The important variable for policy-makers is not the level of bank lending to the private sector, but the level of bank deposits. (Remember Irving Fisher's reference to "deposit currency".) Indeed, because companies are the principal employers and the representative type of productive unit in a modern economy, bank deposits in company hands need to be monitored very closely. If these deposits start to rise strongly as a by-product of the Bank of England's adoption of quantitative easing, the recession will be over. 

Is quantitative easing working? Lags between economic policy and its effects are unpredictable, and celebration would be premature. Nevertheless, the first two months of quantitative easing have seen startling improvements in several areas. Most obviously, the UK stock market has soared by 30 per cent and corporate fund-raising has been on a massive scale. Anecdotally companies are saying that cash pressures are less severe. Business surveys have also turned upwards, with a key survey of the services sector suggesting earlier this month that almost as many companies planned to raise output as to reduce it. If there are more output-raising than output-reducing companies, the recession will be over. 

The debate about quantitative easing, and the larger debate between creditism and monetarism to which it is related, will rage for the rest of 2009 and probably for many years to come. Much will depend on events and personalities, as well as on ideas and journal articles. But there is at least an argument that Bernanke's creditism was the mistaken theory which, by a remorseless logic of citation, repetition and emulation, spread around the world's universities, think tanks, finance ministries and central banks, and led to the Bedlam of late 2008. The monetary approach — which Bernanke himself saw as standard and traditional — argued that measures such as quantitative easing, rather than bank recapitalisation, were appropriate in September and October last year. Why were large-scale expansionary open market operations — operations targeted directly to increase bank deposits — not adopted at that stage? And would not hundreds of thousands of jobs, and thousands of businesses, have been saved if the Treasury and the Bank of England had bought back vast quantities of gilts then instead of bullying the banks? (This is not to propose that the banks are perfect and angelic. They had been silly, naughty and greedy in the years leading up to the crisis of 2008. But they tend to be silly, naughty and greedy in the years leading up to most crises, and recessions as severe as the current one are not normally visited on innocent bystanders.) 

The academic prestige attached to the "lending-determines-spending" doctrine and other credit-based macroeconomic theories is puzzling. As noted earlier, Bernanke and Gertler included in their 1995 article an observation that comparison of actual credit magnitudes with macroeconomic variables was not a valid test of their theory. One has to wonder why. They claimed that bank lending was determined within the economy and so was "not a primitive driving force". (In jargon, bank lending was endogenous and determined by the economy, not exogenous.) Bernanke and Gertler must have known that the relationships between credit flows and other macroeconomic variables were weak or non-existent, casting doubt on their whole approach. 

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