HM Treasury and the Bank of England issued a Memorandum of Understanding between them yesterday. This relates to the supposed independent funding of the Bank and how that arrangement will be managed.
Let me be candid about this document. It is a complete joke. The Bank of England is entirely owned and controlled by HM Treasury.
The Bank's job is to act as banker to the government, working under the direction and control of parliament through the Treasury. What it might do is very strongly controlled by statute.
As a regulator, the Bank is just another government agency.
As a purchaser of the government‘s own debt, of which it still owns more than £650 billion worth, the Bank of England is complicit in the pretence that is called quantitative easing. This arrangement pretends that the Bank independently buys government bonds in financial markets when everyone knows that the government was simultaneously issuing similar amounts of debt into those markets, meaning that, in effect, the Bank was directly funding the government as a result of a direction from the government that it should do so. To pretend in that case there needs to be an understanding between the parties is farcical.
If the government chose to say jump to the Bank of England, then it would jump.
If it told the Bank to stop quantitative tightening, which is entirely within its power, then that is exactly what the Bank of England would do.
And, if the Treasury told the Bank to cut interest rates, it would.
In that case, to cut through all the crap in this document, what it says is that arrangement is that if the Bank of England makes a profit, it will return that profit to the Treasury, and if it makes a loss, then the Treasury will make good the bank's deficit. In a narrow band between these two possibilities, a game is played which suggests that the Bank will fund itself from charges made, but the bottom line is a simple one: what is the Bank's is the Treasury's, and if the Bank loses money then the Treasury coughs up. If that's what independence means to them, then they're taking us to be fools.
Taken as a whole, the document is as opaque, and as deliberately obscure as have been most tax haven structures that I have ever read, and I have read a lot. Throughout it what is apparent is that the economic substance of this relationship is nothing like the legal form that the parties are pretending exists, and I find that exceedingly annoying, and disingenuous.
I expect honesty from a government, and I expect honesty from those who hold very well remunerated positions in what is in reality a senior civil service post, which is what those signing this on behalf of the Bank enjoy. In my opinion, this is not an honest document. It is time that we stopped playing games by issuing pretences such as this.
The Bank of England is not independent.
The Bank of England should not be independent.
There is absolutely no excuse whatsoever for separating the two supposed branches of macroeconomics, namely fiscal policy and monetary policy, with them supposedly being managed by separate entities even though in reality it is very obvious that both are in practice under the control of the Treasury, with the Bank of England then being used as a supposed constraint on what can be done. Such constraints do not exist. The charade has to end.
When will we ever get grown-up economic policy, and grown-up government in this country? All this document proves is that we are a very long way from both right now.
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A bit of hopefully helpful proofreading:
“The Bank of England is not independent.
The Bank of England England should not be independent.”
There is a double ‘England’ in the second statement.
Thanks
It is always hard to edit your own work – you read what you think you said.
It also appears that Quantitative Tightening isn’t mentioned in the document as one of its normal operations, and that under its Principles Other Operations should have approval.
There’s then an argument that under the MoU the BoE should be asking the government for permission before engaging in a loss-making policy that so clearly goes against government goals. There’s no indication that it has done so, and perhaps the government should be indicating that QT falls under Principle 4 of the document and specifically assert its influence as agreed under the MoU.
Thanks
Skimming the 19 pages of the MoU I didn’t spot any mention of Debt Management.
I am reminded of the discussion of the ‘full funding rule’ exactly one month ago:
https://www.taxresearch.org.uk/Blog/2025/01/13/moderation-delays/#comment-1002070
And the conclusions:
1. debt management decisions always have monetary consequences and should therefore always be seen as part of monetary policy, and
2. monetary policy will be better organised if the Bank of England and the DMO work together than if the Bank’s interest rate decisions and the DMO’s operations are at cross purposes.
No sign of any opportunity being taken to introduce joined-up-thinking then. 🙁
Thanks
An agent by definition cannot be independent of his principal and as I have pointed out since 2013 the de facto legal relationship between the Treasury and the Bank of England is an agency relationship.
In accounting terms this manifests itself in the fact that the Consolidated Fund, Ways & Means and Reserve Accounts at the Bank of England are all Memorandum Accounts, not Accounts Receivable and Payable.
So the Big Lie at the dark heart of the Treasury/BoE is that the Government banks with the Bank of England, and that the National Debt is debt, rather than Stock – discounted pre-payment of taxation.
The proof is in the language we use: Tax Return & Rate of Return both references to the Stock portion of a Loan Tally.
https://neweconomicperspectives.org/2013/03/the-myth-of-debt.html
Agreed
Chris
what is a memorandum account?
A Memorandum is a note of record. So the two types of the Tally stick accounting record (which pre-dated double entry book-keeping by centuries) were (a) the Memorandum Tally, which served as a proof of payment/value exchange & hence title and (b) the Loan Tally, which was a record of a promise of a future value exchange.
When an agent acts on behalf of a principal he maintains a Memorandum Account which is mirrored by the account of his principal on whose behalf he was acting. He is not a counterparty to his principal.
The fact is that a Bank of England Note issued in exchange for value spends exactly the same as a Treasury Note to the same value.
https://blackandunderwood.co.uk/bradbury-and-fisher-the-legacy-in-british-banknotes-treasury-notes/
You are right, it is a silly game.
However, we have the institutional set up that we have and given a long list of priorities, altering this set-up is not high on my list because, with modest tweaking the current set-up could be fit for purpose.
How? Well, in one line – Get the right people on the MPC!
I have just made a video on this
Absolutely Clive. My suggestion for one of the 4 external members is the lady from Newcastle who heckled “that’s your bloody GDP, not ours”
Would it be going too far suggest that that the BoE has essentially privatised itself without having to go through parliament?
The implications seem like it to me.
Grown up? This has all the maturity of a child being let lose in sweet shop.
I wager that the very rich children who really run the world as a result of this will now have more say. I reckon it is these people Andrew Bailey talks to a lot.
I tend to agree: it has been captured
Well lets try again.
Why would the treasury write this nonsense? Why would the BoE capitulate? Maybe the hard right wing economics Austrian school dominates the whole of the sector. Maybe its not in their interest that people should know or understand what really occurs with money, then there’s the popularity of MMT which refutes the argument of there being no money which is gathering popularity. But certain of us who are convinced their way is the only way will oppose them too, only because MMT isn’t 100% flawless, only 99% flawless and that’s not perfect enough. So why not tell it like it is, we are being LIED to not only by our politicians, but our economists, our civil servants, our journalists, our bloggers, who else? Is there no one with morals or scruples? Because right now, there are no alternatives.
Could the fact that the governor of the Bank of England in not an economist (both his degrees are in History) have anything to do with the current economic problems? I would be very worried if my GP’s qualifications were in History, (which, incidentally, is recognised as one of the easiest degree subjects)