I got this link from Steve Keen, whose Substack is worth subscribing to.
Ted Cruz has claimed that the Federal Reserve should stop paying banks interest on Reserves:
The Federal Reserve pays banks interest on reserves. For most of the history of The Fed, they never did that. But for a little over a decade, they have. Just eliminating that saves $1 trillion.
The discussion is about 4 minutes and 30 seconds into this interview:
What Senator Ted Cruz in the US and Richard Tice for Reform UK are both now arguing is that central banks should stop paying interest on the reserve accounts they maintain for commercial banks. They are, unusually for them, right to do so, albeit that they are for all the wrong reasons.
I have long argued that these payments should stop (see a list of links to articles on this theme, below). There are a number of reasons for doing so.
First, the reserves in question – whether in the UK or the USA – were largely created by the governments of the country in question, when working in conjunction with their central bank during two crises. The first was after 2008, and it happened again during the Covid pandemic. The process was one of deliberate monetary creation, injecting what is properly called base money into the economy. The commercial banks were simply the mechanism through which this injection was done so that the benefit could reach their intended recipients, who were not the banks in question.
Second, what this makes clear is that these reserve balances were not generated by commercial bank decision-making. They are not the result of ordinary deposits. They are not the outcome of productive commercial activity. They are not even surplus shareholder equity. They are, quite simply, government-created money parked in these commercial banks' central bank reserve accounts, for which the banks did nothing to deserve compensation.
Third, these balances cannot be used in any other way. They are not transferable in the ordinary sense. They only exist in the base money system, and then only because the government created them. That means that they can only be removed by the government, either through taxation or through quantitative tightening. The banks are, in effect, captives of the system, but they are being paid to be so. In effect, their liquidity has been increased, reducing the risk to them of any form of failure, whilst providing them with the capital to ensure that inter-bank settlements can always take place, and they are now being rewarded with massive unearned profits for having been provided with this considerable benefit. This makes no economic sense at all.
Fourth, the consequence has been predictable. Commercial banks have been handed billions in interest payments, benefiting their highest-paid employees and shareholders. Meanwhile, public services have been slashed, people are being denied basic needs, and politicians claim there is no money left, so that austerity is required. Injustice is rarely more obvious than this.
Fifth, this policy has persisted because of economic ignorance, or worse, complicity, within the extreme centrist political class, who are dedicated to maintaining the status quo. They either do not understand, or refuse to acknowledge, that this money was created by the government and that payment of interest on these balances means that government-created money continues to flow into the coffers of private banks as a matter of choice, and not necessity.
The far right has begun to notice this, but only to advance their own agenda of slashing the state. Ted Cruz and Richard Tice are not interested in economic justice. They simply want smaller government. However, this issue should not belong to them. The funds in question should be reclaimed for public use. In a political system where it is pretended that money is limited in supply (even though it is not), these funds should be used to enhance care, education, social housing, and to restore opportunity. This money was created by the government, and it should now serve people's needs and not those of bankers. Interest should not be paid on most, if not all, of these balances.
These are previous blog posts by me on this issue.
- Murphy, R.J., 2024. The Bank of England should not be paying interest on the money the government gifted to our commercial banks. Tax Research UK / Funding the Future. Available here.
- Murphy, R.J., 2024. It is time to end the massive government subsidy that's being paid to the UK's commercial banks. Tax Research UK / Funding the Future. Available here.
- Murphy, R.J., 2024. Is Farage right on the central bank reserve accounts?. Tax Research UK / Funding the Future. Available here.
- Murphy, R.J., 2023. Why is the state paying interest to banks on money the state created?. Tax Research UK / Funding the Future. Available here.
- Murphy, R.J., 2022. How are the central bank reserve accounts created?. Tax Research UK / Funding the Future. Available here.
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Absolutely spot on.
What is offensive about this to me is that it gives people the appearance that this money belongs to the private sector and that the country is in hock and paying for money it has borrowed when in fact it has printed it. It is a complete con.
Great post.
The money saved on not paying interest shows that the benefits cuts could easily be cancelled.
Why is the B of E obsessed with quantitative tightening? Our stance is far too deflationary.
Reeves should be focused on making the tax system streamlined and progressive.
I suspect the BoE is been on QT because it reduces Reserves in the system and that the ” remuneration of reserves” question will shrivel away.
But it won’t – because overall more QE is likely in the future than QT
Dr Andrew Kitching: “Why is the B of E obsessed with quantitative tightening?”
I suspect because the current practice would cause public outrage if it became widely understood. So the BoE is eager to get back to a ‘corridor’ system, where the banks are reserve-constrained.
So in the vernacular:
I have loads of money (infinite), I give it to banks to hold for me & it costs them nothing to hold this money which also helps them in their activities.
& to help them a bit more I pay them to hold this money because ………..I’m mates with them & mates help mates – right?
at the same time I need to fix the house & the missus needs an operation but don’t have the money to do so cos I’m paying my “mates” to hold my money.
The above logic chain is no more or less wobbly than that foist on us by the BoE … & its “mates”.
I know the numbers involved are vastly different; but if I deposited a hundred pounds with a bank and they expected /me/ to pay them £4 p.a. for the privilege of sitting on my hard-earned, I think I’d be looking for another place to safeguard my rapidly eroding savings.* I realise that there might be unfortunate consequences for the banks if the government suddenly withdrew all their “savings”; but not paying billions of pounds in interest to them every year must surely be better for the country than enabling a few bankers to buy country estates.
* Nobody mention pension fund “managers”.
I like your last point.
A good blog post; thanks.
These large central bank reserves were created, as you say, by the Bank of England’s (BoE) quantitative easing program. In the case of the pandemic, the money was injected, via quantitative easing, so that companies could pay their furloughed workers. Had they not done so those workers could not have paid their mortgages or rents, leading to enormous numbers of debtors and, eventually, the collapse of the economy. So the government were right to create money.
The furloughed workers were not better off through the creation of this money. They managed to continue living much as they had prepandemic. But the money went somewhere. It went to those with assets. The owners of the rented properties, banks (and hence their shareholders), and others. Eventually it ended up deposited with banks, hence creating the large reserves. And the banks were happy to take it because the government pays them interest on their reserves, a nice little windfall for them.
Stopping paying interest on central bank reserves makes good sense.
Another issue is how might this excess of reserves be reduced? As you say it could be either by taxation or quantitative tightening (selling bonds). Both of these would reduce money in circulation which, in the current lacklustre economy, is highly undesirable. But the government could compensate for this by borrowing directly from the BoE, increasing it’s overdraft. The government has an unlimited credit facility with the BoE, and pays no (net) interest on that credit, because it owns the bank. The net effect would be to move the reserves into the BoE credit (matching the government’s overdraft). At that point, since the government is responsible for both it’s overdraft, and owns the banks credits, these two could, and should, be cancelled. This would leave lower reserves.
And the point of all this rambling? The government creating or destroying money via quantitative easing/tightening is a bad idea. It is only done to disguise direct money creation (or destruction) and, because of the subterfuge, messes with the rest of the economy. The government should just be honest and borrow directly from the BoE when it needs to do so.
Perhaps Reeves will stop paying this interest now that Reform is talking about it. After all, LINO seems to be keen on apeing other Reform policies.
Thank you, Richard.
Many Big Finance types like to boast about risk taking and explain why they, unlike “civilians”* (sic), as they often call people outside finance, deserve such rewards or, as they call it, “comp(ensation”). The explanations never exist to such subsidies, depositor protection (which reduces their cost of risk), barriers to entry, policy making in favour of too big to fail firms and bootlicker politicians, hacks and regulators. It’s time to call this out.
Russ Cheshire is right to highlight country estates. That is still the case, but, from the turn of the century and, particularly, from QE time in 2008, it’s no longer an estate in Blighty, but somewhere warm and sunny.
As executive director for financial stability, Andy Haldane tracked the money going out. One evening, about 2013, I attended a talk by him. Lots of talking out of turn when out of ear shot. Not just Haldane, but other attendees like me. That money could have been credited to the public, say means tested time limited vouchers, but Brown, Darling and Balls preferred to listen to special pleading by banksters.
*That sort of language sickens me. I like to point out that my dad and other relatives heard shots fired in anger, unlike “civilians” like them, and say thank goodness these types were not in the trenches with my family, all immigrants.
Thanks