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Cheap money


Money is said to be cheap when credit is easily obtainable and interest rates are reasonably low. Governments sometimes deliberately foster a cheap money policy with the intention of promoting a high level of investment. This happened in the U.K. in the years preceding and immediately following the Second World War, when government interference kept the bank rate very low and, by doing so. encouraged heavy borrowing by industry to increase production. Part of the consequent increase in the money supply was swallowed up in government securities, such as 2 1/2 per cent consols, which in turn gave the government the funds to forward its own investment projects. This era came to an end in the early 1950s. The policy rebounded with a vengeance in later years when the increase in interest rates impoverished many innocent investors, who saw their gilt-edged securities fall catastrophically in capital value. The State suffered rather less as the period of rising prices and falling redemption values of stocks reduced the real value of interest payable on undated securities and lowered the cost of redeeming the dated stocks through the market, before the stocks matured.

The latest reappearing of the term is from the stock market crash of 2007/ 2008.


Reference: The Penguin Business Dictionary, 3rd edt.