Letter: Lurches in money sup­ply are proven Brit­ish men­ace

We write to express our con­cern about UK mon­et­ary devel­op­ments (The Big Read, Novem­ber 4). In April 2021 we signed a let­ter to you warn­ing that the then rapid growth of the quant­ity of money — of more than 15 per cent in the pre­vi­ous 12 months — would res­ult in well above-tar­get infla­tion. The pos­i­tion today is very dif­fer­ent. In the year to Septem­ber the quant­ity of money fell by 4.2 per cent.

By “the quant­ity of money” we mean the M4x aggreg­ate pre­pared by the Bank of Eng­land, with the series start­ing at the end of 1997. The 4.2 per cent fall is the largest to have been recor­ded in the sub­sequent 26 years of data. Indeed, until 2023 no annual decline in this meas­ure of money had occurred at all, not even in the Great Reces­sion of 2008 and 2009.

Whereas in early 2021 the worry was above-tar­get infla­tion, now it is of a need­lessly severe reces­sion. If the quant­ity of money con­tin­ues to slide, there is a pos­sib­il­ity in 2025 or 2026 of beneath-tar­get infla­tion or even defla­tion. It can­not be over­looked that the mon­et­ary con­trac­tion has already been accom­pan­ied by bal­ance-sheet strain and asset price weak­ness. Accord­ing to the Nation­wide index, house prices dropped by 3.3 per cent in the year to Octo­ber, while the FTSE 250 index of UK com­pany shares is off by 30 per cent from its last peak in autumn 2021.

Large fluc­tu­ations in money growth are a men­ace to the Brit­ish eco­nomy. In our view the Bank of Eng­land is again mis­man­aging mon­et­ary policy. Lurches in only a few years from much above tar­get infla­tion to defla­tion are destruct­ive and unne­ces­sary, and can have tra­gic con­sequences for house­holds and com­pan­ies. We recom­mend sta­bil­ity in money growth at a low rate. Sta­bil­ity in money growth should pre­vent big swings in demand, out­put and employ­ment, while an appro­pri­ately low increase in money con­trib­utes to on-tar­get infla­tion.

Juan Castañeda
Dir­ector, The Vin­son Centre, Uni­versity of Buck­ing­ham

Pro­fessor Tim Con­g­don
Uni­versity of Buck­ing­ham

John Green­wood
Chief Eco­nom­ist, Inter­na­tional Mon­et­ary Mon­itor

Julian Jessop
Inde­pend­ent Eco­nom­ist

Andrew Lilico
Europe Economics

Pro­fessor Kent Matthews
Cardiff Business School

Pro­fessor Patrick Minford
Cardiff Business School

Pro­fessor Trevor Williams
St Mary’s University, London

Letter in response to this letter:

What changed first, prices or the money sup­ply? / From JE Woods, Kings­wood, Sur­rey, UK