Printing money may be the final desperate roll of the dice

Feb 24 2009 A View from the House by Philip Hammond, MP for Runnymede & Weybridge

Runnymede & Weybridge MP, Philip Hammond

With the failure of the October bank bailout and the December temporary VAT cut now apparent, the Government is resorting to what are literally last ditch measures in an attempt to save the economy from meltdown.

This week we've heard plans for half-a-trillion pounds worth of guarantees to banks to underwrite their toxic assets, billions of extra pounds to Northern Rock to lend and the go-ahead to the Bank of England to start printing more money to try to keep inflation up.

Keep inflation up? To anyone, like me, whose entire adult experience has been in an era when Governments thrived or failed on their ability to keep inflation down, the very notion is alarming.

But that it what is happening: yes, our Government is actively trying to get prices rising to stave off a slump. The way it will do that is by printing extra cash in order to pump it into the system so that more money is chasing the same amount of goods and assets and prices and values start to rise again.

It is a measure of the desperate state that the economy is in that for the first time since the 1930s this kind of action is being taken. This is not some low-level decision that can be run by a committee in the Bank of England, but an initiative of the greatest political significance.

We have a right to know how much of this so-called 'quantitative easing' is being authorised, when and by whom. And we also need to know that somebody is preparing to deal with the aftermath - because all the experts agree that while printing new money may help to stave off a slump in the short term, it runs the very real risk of setting off an inflationary spiral in the medium term - taking us back to a place that none of us who lived through the last one want to go.

A decade of reckless borrowing has put this Government in a position where doing the unthinkable has become its only remaining idea. For all our sakes, we have to hope that it works and that the medicine, when it comes (in the form of measures to curb the inflation that 'quantitative easing' may generate), will not be more painful than the disease.