Questions that the Bank of England must answer (Quarterly Bulletin 2014 Q2)

[first]Every 3 months the Bank of England publishes it’s flagship ‘Quarterly Bulletin’, which explains more about how it works, how it sees its role in the monetary system, and its current thinking on central banking and financial markets.[/first]

As usual, they ignore the most fundamental about the nature of money and its creation. They make lucid statements about their purpose, and then completely miss the fundamental contradiction with what they actually do today. Here are just a few of these contradictions and questions that the Bank of England should answer.

How well are they ‘promoting the good of the people of the United Kingdom’ by maintaining the current debt-based system?

The Bank of England is clear on its purpose:

The Bank of England’s mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. Monetary stability is defined by the Government’s inflation target, which is currently 2% as measured by the annual change in the consumer prices index (CPI). (Article: Public Attitudes to Monetary Policy)

But how well does it promote “the good of the people of the United Kingdom” to maintain a system where all money except for cash is created by the same banks that caused the financial crisis? We’ve explained why we think it’s one of the driving forces between the high levels of debt, inequality and unaffordable housing, amongst other problems. It’s time for the Bank of England to ask whether “promoting the public good” might require reforming the monetary system? (They will state that this is an issue for parliament, but they surely have an obligation to advocate for reforms that would improve the monetary and banking system – or even simply ask the question!)

How well are they increasing public understanding of the monetary system?

The Bank of England claims to be committed to increasing public understanding of their monetary policy framework:

The Bank is committed to building public understanding of, and support for, the monetary policy framework.
…
The Bank uses a variety of methods to explain to the public the MPC’s role of setting monetary policy to meet the inflation target. For example, in addition to its quarterly Inflation Report, the Bank also publishes the minutes of the MPC’s monthly meetings and articles that explain some of the key concepts relevant for understanding the setting and transmission of monetary policy; MPC members give  speeches, lectures, press conferences and interviews, and make appearances before the Treasury Select Committee; and a number of social media channels are used in order to reach a range of audiences. In addition, the Bank’s twelve regional agencies hold regular meetings with businesses throughout the United Kingdom, and the Bank has an education programme that includes the ‘Target Two Point Zero’ competition for schools and colleges.

The greatest step that the Bank of England has ever taken towards ‘building public understanding’ was the release, in March 2014, of two articles explaining how banks create money when they make loans. Yet this was only after 3 years of public education by Positive Money and the New Economics Foundation, and the release of Where Does Money Come From? In 10 years of speeches, former Bank of England governor Mervyn King never once used the word ‘money’, never mind discuss how money was created. (When he did finally explain that banks create money, it was in 2010 and to explain why Quantitative Easing – the creation of money by the central bank – wasn’t a particularly exceptional policy.)

The Bank’s ‘Target Two Point Zero’ competition aims to educate of students – aged 16-18, and the people who may end up suffering most under the current debt-based monetary system – about monetary policy. But incredibly, the resources paper never once mentions that it is high-street banks that create the nation’s money, and that interest rates are adjusted partly to get people to borrow more (or less) and so get banks to create more (or less) additional money. The closest it gets is the following:

On the borrowing side, households can borrow from banks and building societies to supplement their income in order to help finance spending or to buy a house. (Target Two Point Zero)

And they end up perpetuating the conception that inflation is created by central banks (such as the Bank of England) printing money (rather than by, for instance, the commercial banks creating over a trillion pounds of new money in the 8 years preceding the financial crisis):

Suppose the Bank of England printed double the amount of money in the economy and left it on street corners for
people to help themselves. People would go out and spend more. But the economy cannot simply produce twice as much.

Why do they ignore the fact that the government must stand behind and guarantee all the money created by commercial banks?

Back to the Quarterly Bulletin, an article titled “The Bank of England as a Bank” states that:

The Bank is the sole supplier of ‘central bank money’ in the United Kingdom. Central bank money takes two forms — Bank of England banknotes, and the balances (‘reserves’) that are held by commercial banks and building societies at the Bank. An important property of central bank money is that it is close to risk-free: the risk of the central bank defaulting is generally considered to be the lowest of any agent in the economy, given the central bank is financially supported by its Government. [Article: The Bank of England as a Bank]

The Bank of England likes to maintain that there is some sort of inherent difference between bank deposits – the money created by banks – and the cash and central bank reserves created by the Bank of England. Bank deposits are said to be risky, whilst (as stated above), cash and central bank reserves are assumed to be risk-free, as the central bank is backed up by the government.

Yet as we saw in the financial crisis, the money banks create is also backed up by the government. In the first place, this is through the official £85,000 deposit insurance scheme, which will use taxpayers’ money to reimburse the customers of failed banks. However, as the debacle at Northern Rock and the bailouts of RBS and HBOS proved, this guarantee rapidly becomes a blanket guarantee on all bank deposits i.e. all money created by banks. So there is no fundamental difference in the riskiness of a £10 deposit created by a bank, and a £10 note created by the Bank of England. Both are fully backed by the government. The difference is that the proceeds of the Bank of England creating money go directly to the Treasury, whereas the proceeds of money creation by banks go to enrich and subsidise the banks themselves. We address this in our Banking 101 video here.

Why does the Bank of England still think banknotes are important, when electronic money created by high-street banks makes up 97% of all money?

The bulletin states that one of the functions of the Bank of England is:

The safe issuance of banknotes. The high level of public trust in Bank of England banknotes stems from their being a liability of the central bank, financially supported by the Government. [Article: The Bank of England as a Bank]

Yet cash is rapidly becoming an insignificant form of money. It makes up less than 3% of the money supply in the UK. Around 99% of the value of money that changes hands does so electronically. Very few people can now opt to receive their salary in cash. My payment card for the London Underground is connected directly and electronically to my bank account. Contactless debit cards make it even easier for people to pay electronically, and will lead to a further decline in the relevance of cash.

So why does the Bank of England see its role as to create a trivial and mainly insignificant form of money, whilst thinking that it is not its role to create the electronic money that actually powers our economy? Why does it worry about the few criminal gangs who print a few million in dodgy bank notes, whilst ignoring the fact that the high-street banks created £22bn of new money in the last 12 months for mortgage lending alone?

If electronic payments are essential, why not create electronic money, instead of leaving this power to the banks?

The bulletin states:

Electronic payments are essential to the functioning of modern economies. They are used, for example, by individuals to purchase goods, by companies to pay salaries, and by the government to pay for public goods and services. For this reason, the infrastructure used to make sterling electronic payments is sometimes described as the financial plumbing that enables money to flow around the UK economy. [Article: How has the Liquidity Saving Mechanism…]

If electronic payments are the essential plumbing of the economy (which they are!) then:

1. Why do we leave the creation of electronic money to the same banks that caused the financial crisis?

2. Why does the Bank of England make it impossible for anyone to hold an electronic form of cash? Why does it instead force anyone who wants to use electronic money to hold bank deposits created by one of the high-street banks?

3. Is the Bank of England’s failure to provide the economy with an electronic equivalent of cash, which can be stored at the Bank of England, a dereliction of duty, given that it results in the power to determine the nation’s money supply being placed in the hands of banks?