Shortly before Christmas, the Speaker of the House of Lords, Baroness Hayman, invited a group of peers and journalists to a meeting to discuss the economic crisis. I was particularly struck by the contribution of Lord Howe of Aberavon, who was the Chancellor of the Exchequer in the early years of the Thatcher Government.

He said that his memory of the financial crisis when the Conservatives returned to power in 1979 was not whether the Government should borrow, but whether it could borrow.

Former Chancellors have been through the fire. Professor Peter Hennessy, in his admirable book The Prime Minister, quotes another, Denis Healey, on the 1976 sterling crisis: “The trouble with theoretical economists is that they don't understand that when you have a deficit, you can only finance it by borrowing, and you've got to persuade people that it's worth lending money to you and that they'll get their money back... there's no way of escaping it.”

There is no general agreement on the best way to fight a recession; there never has been. In 1937 the League of Nations published Gottfried Haberler's Prosperity and Depression, a serious attempt to identify a consensus among economists on the causes of the Great Depression and possible remedies.

In 1939 Haberler had to publish a second edition to take account of the debate over Keynesian theory. In the introduction to its new Chapter 8, he writes: “The greater part of the literature to be discussed in this chapter emanates from, and centres around, Mr Keynes' General Theory of Employment, Interest and Money... for a number of reasons, it is very difficult to review these theories.”

In the present crisis, Keynesian theory has again come to the fore. Keynes may or may not have been right, but he still dominates the debate. If we look for a general theory, we come back to him. Even economists who differ from him often turn out to do so more in their language than policies. The aura of heresy for heresy's sake still lingers on in his writings, but that is attractive to his more radical supporters. It had always been fun to be a young neo-Keynesian, but it remains “very difficult to review these theories”.

One of the most brilliant young Keynesians of the late 1930s was Richard Khan; in 1937, reviewing the first edition of Prosperity and Depression for the Economic Journal, he raised a question that was not answered at the time. It goes to the heart of the present debate, but is still unanswered. Khan wrote: “There is a fundamental question which Professor Haberler would address to those who put forward theories of the crisis: is it an increase or a decrease of saving which would stave the crisis off?”

He comments that Haberler's own reply would be: “It all depends.”

I'm not sure that Keynes himself would have answered differently. He was certainly afraid of the rush to hoard cash, which he called “liquidity preference”. On the other hand, as an experienced operator, he was concerned with the need to maintain confidence in markets. Another young Keynesian of the 1930s, Roy Harrod, did not hesitate: “In the slump those do well by the community who spend above their income.” Perhaps that is the Keynesian answer nowadays. It may often be right, particularly early in a recession when the authorities are trying to prevent a panic.

In almost every case, a recession is preceded by a period of excessive borrowing. In 1929 the Wall Street Crash followed a period of speculative borrowing on the stock market. In 2008 the UK crisis followed excessive borrowing - in property, hedge funds, private equity, consumer debt and government debt.

Investors found that they had borrowed far too much and had to make a desperate dash for cash. The money supply fell from gross excess to acute shortage. At that point, immediate funding of the banks made good part of the shortage and prevented a complete banking collapse. The objective of policy was to restore short-term equilibrium by a rapid cash stimulus, which only the Government could provide.

That was the right way to save the banking system. Yet there is also a problem of restoring long-term equilibrium. That has been distorted by the excessive borrowing of earlier years. For a time there will continue to be general distrust; banks will not trust each other; governments may find it difficult to borrow and will be competing with each other to borrow very large sums.

This will put international lenders in a very strong bargaining position. They will have a choice of borrowers and may not want to lend to countries that have weakened their balance sheets by excessive Keynesian stimulus.

In a recession there will always be competition for cash. Individuals must improve their own balance sheets; so must banks and other businesses, and governments.

This “liquidity preference” is a global competition for funds. In a recession, budgets are always squeezed by rising welfare spending and falling revenue. Yet governments are also concerned to restart their national economies. They face a conflict between the cost of a Keynesian stimulus and the need to borrow, which depends on the strength of their own balance sheet.

Last week the German sovereign bond auction was a relative failure. The German ten-year bond is the basis of the whole market for bonds denominated in euros. No other eurozone country can borrow as cheaply as Germany. The euro is strong and has risen sharply against the pound. The Germans wanted to sell six million bonds, yet they were able only to sell 87 per cent.

This is the Government's great dilemma. To reflate the British economy it plans to borrow and spend. To be able to borrow, it will need a stronger balance sheet and a lower borrowing requirement. It looks as if Haberler was right. Is saving good or bad? “It all depends.”

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