Leaving a financial crisis is like leaving an awkward social gathering: a good exit is essential. In 1936-37, the Federal Reserve made a colossal mistake in its “exit strategy”. This time round it is crucial that central banks get their timing right.

Seventy-three years ago, fearing the large accumulation of reserves held by the banks at the Fed could result in an “uncontrollable expansion of credit in the future” if the banks decided to lend out those reserves, the Fed raised reserve requirements to absorb them. This sharp tightening of monetary policy stopped the robust recovery that had been in train since 1933, precipitating a “double-dip” contraction in 1937-38, which according to Milton Friedman and Anna Schwartz in their 1963 book A Monetary History of the United States, 1867–1960 “was one of the sharpest on record”.

Today, there is much concern about the inflation potential of the roughly $700bn (€494bn, ￡425bn) accumulation of excess reserves on the Fed's balance sheet as well as excess reserves on many other central banks' balance sheets. Central banks must not repeat the premature “exit” mistake of 1936-37.