I have published this video this morning. In it I argue that it's claimed that the Bank of England is independent of the government. Almost certainly, that's a complete sham. But it's one that's been used to impose policy against the best interests of people in this country. This pretence has to end, and the government has to be accountable for all our economic policy.
The audio version of this video is here:
The transcript is:
If you listen to our politicians, if you listen to the Governor of the Bank of England, if you listen to our journalists, all of them will tell you that the Bank of England is independent, and I doubt that that is true. The claim that the Bank of England is independent is based upon something called the Bank of England Act 1998, which was passed by the Blair government very soon after it came into office.
It was introduced in 1997 and became law in 1998. It was the brainchild of Ed Balls, who is now the husband of the current Home Secretary, Yvette Cooper.
The aim of Bank of England independence was to take away responsibility for running the Bank from elected politicians. Plain, straightforwardly, Labour did not believe that elected politicians could be trusted with running the Bank of England because the public, they thought, didn't trust politicians with money. Therefore, they wanted to pass over the running of the Bank of England to ‘wise people' who they claimed would do it better than any politician could.
The fact that this revealed that the Labour government had no confidence in itself seems to not have been noticed at the time, and every politician since then has said that this is a very good thing that they should not be trusted and that these ‘wise people' should run banking policy and monetary policy for the UK economy.
I stress the point, banking policy and monetary policy because, in fact, the Bank of England does regulate the financial services industry, or large parts of it, as well as run monetary policy as part of the total economic policy, for which the government as a whole should be responsible, but for which this part has been outsourced.
Now, was that wise?
In my opinion, no.
Why? Because monetary policy, which is trying to control the economy through the setting of interest rates to control inflation is really very simple and very straightforward, except that there's very little evidence that interest rates do actually control inflation.
But, that task is handed to them, and the management of the rest of the economy is left with the UK Treasury. So, the fiscal policy side, which is all about the balance between government spending and taxation, is left with the Treasury. And the control of inflation, which is, of course, impacted by that relationship between the amount of government spending and taxation, is given to the Bank of England, the two then being unrelated, which results in a lack of coordination and discordant economic policy.
So, we have an economic policy that is designed to always be under stress. The Treasury may want one thing, the Bank of England may want another. We saw this most emphatically during those relatively few days when Liz Truss and Kwasi Kwarteng were responsible for the Treasury and the Bank of England most definitely was going in a different direction. But frankly, this happens quite a lot.
But in reality, is this quite as significant as it seems? If you actually read the Bank of England Act 1998 - I have, and I suspect I'm one of a tiny number who bothered to do so - you'll find that it actually includes a provision that says that if the Chancellor does not agree with what the Bank of England is doing, then the Chancellor may put an order before Parliament to overrule the Bank.
Now there have to be supposedly exceptional economic circumstances when this will arise. And, that sounds as though it's a pretty difficult thing to prove, except the decision that there are exceptional economic circumstances appears to rest with the Chancellor. In other words, they can do this whenever they like, if they so want.
But, they don't even need to do that. Because they have the power to overrule the Bank available to them at any moment because of this legal provision, a wise governor of the Bank of England will listen to what the Treasury says to them.
And they do, of course, talk to each other. The fact that we have high interest rates at the moment is not because the Bank of England is in an outright disagreement with the government. If the government had sent a signal to the Bank of England that interest rates should fall, I think you would have discovered pretty quickly that those interest rates would begin to tumble.
But that isn't the message that's being sent. These people will sit around a table together agree broadly what they want, and although there are external members of the Bank of England Monetary Policy Committee, it is actually controlled by bank employees. There are five of them as opposed to four external members, and therefore whenever the bank employees want to get their way, whatever the external members think, they will have the majority, and therefore if they were told by the government, you will cut interest rates, that would happen.
Now, it isn't because I don't believe that Rachel Reeves wants interest rates cut. But that doesn't mean to say the Bank of England isn't under government control. In fact, I'd say it's evidence that the Bank of England is under government control because Rachel Reeves so firmly believes in the policy that the Bank of England has established. But, let's just stand back again and remind you of what I said at the outset.
Everybody says the Bank of England is independent, but my belief is that it isn't. It actually will always work at the behest of the Treasury at the end of the day. There will never be an exceptional circumstance where the Chancellor has had to overrule the Bank because it will never come to that.
The Bank will always do what the Government wants. And therefore, to pretend there's independence is disingenuous at best, an outright lie at worst, if you like.
But it's an incredibly useful pretence to politicians who can claim, “Oh, these wise people have dictated that you must suffer for this policy”, which they would otherwise impose. And that's incredibly convenient for a Chancellor who doesn't want to accept responsibility for imposing what harsh measures they think they would like to impose otherwise.
So this is a political sham to deliver economic policy that is against the interests of the majority of the people of this country, as that which has been put in place since late 2021 has been, and get away with political responsibility for it.
I don't believe that that is right. I believe that democratic accountability for the economic policy of a government should rest with the elected politicians, not with some officials who are supposedly in charge. I believe we should end this sham and let's get the Bank of England back under central government control. That's what we should be doing. Let's get on with it.
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What would be the point of taking away operational independence from the BoE? I can’t see one if they already do whatever the government want. Maybe that sentence was included by mistake, but it only makes sense if the BoE does not currently do whatever the government wants.
Hoiw abut honesty in government?
How about readily apparent accountability?
How about explicit policy co-ordination?
How about stripping power from unelected people?
Are you really saying you cannot see that?
Why is there a plank in your eye?
My view Graeme?
Balls by name. Balls by nature.
Ed had no idea what he was really doing. It sounded like an innocent, sensible idea (like most Neo-liberal ideas sound when first aired) to hand over a complex job to ‘some experts’.
In practice, what is was was to hive off a piece of government responsibility – essentially privatise it – in broad daylight so that the BoE would be able to join the real shadow opposition in this country – the capital order, the establishment etc., and work for them.
What Ed Balls did not realise – or did he given the company he keeps presently? – was that handing over of such responsibility to ‘experts’ is also a prelude to austerity that was to come.
Cynical?
No.
Possible?
Well, look around you chap. I’d say ‘Yes’.
Thank you and well said, Richard.
I would add perverse incentives such as governors seeking a second term and governors who have been regulators, ahem, ignoring the misdeeds of banksters turned politicians, including at great office of state level.
With regard to Brown’s announcement of independence for the BOE, that was as much a sign to the markets and media that New Labour was indeed a new form of Labour and on their side and, as per advice from Campbell, Mandelson and Draper, Labour would control the media agenda.
A former deputy governor and other former officials would like a public enquiry about that and the institutional reorganisation and its impact on the economy and financial stability, including papers sealed under the thirty year rule. These former officials, one of whom was twice threatened with dismissal by the Treasury, want their day in court…
Declaration: I wrote a masters on central bank independence in 1994 – 5, opposed the idea then and oppose it now, and contemplate updating the work into a doctorate and including the run up to and aftermath of 2008 and covid and central banks getting macro-prudential tools.
Completely agree,
This needs to happen ASAP.
In a nutshell giving the Bank of England independence was yet another scam from one of the country’s scam parties formerly the Labour Party! This has been the history of this country – endless scamming. The question is what changes need to be made to stop it!
“Everybody says the Bank of England is independent, but my belief is that it isn’t”
You offered a series of facts that suggest that the BoE is not independent of gov – indeed independence is a fig-leaf. Thus I’d suggest given realities we are well beyond the “belief” stage of things. It is also note worthy that B.Liar said that on first going into No 10 his overriding emotion was: fear. I suspect that Broon felt the same.
Thus possibly accounting for the BoE act. Politicians, cowardly as well as stupid.
Might this be yet another HMG – mainstream media deceit and further example of the oligarchical collusion between (senior) politicians and the mainstream media which uses/abuses the following
1) state education taught ignorance
2) ditto lack of analytical attitudes and skills
3) ditto lack of assertive, “take anyone on” questioning attitudes and skills
All of which are consistently, if indirectly, taught in state schools controlled by the draconian 1988 Education Reform Act and its agents?
A note for Steve:
I teach my students that ERA 1988 and subsequent actions contain all the seeds of our current misfortunes. (Blair lied to attain power then doubled down to create further chaos, despite some socially liberal tinkering). In many ways we are largely still in the 1860s with minimal education for the Populace.
” Bank of England Act 1998 – …. includes a provision …. if the Chancellor does not agree with what the Bank of England is doing, then the Chancellor may put an order before Parliament to overrule the Bank………. they have the power to overrule the Bank available to them at any moment because of this legal provision, a wise governor of the Bank of England will listen to what the Treasury says to them”.
A Governor of the BoE is never going to stand out against Treasury and, even more against Parliament. It will never be expressed; because Governors ‘get it’. Nods and winks are sufficient leverage.
The whole point of the 1998 Act is to move government responsibility for monetary policy and inflation off the books and far away from Government. The reason is twofold, for government to duck the responsibility (without giving up the latent power), and second for Neoliberalism to show that money and economics can be privatised in its entirety (even when they know perfectly well, it isn’t and can’t be: but you can deceive the public).
The outcome is easily illustrated. First, according to Sunak as PM Inflation was the responsibility of the BoE alone; that meant it was nothing to do with him, and not his fault when inflation rises. Then, if inflation falls Sunak takes Government credit for the fall in inflation – which he did (implying he really is responsible in spite of denying it). You have your cake, and eat it. But he is responsible for what the BoE does, because only he is answerable to the British people for national decisions.
Second, if a world crisis strikes the supply or supply chain of a basic, vital imported commodity of critical national importance; the BoE probably will have no power, or sufficient levers to stop the adverse impact. It will also have to attempt to have some effect on the consequences for Sterling as well as an inflation it has no power to influence directly. All it can do is make things harder for the most vulnerable to inflation, through interest rates. Only Government can develop policies, over energy; for example to minimise the dangers to British people of energy supply that is not wholly dependent on the volatility of world market prices, or on Russian oil and gas; by doing precisely nothing about either.
The Conservative Party idea of Government is to privatise it; and leave everybody to cope alone with the chaos that inevitably follows. The Labour Party has not changed the basic idea. GB Energy alone will not fix it in anyone’s life time.
Because I have it handy, here’s the relevant legislation https://www.legislation.gov.uk/ukpga/1998/11/section/19
This is the leading clause “The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.”
Heh… I like that bit about ‘consultation’ #cracksknuckles
It goes on to say a statutory instrument has to be laid to enforce any direction. I gather though that since the threat is real it need never actually be carried out. Nods and winks will get the job done.
Thanks
Crown prerogative ……..
Thank you to PSR re Balls.
Balls’ brother Andrew was then a leading light at PIMCO, the world’s largest bond investor. This is the same gang that tried to have their friend and PIMCO colleague Mohammed El Erian at the BOE. They got his wife Minouche Shafik in.
Col Smithers, I think you missed out a P between the M and C in the company referred to. The name would then start to reflect the nature of their financial activities. Indeed it remains an open question if Italians active as gatekeepers wrt “the world’s oldest profession” dressed in pin-stripe in an attempt to appear as respectable as bankers, or perhaps it was the other way around? 🙂
Thank you, Mike. 🙂
You make the error in assuming that the public wish more power to politicians and the government.. they 100% do not. Politicians are not trusted, civil servants enjoy a better reputation.
There is not a shred of evidence to support your claim
Of course they are sceptical, but most want a lot more public services
Amy
Let’s try this.
The ‘State’ is a permanent, enduring idea along with its apparatus – the Civil Service, court systems/legal, military, central banking, geo-political protection, territory definition etc. To that you can add public services – past and present or declining.
Politicians on the other hand just pass through via a voting process that permits them to be in charge, and these politico’s are all to often part of a self governing organisation called a ‘party’ whose aim and objectives can get woven into, be at odds with and affect those of the State.
It is the impact of the politicians and their parties – the impermanent part of the State – that has always interested me, and what they get up to when they have power.
It is this lot who can be the most destructive, self seeking, corrupt and short sighted bunch whose negative impact on the notion of the state needs to be teased out by the people whom you quote, and be separated out more.
What we have had in this country I think since Thatcherism and her City of London boot boys – all nice posh accents, private schools and that – is not democracy but a kakistocracy – government by the most unprincipled and least qualified people. And this influence endures.
The State can be a force for good or a force for evil. British history has many low points, but I’ve always considered myself lucky to live here until only very recently.
Our politicians use the State’s power to undermine the State’s credibility in the people who should believe in it, make life easier for those who fund them by not using state power and don’t use the State’s power to make life easier for others (the poor).
Think about it. I think I provide a succinct and fair summary.
‘The State’ and ‘the politicians’ are not the same thing Amy.
We can start by believing in the State and asking what it should do for us – those of us whose work provides GDP, keep order, fight fires and fight its wars and look after us when ill and infirm and even clean our windows and produce our food.
Ancient rulers knew this – from China to the near East. Look after the people, and the people will look after you. Reciprocity. That is a real debt from the State to the people, and the people to the State – our obligations to each other.
It is modern ‘politicians’ who break this relationship and where the blame ALWAYS lies.
Demand more from your State and do not give up.
Insist on and vote for better politicians.
Because without a State – you are perhaps nothing in this world as it is today.
Thank you and well said, PSR and Richard.
My phrase is that voters should swagger around as if they own this country.
One thing that I have observed from regular visits, work and study in France, the proximity of the state by virtue of the mayor’s office and prefecture. One need not go far to kick up a fuss. There’s a figurehead, too.
I may quibble with Richard as, over the past twenty years, I have begun to revise downwards my opinion of civil servants in Whitehall, DC and EU capitals. Jeremy Hayward (Greensill), the diplomats who co-wrote the sexed up / dodgy dossier, the civil servants involved with the post office, the officials working on the 2008 bail outs and EU presidencies joining the firms they used to supervise etc. in unseemly haste etc. are increasingly the norm. It’s the incentives and education.
The education and prejudice in recruitment…..
Richard. Well done!
I agree on all counts.
As someone who gets to talk a lot to politicians through volunteering and attending donation events, I would say there is another problem. Politicians are bewildered by the current system and the loanable funds fallacy. That suggest to me we need a simpler system, something more like Bradburys or Greenbacks – a digital version of national banknotes. How can they govern something they cannot understand?
But why is money so hard to understand when it is so simple?
Bertrand Russell once remarked that the humans seem to be tuned to understanding a certain level of complexity; that, just as some things are too complex for us to easily understand, other things are too simple for us to easily understand.
Richard your response reminds me of a friend a group of us golfed with in our late teens. He was a scratch golfer by the end of the summer. The rest of us are still golf masochists over 50 years later.
The most successful political movement to make money serve the people was the American Greenback Party in the 19th century. It wanted to continue the economic miracle that employing greenbacks had produced. It also had a very progressive platform.
https://en.wikipedia.org/wiki/Greenback_Party
Most great social movements have simple paradigm shifts that the general public can understand.
The very idea of the “expectations-augmented” Phillips curve, NAIRU and fiscal policy having to bend round them, is antithetical to the Labour Party. Or at least to any party (supposedly) representing the interests of people who work for a living.
It isn’t even good for predicting and countering inflation, but it’s a great way to suppress wages and workers’ bargaining power.