November 2, 2089

The most unlikely literary event this decade was probably the celebration of the 200th anniversary of Looking Backward by Edward Bellamy. One of the most popular novels of the late 19th century, it inspired numerous colonies founded on socialist principles. Yet it fell into obscurity from the 1920s till the stock market crash of 2087 sparked new interest in critiques of capitalism.

The book, of course, tells the story of a wealthy Bostonian who falls asleep in 1887 and awakes in a socialist utopia in the year 2000. Its prose is wooden, its characterisation sentimental and its economic philosophy muddled. But the idea of a command economy, rationally planned to eliminate waste and greed, has suddenly won adherents since the financial system imploded.

The worry is that policymakers seem to have no better ideas. These notes, drawn from the archives of The Times, relate decisions taken in an earlier epoch. They might help historians to explain this latest of the periodic financial panics of capitalism, and policymakers to mitigate it.

It is 80 years since the famous credit crunch of 2007-09. Central banks and governments were grossly unprepared for it. Yet they looked back 80 years, too. Ben Bernanke, chairman of the US Federal Reserve, had literally written the book on the stock market crash of 1929 and the Great Depression. There were obstacles, reversals and regional weaknesses (the UK, with an economy more geared to finance, suffered a longer recession). Yet while the economic pain was intense, there was no depression. The medicine worked. Capitalism proved more resilient than it had done in the 1930s, when financial panic and economic misery had propelled political extremism.

In the early 21st century, economics had become a dismal and also a derided science for having failed to foresee disaster. Yet it salvaged its reputation by returning to its most creative thinker of the 20th century, J.M. Keynes. The lessons learnt from harsh experience in the 1930s were applied. In summary, they were these.

Capitalism is the most efficient way of creating wealth and also of spreading it. Financial markets help to direct capital to businesses that can use it productively and make profits. But as Keynes perceived, a market economy does not correct itself. Policymakers have to stabilise activity by monetary and fiscal policy. They do not have the knowledge to pick industrial winners, because they cannot predict the goods and services that consumers want. But the very uncertainty of the future means that an economy may not be able to get out of recession on its own. Investors will not invest if they fear that consumers will not buy. It is then the proper role of government to inject confidence, by cutting interest rates and filling the shortfall in demand.

Above all, an efficient economy requires faith in the banking system. Policymakers in the 1930s had defended the ruinous policy of pegging the currency to the Gold Standard, and raised interest rates. In the 2000s they realised that the only thing that mattered was to stop the banking system from collapsing. They flooded the economy with cheap money. Eventually it worked.

The global economy after the credit crisis of 2007-09 expanded steadily. It also became more balanced. US households paid back debt, while the Chinese authorities stimulated domestic demand. The demands for trade protectionism, which had worsened the Depression of the 1930s, subsided. Eventually, just as memories of the Long Depression of the late 19th century had dissipated by the roaring 1920s, the credit crunch came to be seen as an isolated event. It was unfortunate that the banks then became so active in the burgeoning futures markets for lunar real estate, but that is another story.