In this respect the cause of the current rise in government debt has more in common with the 2008 financial crisis than with what occurs in wartime. And unlike the 1970s and 80s – indeed as a result of that experience – there is now a stable monetary regime in place. As it happens, it would now be significantly harder to “inflate away” the public sector’s liabilities than in the past. Thanks to a combination of indexed gilt issuance and (somewhat ironically) QE, the relevant “tax base” – non-indexed, longer-term debt in the hands of the private sector – is much lower than in the 1970s and  20  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  20  80s. But the most important guarantee of price stability is a stable regime governing monetary policy and macroeconomic policy more generally. For policy to be effective that regime has to be credible. Indeed, without such credibility – without confidence that fiscal outcomes are a matter for fiscal policy, with monetary policy assigned to controlling a nominal objective – it’s not clear that QE would even work in the first place. And that credibility relies in part on the monetary authority being held to account. It’s crucial that the MPC should have to explain why its actions are necessary for meeting the inflation target, and nothing besides, during this episode as in any other.
Third, and instead, what matters more – not just for inflation itself but the cost of government debt as well – is the prevailing regime for monetary policy. The two can clearly interact: the monetary regime was abandoned in those wars partly because of the pressures from higher spending, and it was that de-linking from gold that allowed prices to rise in the first place. Equally, it was precisely because of the visibility and prominence of that measure, and the belief that it was likely to be temporary, that both the subsequent inflation and the rise in the cost of new government borrowing were contained to the degree they were. Conclusion Aggressive monetary easing by central banks, occurring as it has alongside very large government deficits, has raised fears in some quarters about “monetary finance”. These are misplaced. Certainly there’s nothing about the coincidence of the two in time that, in and of itself, constitutes monetary finance. If the rise in government debt is caused by a weak economy, something that would otherwise depress inflation, easing policy is exactly what an independent, inflation-targeting monetary authority should be doing. Theory tells you that, to stabilise inflation, policy needs to lean against swings in demand and UK history bears that out. It’s true that, if only for a while, easier money policy reduces the real cost of borrowing, for public and private sectors alike. That’s how it’s meant to work. The reduction in the cost of borrowing for the private sector stimulates demand and inflation.