fundamental problem today is that the underlying profit rates are low.
That is why investment has collapsed, and cutting interest rates and printing money does not alter that fact.
Throwing money at the same people whose pursuit of profit sparked the turmoil doesn’t address the causes of the crisis, and leaves the system that caused the chaos in place.