In Foreign Policy

Credit guidance was used extensively in the post-war period. The policy helped states build up their industrial capacity, expand their welfare systems, and accelerate technological innovation in key sectors where rapid development was needed. It is a central pillar of any successful industrial policy framework. And with the ecological crisis, it is gaining renewed attention: A recent report produced by the University College London’s Institute for Innovation and Public Purpose shows how credit guidance can be used to accelerate an effective green transition.

This approach can also be used to offset inflationary pressure. In a scenario where we need to increase public investment in necessary social projects—such as health care, housing, and transit—credit controls can be used to reduce commercial investments elsewhere in the economy (again, specifically in damaging and unnecessary industries that we need to scale down), thus regulating aggregate demand. This is a much more rational strategy for inflation control than using broad-brush interest-rate policy, which can have a devastating impact on people’s livelihoods and on socially important sectors.