The Bank of England governor is desperate to avoid the Federal Reserve's great mistake
Mervyn King's worst nightmare is that the Bank might repeat one of the biggest failures in economic policy of all time: the US Federal Reserve's decision to rein in growth too soon during the Great Depression.
Amid tentative signs of recovery in 1936, and fears of rising inflation, the Fed tightened monetary policy, amid hopes the downturn that began with the Great Crash of 1929 had ended. But the decision proved premature, and sent the US back into recession.
"It prematurely turned the screw, with the first of three quick increases in bank reserve requirements, beginning in August 1936," said economist Graham Turner of consultancy GFC Economics. The next year, the economy plunged into a second recession, and unemployment shot up to 19.1%.
A full recovery from the Great Depression did not begin until the onset of the second world war, when increased demand for military goods pushed the jobless rate down to 9.9% in 1941. "Pearl Harbor was then the trigger for full-scale militarisation. The jobless rate dropped finally to a low of 1.2% in 1944," said Turner.
Christina Romer, chairwoman of Barack Obama's council of economic advisers, said: "The 1937 episode provides a cautionary tale. The urge to get back to normal is strong. That urge needs to be resisted until the economy is again approaching full employment."
Copyright Speakers Corner 2017