First Name
Last Name
Email Address
Select the mailing lists you wish to join:
Event Notice:
Weekly Digest:

ERC Research Papers

Playing with Monetary Fire

Published December 2007
By Professor Tim Congdon CBE
ISBN 9780903499309

The Economic Research Council's latest research paper 'Playing with Monetary Fire' by Professor Tim Congdon argues that the recent banking crisis is likely to reduce mortgage availability sharply in 2008. He argues that banks will want to improve both their liquidity positions (i.e., their ratios of cash and liquid assets to total assets) and their solvency (i.e., the ratio of capital to assets), in order to avoid a repetition of the Northern Rock fiasco. 


In the year to September 2007 new lending by the UK's banks and building societies amounted to over £240 billion, with mortgage finance accounting for almost half of the total. In 2008 new lending is likely to under £150 billion, with mortgage finance being two-thirds or less the 2007 figure. Lower house prices will be welcome to first-time buyers, but first-time buyers may find it difficult to obtain finance. 

Congdon's paper surveys the facts of the relationship between the quantity of money - dominated by bank deposits - and the levels of national expenditure and income in the 43 years from 1963 to 2006. He attacks claims that the 'velocity of circulation is unstable'. He shows that the growth rates of households' and companies' money holdings over this very long period were similar. The ratio of households' money balances to national income did change, going up by 2 and a half times because of such developments as the payment of interest on current accounts. But money balances themselves have soared by almost 87 times and national output by 40 times! Congdon's verdict is that 'the behaviour of bank deposits is basic to the determination of national income and asset prices in the UK, as in other economies'. 

Congdon's paper is highly critical of two schools of economic thought, the New Classical Economics favoured particularly in American universities and the so-called 'New Keynesianism' now widely adopted in central banks. Both these schools claim that the rate of growth of money (in the sense of money in bank accounts) is unimportant to macroeconomic outcomes. As Congdon notes, one message of the Northern Rock affair is that events in the banking system have a powerful influence on aggregate demand and inflation. In the paper's words, members of the two schools should 'check the facts and reorganize their theories in the light of the facts'. 



Members can download this publication here.



Non-members can purchase ERC publications via Paypal.  Please select the title and format (where available) of the publication you wish to order from the drop-down menu below.

 If ordering a paper copy, please allow up to 5 working days for delivery.  If ordering a digital copy, it will be emailed to you as soon as possible following payment (usually within 1 working day).

Delivery Method

Other Publications

The full list to purchase research papers from the archives, and their paper and electronic availabilities, is below.

Research Paper Name Paper Electronic
Energy Policy: Which Way for the UK? Y Y
Aqua Britannia! Y Y
The Essential Guide to EU Quangos 2009 N Y
The Digest of Energy Statistics 2008 Y Y
New Nuclear Build in the UK - The Criteria for Delivery Y Y
Playing with Monetary Fire Y Y
The Spectre at the Economic Feast N N
Cracks in the Foundations? N Y
Creative Destruction in the Music Industry - The Way Ahead Y Y
Cost Effective Defence Y Y
The New Economics of Energy Security Y Y
The Essential Guide to British Quangos 2005 N N
Electrifying Britain - forward with Coal, Gas or Nuclear? N Y
Family Structure and Economic Outcomes Y N
Recharging The Nation Y Y
Identity and Development N Y
Forward with the Euro and the Pound N Y
The Deadweight State N Y
VAT: The Unacceptable Face of Taxation? N Y


For older publications, please see our Historical Archive.