In yesterday’s news it was reported that a senior government minister had admitted the UK economy was in crisis and that plans to boost growth and jobs were needed. The comments by Cabinet Office minister, Oliver Letwin, to the Environmental Audit Committee, were made in response to a question about economic decisions in the lead-up to last month’s Budget. Mr Letwin said that: "…we took the view…that we faced an immediate national crisis in the form of less growth and jobs than we needed and we were determined collectively to try to increase that growth and those jobs."

As has become usual practice, Government sources blamed the previous administration, saying that Mr Letwin’s comments referred to the ‘crisis’ they faced on taking office. However, this seems unlikely and the quote brings to mind that the UK has already recorded one quarter of negative growth; one more and the country is officially in recession, again. It occurred to me that there are echoes here of the economic crisis that gripped the US in the 1930s. Some historical context is therefore required.

Between 1929 and 1933, US unemployment rose from around 4% to 25%, manufacturing output fell by one-third, and prices fell by 20%. President Roosevelt’s (Franklin Delano Roosevelt – FDR) election in 1933 led to the creation of the famous New Deal, which in general aimed to boost demand through public spending on government programmes to assist the economy. FDR’s first term in office saw GDP leap upwards. But, deciding in 1937 that the fight against Depression had worked, FDR was persuaded to cut spending, aiming to balance the US budget.

What followed was a renewed recession, with unemployment rising sharply back up to 1931 levels, output contracting and prices plummeting. FDR reacted by abandoning his fiscal policy, agreeing a multi-billion dollar spending programme aimed at increasing individuals’ purchasing power. While unemployment fell and GDP began to improve, the economy did not recover fully until the US entered World War 2 in 1941. To many, this so-called Roosevelt Recession renewed belief in the need for government intervention in the economy, as recovery is likely to have been sustained if spending had not been cut in 1937.

Which brings us back to Mr Letwin’s comments: The UK’s Coalition Government has decided that fiscal austerity measures are required. In its view the budget deficit is unsustainable and needs to be cut. If this does not happen, it says the financial markets will lose faith in the UK’s ability to sell government bonds. This will lead to an increased risk of the UK defaulting on its debts. While this view is widely held and to a certain extent the opposition agrees with the need to cut the deficit, it is by no means a unanimous opinion.

A growing number of analysts, economists and commentators now argue that in a country which is the monopoly issuer of its own sovereign currency, there is never a risk of default or being unable to repay its own debts. The biggest risk, when an economy is suffering depressed levels of demand, is for a government to refuse to bolster demand through public spending and/or tax cuts. This is precisely what the UK’s Coalition Government is doing and it risks creating another damaging economic slump. In the America of 1937 this was blamed on FDR; in 2011 Britain it would be the ‘Cameron Recession’.