In short, the peripatetic pound has caused, and continues to cause, severe headaches for economic policymakers. But was currency instability really the cause of those headaches in the past, or was it simply the effect of bad policies? Some of both is the answer. Large movements in sterling can create problems for monetary policy, as we have seen very recently. Equally, the absence of a credible monetary framework means that the currency is likely to be volatile. Sterling crises of the past reflected an absence of monetary stability. Inflation has eroded the value of money to the point where the purchasing power of £ in 1950 has been reduced to less than a shilling, or 5p, today. The failure to control inflation led to excessive expansions of the economy, and the subsequent struggle to bring inflation back down resulted in severe recessions. This country experienced the sharpest decline in output of any G7 economy in the early 1980s. And in the early 1990s only Canada had a more severe recession. Eventually, the realisation that inflation did not generate sustainably higher output and employment produced a determination to restore stability to the UK economy. Since our departure from the ERM, in September 1992, successive governments have put in place institutional changes that would deliver stability. First the inflation target and then independence of the Bank of England, with the new Monetary Policy Committee (MPC), have put us firmly on course to achieve monetary stability.
The third motivation for more equity is that some companies who can bridge the virus disruption effectively with more debt could then consider their balance sheets overstretched. During the crisis, debt is the natural – fastest – way to raise finance for most companies. That’s why so much support has been provided to allow it to be raised. But it could leave an overhang. That overhang won’t be one that, at current interest rates, presents an acute problem. The share of companies with interest payments taking up a material fraction of revenues is likely to remain low. But it could create a chronic issue for the economy in the longer term. Greater leverage could damage companies’ ability to refinance and access new capital when dealing with future stresses. Governmentguaranteed loans may need to be refinanced at higher rates in future. Looking ahead to these possibilities, many prudent companies will want to repair their balance sheets, holding back on employment and investment to work the overhang off through time. 10  Source: Office for National Statistics 7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7  With enough companies in that position, what makes sense individually could be harmful collectively; it could drag future growth. So it is essential to give companies every means to repair and restructure balance sheets by issuing equity to repay debt. With these three important motivations, the good news is that equity issuance is already strong.