Government debt and inflation Speech given by Ben Broadbent, Deputy Governor Monetary Policy 2020 Annual Meeting of the Central Bank Research Association London School of Economics via videolink 2 September 2020  I’ve received helpful comments from colleagues at the Bank of England. I’d like to thank Jack Meaning, Nickie Shadbolt and Ryland Thomas and especially Mette Nielsen for their help in preparing the speech. The views expressed are my own and do not necessarily reflect those of the Bank of England or other members of the Financial Policy Committee or the Monetary Policy Committee. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  Good afternoon. Thank you for asking me to speak to you today. This is an important and innovative time for central banks, across their many functions, and it’s vital we learn from our own and others’ research on the big questions. The Bank of England launched its new Agenda for Research1 yesterday and Andy Haldane will I’m sure want to tell you more about it in the panel following this talk. The topic I’ve chosen today certainly isn’t a new one. In fact, it’s almost as old as economics itself. I want to talk about “monetary finance” – what it is (and what it is not), what it’s worth and when it’s been used in the past. Old it may be, but there’s been quite a bit of talk about this topic very recently.
23  In an effort to control debt levels incurred during the war, the British government ran huge primary surpluses during the 1920s, averaging 7% of GDP, with all the social and industrial unrest that entailed. Yet ratios of government debt to GDP didn’t fall, remaining at over 160% of GDP throughout that decade. Just as rapid inflations can eat up debt so deflations can increase it. The short-lived reinstitution of the gold standard (it was then abandoned for good in 1931) was heavily criticised at the time by Keynes. 24 The question was only formally considered – and a return to the pre-war parity recommended – by the Cunliffe Committee in 1918. 18  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  18  Chart 13a: To the extent fiscal variables matter for inflation government demand more important than debt  Chart 13b: Debt higher in wars than in 1970s but residual monetary credibility may have contained inflation, bond yields  Average debt/GDP; changes in central government expenditure less interest payments over nominal GDP; and average inflation. Sources: Thomas and Dimsdale (2017), Mitchell (1988), Feinstein (1998), O'Donoghue et al (2004), ONS and Bank calculations. Average bond yields based on consols/ long-term bonds. Sources: Thomas and Dimsdale (2017), Capie and Webber (1985), Neal (1990), Klovland (1994), Feinstein (1998), O'Donoghue et al (2004), ONS, DMO, and Bank calculations.