A commentator on this blog asked me what the Ways and Means Account was yesterday. I thought the best way to respond was to create a glossary entry, but then I found I had already done that, and that the entry in question was in serious need of updating. This is the new version:
Ways and Means Account
The Ways and Means Account is the UK government's overdraft facility at the Bank of England. It allows the Bank to make sterling advances directly to HM Treasury.
Historically, the Ways and Means Account was routinely used to manage the government's day-to-day cash requirements. Since the Debt Management Office took responsibility for government cash management in 2000, the account has largely fallen out of use, although it continues to exist and a small balance is deliberately maintained on it.
The significance of the Ways and Means Account is greater than its current use might suggest.
The account demonstrates that the UK government has access to an account at its own central bank through which the Bank of England can provide it directly with sterling. During the Covid crisis in 2020, the Treasury and Bank explicitly agreed that the Ways and Means Account could be temporarily extended if necessary. This would have allowed government spending to continue without the Treasury having to raise corresponding sums immediately through financial markets.
Under current institutional arrangements, this is not how the UK government normally manages its finances. Government cash management is undertaken through the Debt Management Office, while gilts and Treasury bills are issued as part of the government's debt-management programme.
The Funding the Future perspective
The Ways and Means Account is important because it exposes the weakness in the claim that the UK government is inherently dependent upon financial markets to obtain the pounds that it spends.
The Bank of England can create sterling and provide it directly to the Treasury through this account. The government normally chooses not to use the Ways and Means Account for this purpose because the institutional framework instead requires extensive use of government bond issuance.
That is a policy choice, not a technical necessity.
The Ways and Means Account therefore illustrates a fundamental difference between a currency-issuing government and a household or business. A household requiring an overdraft must obtain money from its bank. The UK government has an overdraft account at the institution that creates sterling.
The fact that the account is now little used does not diminish its conceptual importance. It demonstrates what is possible within the UK monetary system and helps explain why the government's supposed financial dependence upon bond markets should not be confused with an inability to create or access its own currency.
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former manager of mine used to talk about the ‘Ways and Means Act’ which basically meant
‘We know what needs to be done and we will do it, we just need to work out how we apply the rules to do it’
So, next time someone spouts the “household analogy” to me, or talks about how they have to run their business within its means or go bust, I may ask them to explain how their household or business “Ways and Means Account” works, in the hope that it provokes a “What do you mean by a Ways and Means Account? I don’t have one of those.” question, followed by an explanation of why a country is not like a business or a household.
Might work better than a straight “you’re wrong” argument?
Maybe. Worth a try.
Jamie Driscoll & his team have produced a report titled “Hostage Nation” which I am sure will be of interest to you. Your “Taxing Wealth Report” gets a mention. I hope this link works. If it doesn’t, you can search for Hostage Nation.com
[Ed note: the link did not work]
Thank you.
sorry about the link failure – hope you have found it via the dot com link, if not send me your email address & I will forward it.
I did, thanks.
Correct me if I am wrong, but the bank of England cannot charge interest to the treasury, which is good – because we spent more than the defennce budget servicing our debt. However, W&M creates NEW money, ie it adds to the amount in circulation, whereas borrowing comes from money already in society, how is this difference felt?
There are two misunderstandings here.
First, the Bank of England can charge interest on the Ways and Means account. There is no rule preventing that. But because the Bank is ultimately part of the state, interest paid by the Treasury to the Bank is very different economically from interest paid to private holders of government debt.
Second, the distinction you draw between Ways and Means creating new money and government borrowing using money already in existence is not really correct.
Government spending creates new money when it is spent into the economy. That is true whether or not gilts are subsequently issued. Selling gilts does not provide the government with money that it otherwise could not spend. Instead, it exchanges one government-created financial asset, money, for another, a government bond.
Ways and Means makes this particularly obvious because the Bank of England can simply credit the government’s account, allowing spending to take place without an accompanying bond sale.
The important economic question is therefore not whether Ways and Means creates money whereas borrowing does not. Government spending creates the money in either case. The question is what happens afterwards.
Tax can cancel some of the money created by government spending. Bond issuance can offer people an alternative way of holding their resulting savings. If neither happens sufficiently and there is more spending in the economy than available resources can satisfy, inflation can result.
So the real constraint is, once again, the capacity of the economy, not whether the accounting mechanism used happens to be called Ways and Means or government borrowing.
Richard and I have crossed on this before, but I’m convinced that using words like ‘overdraught’ and ‘debt’, however technically correct in a formal accounting way they may be is the wrong approach when trying to debunk the household analogy to Mrs Thatcher’s ‘every housewife’, for whom these words immediately invoke fear. Simplicity is of the essence.
Money is just numbers stored in a bank’s computer. Your bank balance is just one of many numbers in your bank’s computer.To put more money in your account your bank just adds to that number. But it cannot do that at will, a formal procedure must be followed.
When I pay you $1000 I issue an instruction to my bank to pay you. My bank takes 4 steps:
1- Security. Is this a valid instruction?
2- Check account balance. Is my account balance at least $1000?
3- Subtract $1000 from my balance.
4- Honour the payment. This gives formal permission to your bank to add $1000 to your balance.
In effect $1000 has been transferred from my bank account to yours, no new money has been created.
The government’s bank is different. This is the national central bank (BoE, Fed, RBA etc.) When the government wants to pay you $1000 the steps are:
1- Security- as before.
2- Not Applicable. The government has no bank account in the form you and I do. There is no balance to reduce.
3- Not applicable. See 2.
4- Honour the payment. Your bank gets formal permission to add $1000 to your account.
You get your money just as when I pay you, but now $1000 of brand new money has been created out of nothing. It has simply been ‘spent into existence’.
I hear you.
I think people need things they know to latch onto.
But let’s not fall out over it.
We’re not going to fall out, but I think the problem with using words like ‘debt’ and ‘overdraught’ is that those are the words that people DO latch onto and immediately stop listening to the rest of the message. I realise that my explanation is the “Noddy and Bigears go to The Bank” version but that’s what is needed as the first step.
Actually the first step is getting people to wholly accept the notion that money is just numbers stored in a computer, that the result of their life’s struggle to save up for a secure retirement is just a spreadsheet and that when they look online to check their balance the number they see on the screen isn’t just a record of how much money they have, that number IS the money they have. I’m quite sure my late parents would have had great difficulty becoming comfortable with that notion and always lived in fear of the bogeywords ‘debt’ and ‘overdraught’. Once this has properly sunk in then the idea that a central bank can create new money simply because it has the lawful permission to send a message to a high street bank that says “Open the spreadsheet of Richard Murphy and type + 1000 (ENTER)” without having to type – 1000 anywhere else becomes clear.
I will think on it