If the private sector wants to hold more in their bank accounts for a given level of spending – if the extra deposits held not as a “medium of exchange” but as a “store of  Page 21  wealth” – this needn’t have any implications for inflation. One clear example is the experience of the first few years of the 1980s. After years or extremely high inflation, the incoming UK government – which in those days set monetary as well as fiscal policy – was determined to reduce it. To this end it set itself intermediate targets for broad money growth. These were repeatedly overshot – as you can see from Chart 12, broad money growth remained stubbornly high – and eventually abandoned. Yet inflation fell sharply anyway. Chart 12: During the first half of the 1980s broad money growth remained very high but inflation declined anyway  Sources: ONS, Bank of England and Bank calculations. At least with the benefit of hindsight, one can see that these differing trends reflected strong growth in the demand for money, alongside stronger supply. After the financial liberalisation of the early 1980s banks had started to pay interest on deposit accounts, making them more competitive relative to securities like gilts (the orange line in Chart 13 plots the spread between the two). So it would make sense if the private sector wanted to allocate more of its financial assets to deposits. Because they’re held as stores of value these extra deposits were not inflationary.
But the upshot is that the efficient organisation of production at the global level is a public good that needs to be preserved. The role of multilateralism after the COVID crisis Trade aside, the present juncture is, in fact, a particularly suitable one for giving fresh impetus to multilateralism. Healthwise, the crisis will clearly not be resolved until immunity against the virus has been achieved in all countries. On the economic front, divergences in the rate of recovery may be particularly harmful for economies that are in a more vulnerable situation. Concerted global action is fundamental both for accelerating vaccine production and for making distribution affordable and fair for everybody. In the economic arena, we need some coordination of crisis exit strategies and, in parallel, support for the most vulnerable countries. Here, international institutions have a crucial role to play, in coordination with regional institutions and mechanisms. The aim is not only to entrench the global economic recovery. We must also combat the backsliding in inequality and poverty as a result of the pandemic, and jointly address the common structural challenges arising, for example, from digitalisation and the fight against climate change. And, more generally, as former ECB President and now Italian Prime Minister – Mario Draghi – put it: “one of the main reasons why multilateral institutions exist is to create regulatory convergence, and therefore to increase trust between countries”.2 A role for multilateral institutions that goes way beyond their pure economic mandate.