Milton Friedman did not think I was a particularly gifted economist. His comment on my writings in the 1970s was that it was a step forward that an Editor of The Times should be interested in economic theory at all.

Nevertheless, the Friedman-Keynes debate on monetarism that was waged after Maynard Keynes himself was dead was one of the great controversies of my lifetime. I started my editorship in 1967 a Keynsian and ended it, in 1981, as a Friedmanite. I was converted by the events of the Seventies.

The Friedmanite doctrine of monetarism does help to provide an understanding of the crisis that is now happening in world finance, and its possible economic consequences. Friedman wrote in 1968: “Acceptance of the quantity theory of money means that the stock of money is a key variable in policies directed at the control of the level of prices or of money income. Inflation can be prevented if, and only if, the stock of money per unit of output can be kept from increasing appreciably. Deflation can be prevented if and only if the stock of money per unit of output can be kept from decreasing appreciably.

“This implication is by no means a trivial one. The emphasis on credit as opposed to monetary policy accounts both for the Great Depression in the United States from 1929 to 1933, when the Federal Reserve System allowed the stock of money to decline by one third, and for many of the postWorld War Two inflations.”

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The 2007 to 2008 credit crunch had undermined the monetary base of the world economy. In the past 12 years there has been an inflation of the global money supply based on the rise in house prices and the conversion of mortgages into structured debt, traded between financial institutions. This resulted in a growth of credit, leveraged on unsustainable market prices for housing. The scale was unbelievably large – Irwin Stelzer puts the size of the US mortgage market at $11 trillion. This process is now having to be unwound.

There has been a fall in the US housing market, perhaps of 20 to 30 per cent. The US banking system must have lost about $2 trillion of its underlying assets, perhaps more. This has resulted in the reduction of availability of credit. That has caused multibillion-dollar writedowns, the collapse of the Carlyle Capital Corporation and the need for a short-term rescue of Bear Stearns. The Federal Reserve is desperately trying to restore normal credit conditions. The most likely outcome, in monetary terms, is inflation. Most of the debt would then be repayable, but in depreciated currency.

In 1973, after the first oil shock, the world’s central banks lost control of inflation; the aftershocks continued for about 20 years, including peaks of inflation in the 1970s to 1980s, the 1987 stock market crash and the 1990 recession.

So far as the New York banks are concerned, the current credit crunch has had an impact comparable with the 1973 rise in the oil price. We may be only at the beginning of a new struggle between the forces of inflation and deflation. We do not know how long this period will be – there is unlikely to be any miracle cure from one month to the next.

The struggle is already having a political as well as a financial impact. I regard YouGov as probably the most reliable of the opinion polls. Yesterday The Sunday Times published the latest YouGov poll, which showed the Conservatives in the lead with 43 per cent support, Labour at 27 per cent and the Liberal Democrats at 16. This is the first poll to give the Conservatives the sort of winning lead that they enjoyed in the late 1970s, or Labour in the mid1990s.

I have looked up the table at the end of Colin Rallings’s and Michael Thrasher’s Media Guide; this converts voting preferences into seats. I found that the authors had not even included a column in which Labour has only 27 per cent; this YouGov poll has gone off their scale.

The nearest estimate one can make is that a 16 per cent Conservative lead might produce 380 Conservative seats, 204 Labour and 36 Liberal Democrat. An overall Conservative majority is now a serious possibility, though the election may be two years away. About half of all Labour and Liberal Democrat seats are at risk.

I am sure that the Government thinks in terms of polls, but I doubt whether it thinks in terms of monetarism. We know that Gordon Brown does take an intellectual view of economic policymaking. He has read Adam Smith and other figures of the 18th-century Scottish Enlightenment. Yet Alistair Darling’s Budget speech did not contain any serious theoretical analysis of the most serious global economic crisis in 30 years. The public has noticed the deficiency.

The repeated keyword of the Budget speech was “stability”, mentioned 23 times. The Chancellor did not seem to offer anything one could call a “stabilisation programme”. Historically, “stabilisation programmes” have been horribly painful affairs, as in Germany after 1923. The usual function of such a programme is to bring an end to an inflation that has become intolerable. At present, central bankers seem more afraid of a systemic crisis of deflation than of inflation itself.

The Government will not be able to stabilise the opinion polls unless it can stabilise the economy; it will not be able to stabilise the economy unless it can stabilise money. At present there is no confidence in currencies, no confidence in the modern system of structured debt and a significant contraction in the money base including back assets. Everyone is running scared, not least the central bankers.

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