Gordon Brown meets the real opposition when he visits Strasbourg

Nigel Farage publicises a few home truths as Gordon Brown seaks in the European Parliament.

How To Stop The Recession By UKIP's Economic Adviser Tim Congdon

Too much recent commentary has treated the current recession as if it were preordained and unstoppable. Recessions are not Acts of God.

On the contrary, nearly all major fluctuations in economic activity are the man-made result of serious errors in economic policy. They can be halted if the right decisions are taken.In their classic work on A Monetary History of the United States Milton Friedman and Anna Schwartz showed that the dominant influence on the slump in output and employment in the USA's Great Depression was a fall in the quantity of money. Between October 1929 and April 1933 the quantity of money dropped from $48,155m to $29,747m or by almost 40pc.

Money takes two forms, legal tender cash (mostly notes) and bank deposits. Holdings of deposits were much larger than those of cash in the early 1930s, just as they are today. Over the October 1929 to April 1933 period deposits slumped from $44,323m to $24,545m or by 45pc.In other words, the Great Depression was due above all to trauma in the American banking system. The virtual halving of the level of bank deposits meant that rich people had too little money in their portfolios, and they sold stocks and shares to straighten their positions.

As in a game of pass-the-parcel, such sales merely altered the distribution of money between different investors. Some sort of balance between non-monetary assets and the reduced amount of money was restored only by a crash in the prices of shares, real estate, farmland and so on, with catastrophic impacts on demand and output.

One lesson is that policy must at all times keep the growth rate of money – which means the growth rate of bank deposits, in practice – steady at a moderate rate.
In the 14 years from 1992, in which the UK enjoyed unusual macroeconomic stability, the annual rate of money growth was in fact similar to that of national income at about 6pc or 7 pc.

But in 2006 the Bank of England lost the plot. A large and violent fluctuation in money growth has occurred in the last three years, and the predictable outcome has been a large and violent boom-bust cycle. In early 2007 the bank deposits of British companies were 15pc higher than a year earlier, but in the last year they have fallen by almost 5pc. This lurch from easy monetary conditions to liquidity squeeze has been an important – perhaps the most important – causal influence on the economic downturn.

What must policy-makers now do? The answer is that they must raise the growth rate of bank deposits in the hands of genuine non-bank agents, such as companies and households. Over the last 20 years new bank deposits have been created mostly as a counterpart to lending to the private sector. When a bank extends a new loan, it adds the same amount to its assets (the loan) and to its liabilities (the deposit).

The loan typically stays inert on the bank's books for months or even years. By contrast, the borrower can write cheques against the deposit, moving the money into someone else's deposit. Whereas the loan is only one transaction, the extra deposit is money and can result in endless rounds of transactions. On this basis it is the money – the new bank deposit – that really matters to the economy, not the bank loan.

However, in the last few months the Bank of England has expressed the view that new credit to the private sector, not extra money, plays a vital role in the economy.
In recent speeches the Governor, Mervyn King, and the Deputy Governor, Charles Bean, have warned that – unless banks lend more to the private sector – the economy will not recover in 2009.

This credit-determines-spending doctrine is false and dangerous. The correct answer is for the government to replace the private sector in the credit process, and so to create new deposits by itself borrowing from the banks and increasing the quantity of money. Since the government has the power of taxation, its own credit-worthiness is not in doubt and it can borrow almost without limit from the banks.

In the first instance the proceeds of the banks' loans to the government would be credited to the government's deposit. But civil servants can then write cheques to the government's suppliers and add to the quantity of money. These suppliers may include some financially hard-pressed small companies, giving them immediate help. But the favourable effects of extra money should soon spread widely. Payments between different companies and individuals are on such a scale that all cash-strained companies ought to find it easier to improve their financial position.

We are of course opposed to an excessive rate of monetary growth, because that causes inflation, and favour sound public finances over the medium term. But large-scale government borrowing from the banks in early 2009 – of between, say, £50bn and £100bn – would be simple to organize given the enormous budget deficit now being incurred. That would quickly boost the quantity of money, easing the financial squeeze on British companies, and helping them to maintain jobs and investment.

Professor Tim Congdon is one of Britain’s leading economic commentators and the founder of Lombard Street Research. Between 1992 and 1997 he was a member of the Treasurer Panel of Independent Forecasters (the so-called ‘wise men’) which advised the Chancellor of the Exchequer on economic policy. In 1997 he was awarded the CBE for services to economic debate. Tim is currently a member of the Shadow Monetary Policy Committee. His opinion and comments are frequently reported in the media and he is the author of a number of books – the latest being Keynes, the Keynesians and Monetarism. If you would like to come along to a public meeting with Tim click here

Free Christmas ride home for EU workers

The European Union’s institutions in Brussels are squandering millions of Pounds of British taxpayers’ money by paying for their employees’ Christmas travel expenses at a time of economic crisis.

Hans-Peter Martin, an independent member of the European Parliament from Austria, wrote to the press denouncing this “shocking privilege.”

“The money would be better spent financing meaningful social projects,” Martin wrote.

Last year, the European Commission and the European Council jointly spent just under 47 million Euro (USD 65 million dollars) to pay for the Christmas travel arrangements of their 22,800-odd employees. Once a year, EU employees are given a lump sum covering their travel arrangements. The amount varies according to how far they need to go to reach their country of origin. The payment also covers their espouses and children, and no receipts need to be submitted, as long as the travelling takes place within the EU.

A spokeswoman for the commission said her office had already addressed such concerns to MEPs in February. “Like most international organisations or foreign services in the (EU’s) member states, the Commission pays staff a travel allowance once a year. This is foreseen in staff regulations,” said Valerie Rampi of the commission’s administrative unit.

Rampi said the amount spent by the commission, which employs about 20,000 people, totaled 42 million Euros in 2007, with the remaining amount being paid out by the council. This works out at about 2,100 Euro per employee. Any changes to the rule, in place since 2002, would have to be proposed by the Commission and approved by EU governments, and what do you think the chances of that is ?

Any excuse

The press this week has been full of stories about Britain considering joining the Euro in an attempt to beat the effects of the global economic crisis. The latest debate was prompted by the President of the Commission, Jose Manuel Barroso, announcing on French radio that Britain was closer than ever before to signing up to the single currency.

Although I find this very worrying I sadly do not find it surprising because many of our politicians secretly (or not so secretly as is often the case), harbour a wish for Britain to step further into political integration with the European Union. The latest whisperings are another example of their contempt for the very anti-Euro British public whom they are meant to serve.

I do not agree that our decision regarding joining the single currency should be based on purely economic considerations; the Euro is not simply an economic tool – it is very much political and therefore the political implications of joining have to be considered within the argument. It angers me that the supporters of the Euro are currently trying to suggest that Britain would be better off as a member of the Eurozone, claiming it would have helped as the credit crunch bites harder and we enter into a recession.

Perhaps this argument would hold some economic weight if only Britain was struggling in these difficult times but the very point is it is a global economic crisis! Also if Ireland is any example then membership of the Euro certainly doesn’t prevent recession, mass job losses and a collapse of the housing market. And being part of the Eurozone means the country does not have the power or the flexibility to respond in the way best for that individual country.

Current times are hard and look like getting worse. This is a global phenomenon and there will be no easy solution. It is disingenuous for Europhiles to use this as an opportunity to champion their pre-conceived beliefs – but then those who long for a European federal super-state will use any excuse to further their cause!