The Bank of England published an astonishing blog post yesterday. This began by saying:
Financing World War I required the UK government to borrow the equivalent of a full year's GDP. But its first effort to raise capital in the bond market was a spectacular failure. The 1914 War Loan raised less than a third of its £350m target and attracted only a very narrow set of investors. This failure and its subsequent cover-up has only recently come to light following research analysing the Bank's ledgers. It reveals the shortfall was secretly plugged by the Bank, with funds registered individually under the names of the Chief Cashier and his deputy to hide their true origin. Keynes, one of a handful of officials in the know at the time, described the concealment as “a masterly manipulation”.
To put it another way, because the country did not rush forward to fund the Great War as the government expected, the Bank of England (then, admittedly, a privately owned institution), stepped in and saved the government's day by buying over £2oo million of the debt that had to be raised to fund the initial war effort. In effect, it created money out of thin air to do so, and as a consequence effectively used what we would now call quantitative easing for the purpose of funding the war effort.
As the blog also notes, this was covered up by entirely false news reporting that stated that the issue was a resounding success. The false news reports in the FT of the time is reproduced, and the FT has now apologised for it, one hundred and three years after the event.
This does, however, leave some very obvious questions that the BoE needs to answer. They are:
1) On how many other occasions did purchases by it of government debt take place before QE began in 2009?
2) What were the dates when this happened?
3) What sums were involved on each such occassion?
4) When we're the positions unwound, if they were, and how?
5) What profit or loss arose on such operations?
6) What publicity was given to these operations at the time they took place?
7) If these operations took place how did they impact data on UK government gross debt by effectively overstating them, and by how many percentage points?
I am sending these questions to the Bank of Engloand for comment.
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Debt Management Office publishes these numbers here: http://www.dmo.gov.uk/index.aspx?page=Gilts/Data.
From 1987 to 2009 BoE holdings were 0. can’t immediately find anything prior to 1987
Let’s se what they say
I have sent the request
Just to add – the blog is bankunderground.co.uk which is not an ‘official’ BoE blog and is written by staff members. Of course, what they have highlighted is undoubtedly correct.
It is pubslihed by the BoE
Whilst it is true they say they do not endorse content you can be sure they would not publish it if they were unhappy about it
Thank you for highlighting this, Richard. The issues resulting from the efforts to finance WW1 drew an even more vitriolic statement from The Rt Hon Thomas Johnston PC when he noted that interest rates incurred were progressively increasing, and to use a more modern expression, churning was taking place.
Many have argued that the world wars provided a means of winning massive financial gains for the bankers and their agents but his last paragraph sums up precisely the many discussions you have raised re People’s Quantitive Easing. Not a lot has changed!
Sorry, I missed out the link
https://archive.sustecweb.co.uk/past/sustec12-6/extract_from_the_financiers_and.htm
Maybe a bit off topic but I heard the end of the World at One on radio 4. They were talking about the tenth anniversary of the 2008 crisis. Takis Varoufakis gave his reflections for two and a half minutes and IMHO was based on facts. “The new order we need for a sustainable future has not been born yet,” he finished.
The BBC then gave an ‘alternative view’ from ‘Philosopher and Free marketeer’ , Jamie White. He gave some figures about the growth in wealth in the last 250 years. Some, he said, put this down to technology. “This is wrong”, was his comment but no real reason. He went on to use China as an example. In 1980 the Chinese had the ‘same access to technology as the rest of the world ‘ but it was the switch to capitalism which has made them so rich’. In fact China imported much the production technology -or the West set up facilities-but the government of China played a large part in directing resources and giving them the legal framework to do so, perhaps as the House of Commons in the early 1800s passed the enclosure acts which made modern farming possible and released labour for the factories.
He ended by claiming the 2008 crisis was a failure of ‘state capitalism’ as the government regulated the system.
What I object to is that two views are presented as of equal worth. The mission of the BBC is to inform, educate and entertain. Unless one has some sort of background knowledge, it is difficult to evaluate the opinions. I have a growing feeling that the BBC is failing to get the balance right.
We were not given full disclosure of the War Loan even after the war (it being reasonable to do in the major war) and we are not being given enough information today.
Democracy cannot function in an environment of ignorance.
I do see a growing issue with this nonsensical ‘balance’ which would require a flat earther to go on if the issue were mentioned
Yes, it’s crazy. One lone loony is called on to comment when everyone else has the same view. And the BBC call this ‘balance’!
I listened to the same programme with similar reactions. Whilst I’d not always agree with Varoufakis, his points were pertinent and well argued. The guy from the Institute of Economic Affairs – who are a neo-liberal rentamob, turning up to anything – trotted out their usual generic lines of ‘the problem is the state, the answer is the market, everything is rosy, now what’s the question?’
Similarly this morning Nigel Lawson was dragged out from his sepulchre to pronounce on renewables and climate change. Another area where efforts to deliver ‘balance’ are farcical and downright misleading. Mind you it’s telling that they have such a limited range of speakers to choose from and that they are so grim. As I think others have said, perhaps part of the answer is to flood the media with alternative speakers.
Who was it from the IEA?
@ Richard
I believe it was this guy
https://iea.org.uk/jamie-whyte/
Pure libertarian nonsense then
Richard, did the Bradbury Pound play any equivalent QE rôle in the financing of WW1, as the US “greenback” most certainly did in financing the American Civil War?
I think that is a good question, to which the answer is almost certainly yes
I think we do have to see the Bradbury as an interest free QE in very many ways
There was no reason for their withdrawal post WW1
If they had not been the world would be very different now
The article says this about the origin of the money in question “And this episode was to be the first of several instances during the war where the Bank used its own reserves to provide needed capital.” Is this what we interpret as QE? I thought BofE reserves were something different, and in today’s lexicon they may well be, I suppose. Was it different back then?
It did not have sufficient reserves to do that as I understand it
The Bank was privately owned
In that sense this was different, I agree
But not that much: the assets were bought using a loan to an effective nominee just as QE assets are now
Hmmm… and I suppose we now have to regard much here https://www.theguardian.com/business/2014/oct/31/uk-first-world-war-bonds-redeemed in an entirely different light, like “The Spectator wrote at the time: “It is the people of Great Britain who must provide the cash with which to finance the war, and there is little reason to doubt that they can do it if only they will. A large part of the nation, instead of being impoverished by the war, has been enriched.”” It appears more as if the nation had been lied to by both its government and its media to me. Anyway, are these then to do with the war bonds/loans Osborne made such a fuss about paying off when he was only refinancing them anyway? These ones ““The fact that we will no longer have to pay the high rate of interest on these gilts means that, most important of all, today’s decision represents great value for money for the taxpayer.””? Was this because we wouldn’t have to pay, er, ourselves this high interest any longer, one wonders?
Excellent article. Very interesting. The questions are valuable. May I add another question.
What was Parliament told? Who (precisely) knew in government? I ask this partly because Keynes worked closely with and for the wartime (Conservative) Chancellor, Andrew Bonar Law (later PM). Bonar Law was one of the few politicians Keynes respected. What did Bonar Law know? What did Asquith (PM), and Loyd George (PM after Asquith) know. What did they do; what ddi they approve? Also, why have we never found out anything about this event even indirectly, even a hint, given the amount of historical research carried out on this period?
Okay, that is more than one question. I am greedy when it comes to history.
I noted that in the bank blog it says
“But a small fraction of 2% of investors by number accounted for over 40% of investment by value.”
Then as now, the UK is overly dependent on a small number of rich people. If only we could get rid of them, we surely would not have to depend on them!
This deceit is yet another reason to educate your children and grand children to never ever volunteer to be part of any war and to realise that because of government propaganda assisted by media collusion they will never ever have all the facts on which to make a rational decision as to whether to fight or not. Be ever the pacifist.
Gareth – what facts do you think were missing from what the public were told about Hitler? All attempts at appeasement failed. What would you have recommended when Germany invaded Poland and began rounding up dissidents and jews?
As a Quaker believe I would have fought in WW2 with a clear conscience
I cannot think of another war of which I could say that
Yes I too would have probably fought in WW2.
But this was the only war worth fighting
None of the 100 odd wars since, mostly promoted by USA (whose biggest fear, as 9/11 proved, is a war on their own territory) have been worth fighting
Imagine losing a son in the Falklands, Vietnam, Korea, etc wars!
Absolutely pointless.
Richard, I’m not an economist per se, but I’m wondering if the vanquished powers – notably Germany, tried this? And, if not, could they have?
I genuinely do not know whether they did, or not
I see the BBC are still saying incorrect things:
http://www.bbc.co.uk/news/av/business-40876528/we-re-going-to-run-out-of-money-in-the-afternoon
A bank can have a liquidity crisis in the way described
Very interesting and I do wonder why this has come out now. It does show how all kinds of things become possible in the event of war that are beyond the bounds of possibility otherwise. Quite apart from the money mechanism used to finance the war the other interesting point about that story is the marked lack of enthusiasm shown by investors. That would not have reflected a perception that the UK was going to be on the losing side – it was clear from the start that the Central Powers were at a huge disadvantage, particularly once the British Empire had joined the war. Rather it reflected real lack of enthusiasm and support for the war among the wealthy in general and the business class (and the City) in particular. The Cabinet of course was deeply divided and only decided to join in after the Germans invaded Belgium, before then there were only four people in it who supported taking part (Asquith, Haldane, Grey, and Churchill).
Another point to bear in mind is that there was a big rise in the price level during the war which came as a shock after the sustained deflation there had been between 1873 and 1910. The other part of the story is that while taxes did rise very sharply they still didn’t rise enough given that the government was now competing with private consumption for a lot of resources. Ludwig von Mises made this point about war finance on the Continent (his argument was that the government in war time should simply tax consumption goods very heavily so as to reduce private demand so that the government would be left with a clear field to acquire the resources it needed without causing inflation).
I am not sure any advice from Ludwig von Mises was ever worth noting