As far as most people know, the job of the Bank of England is to control inflation, which it has proved itself utterly unable to do. Meanwhile, its essential roles in money creation, government funding, and bank and financial services regulation are almost all ignored when they are really important. We need a Bank of England that concentrates on the jobs it needs to do, not the one it can't do.
This is the audio version:
And this is the transcript:
Time and again, I have said that the Bank of England should lose the responsibility for setting the interest rate policy of the United Kingdom and, therefore, for controlling the monetary policy, which is a fundamental part of UK economic management. And I stand by that opinion.
Nothing will persuade me that the Bank of England should be in control of the largest part of our current economic policy within this country. But if we did take the powers of the Monetary Policy Committee away from the Bank of England and transferred them to where they belong, in the Treasury, where these monetary policies can be coordinated with the fiscal policy that the Treasury runs in a way that might be highly beneficial to the overall effectiveness of the management of the UK economy what would there be left for the Bank of England to do? Well actually, quite a lot. And I think it's important that we understand just how significant the role of the Bank of England is as our central bank.
Remember, the Bank of England's primary job is to Is to issue money on behalf of the government - and I'm not talking about our notes here - the coins, by the way are issued by the Royal Mint – I am instead talking about the fact that every single time the government spends the Bank of England extends its overdraft to the government and creates new money. As a consequence, literally all government spending is funded by the Bank of England.
The effect of that money creation is cancelled through taxation, which is managed by the Treasury, but the Bank of England creates the money that is taxed in the first instance. And, of course, if it didn't create the money to enable the tax to be paid, there would be no money available to pay that taxation. So, things have to be in that order.
This fundamental task of the Bank of England is not fully understood by almost anyone. And if it was, the Bank of England would be seen as a much more significant organisation than it is at present within that role.
There's another task that is absolutely fundamental that the Bank of England undertakes and that is to regulate the banking system of the UK. That is a major task that it must undertake. It does, in fact, set the rules under which all the commercial banks that operate in this country do operate. That's important. Why? Because, as we saw in 2008 when commercial banks decide to fail because of their own recklessness or because the regulation under which they have been operating is not good enough, and there is very good reason for thinking that it was not at that time, and that the Bank of England did seriously fail us, then the cost to society is very high.
So, the Bank of England should be concentrating on getting that job right.
Are they? I don't know. Why do I not know that? Because at present, one of the facilities that they supply to ensure that interbank relationships are properly regulated, which is the banking facility that the Bank of England actually supplies to our commercial banks, is being progressively withdrawn by the Bank of England.
I am referring to the quantitative tightening process by which the balances on what are called the central bank reserve accounts that the commercial banks maintain with the Bank of England are being steadily reduced to the point that a time will come when there will be insufficient credit in the interbank trading system to ensure that bank solvency can always be guaranteed. That worries me.
What else should it be doing? Well, the Bank of England actually has a responsibility for regulating quite a number of other activities, including the life assurance sector, even though very few people seem to understand that outside the financial services industry. So, we do need the bank to do that as well. Why? Because we are dependent on a large part of our financial services industry for the sake of our own well-being. Many of us will have products which are sold under regulation by the Bank of England.
But the whole focus of its public identity is centered on the activity of the Monetary Policy Committee. And the whole focus of the Monetary Policy Committee is upon controlling inflation, when there is no evidence that it has actually had any real effect in achieving that goal. Controlling interest rates in the UK has never had an impact on global fuel prices, oil prices, gas prices, wheat prices, fertilizer prices, or anything else that drove inflation upwards in 2021. But the failure of the Bank of England to properly regulate banks did have an impact in 2008 and the global financial crisis then. But on inflation, the Bank of England Monetary Policy Committee might never have achieved anything.
So, the public persona of the bank is all wrong. That's one of the reasons why we should be moving monetary policy out of its control, so that we understand the importance of the Bank of England for all other aspects of our life, including the smooth operation of our commercial banks.
And if, in due course, then we do get what is called a central bank digital currency, as some people are proposing, which means that you and I might be able to bank directly with the Bank of England, then we really do need to understand the consequence of that for the Bank of England itself, for our commercial banks, and for the stability of the financial system in this country. And again, I don't think the Bank of England is at present making nearly enough noise about what all this might mean and talking about the consequences for us all.
The Bank of England does then have enormous jobs to do but it is putting all its focus of attention on the thing that it can't do, which is control inflation. I would really like it to get on with the job that we require that it do, which is regulating financial services and banks. I would rather it had nothing to do with the undemocratic control of economic policy in this country.
We need a Bank of England. It has to be effective. But we're not getting the Bank of England we need at present. And therefore, it does require change.
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So who makes the first move in a change?
The government
Ok, thank you.
We do need a central bank to facilitate interbank payments. The government needs a bank to make/receive payments. We do need regulation of the banking system. We do need a body that sets interest rates. We do need a body that conducts monetary operations in the market.
Now, if you were starting afresh you would not create the Bank of England as we know it today…. but we are where we are. Starting from here, what changes that are politically feasible (and that is important) that will improve things?
For me, it is two things.
First, get rid of the notion that monetary policy can sensibly be set without close coordination with government.
Second, get the right people making decisions at the BoE today…. and a system of choosing the right people in the future. In one sense I do want bankers running my central bank (just as I want a plumber to deal with my pipework)… but bankers (all of them) need to understand that they are servants of the real economy and society – not masters.
Clive,
The problem of starting “where we are” is that it has led to poor “coordination with government”. It has led to regulation of the banking system in the UK in which: “The Bank of England prudentially regulates and supervises financial services firms through the Prudential Regulation Authority (PRA)”. And if you argue these are not banks, one of the problems is that money operations change dynamically in the real world – and I invite you to offer a 100% watertight definition of a bank. When does insurance become banking? In a crisis. The Financial Conduct Authority (FCA), which claims “prudentially” to regulate 41,000 firms is accountable to the Treasury, as far as I know. This looks to me like a typically British, badly integrated set of responsibilities begging for the loss of vital data and knowledge, when we urgently need to achieve “coordination with government”. And I wish I had your confidence in “bankers”, but I don’t – and it worries me that senior bankers who learned their trade (and acquired their banking priorities and values) in the last thirty plus years, are making the big decisions. Sorry, but in Britain we too easily brush over the flaws, have inquiries, write sober reports describing all the terrible failures. And then file all of it in the bin, and carry on (almost) regardless with solutions that structurally – take the easy way out of solving big problems.
To make my point clear, if we need a BoE with responsibility for regulation of the banking industry (I note your wording neatly sidesteps this), then the responsibilities of the PRA and FCA should not be sub-contracted, but directly within the remit and responsibilities of the BoE. Then, assuming they have the right network, information and data; they might know what is going on. And go further than classic British regulation, respond to the disaster they never saw coming.
I think that reasonable
This is v helpful, and also correct. But to pick up on the repatriation of interest rate control to the Treasury, where it resided before Chancellor Brown abandoned it to the BoE MPC, that will still leave us with a problem – which is that it seems to me that you can’t slide a cigarette paper between the monetarist Treasury, the monetarist BoE governor and the monetarist Chancellor, who all practice their destructive self-serving brand of 55
Tufton St./Oxford PPE neoliberal monetarism.
What you say above is correct, it should be done, but where are the people who will make that happen, in either the House of Commons, the Treasury OR the BoE (or the mass media)?
And so far, where is the public pressure to effect change?
You are working hard to discredit the lies of the monetarist establishment, but so far, the general public’s awareness, as I sense it (on that omnibus) is:
– Austerity isn’t working (and I hear the pundits arguing for more “investment for growth”, usually suggesting government borrows from the City, without mentioning BoE money creation).
– The politicians don’t seem to have answers
– The public, and the media who influence them, are VERY focussed on the “we can’t afford it” mantra.
– Reform UK are waiting in the background
I have “omnibus” conversations about this almost every day with my neighbours, friends & family. But it’s going to be a long haul and you are doing great work.
Thanks
And good luck
When day there will be a critical mass of understanding
That was my thought. No reform of these institutions will matter if they’re populated by the same old neoliberal cabal finding new ways to say “we can’t afford it”.
As far as most people know, the job of the Bank of England is to control inflation.
I am glad you made it clear that the Bank of England (and to some degree the US Federal Reserve) was almost powerless to control the inflation caused by COVID (different reason for COVID inflation in the US from those in the UK) and inflation caused by the Ukraine War effecting UK energy prices.
What I try to drive home to my Yank friends is that the price of oil affects food price overall almost more than anything else.
This was a great video; one of your best!
Thank you
I actually wondered whether to put it out, so what do I know?
Richard,
You are not the best judge of your own work. No one is the best judge of their own work..
True
It’s why in part I rely on Thomas when we make these. If he likes them they’re usually ok
One in four we remake of abandon
“One in four we remake of abandon”
Did you mean “One in four we remake OR abandon”?
My Yank to Limey and Limey to Yank sometimes fails me. LOL!
Or
Too much haste, as usual, and moderating on my phone – which I hate
It was in the Labour party manifesto to do away with non-dom status. The Tories intended to do away with it.
So why are their headlines saying that the Treasury is reconsidering the proposal? It is not for the Treasury to reconsider government policy, any more than it is for the BofE to do so. Both their roles should be to advise.
I am lucky enough to have significant savings. When the Bank of England keeps interest rates well above the rate of inflation, it is equivalent to giving me an inflation-busting increase in income. The banks take quite a lot of the difference, but even so…
I fail to see why giving me more money to spend is expected to reduce inflation.
When Labour bows to the Bank of England’s superior understanding, I can see that this helps to increase inequality.
But creating greater inequality seems a strange policy for a Labour Govenrment
Agreed
So Mervyn has got it wrong…… again? :
“Record high inflation was caused by the Bank of England keeping interest rates too low for too long, according to its former head”
Total nonsense by King
I’m not sure Id trust the Treasury any more than the BofE when it comes to interest rates. Under any government. An alternative might be to have a much more independent MPC but made up say of 1/3 economists/finance, 1/3 business (large and small) and 1/3 local government/regions/not-for-profits. In other words a group who really understand the wider economy and society.
And take any regulation away from the BofE with an independent body, again with a much more cross-sector governing body, and with real teeth and resources.