John McDonnell: QE for People will entail an independent Bank of England

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John McDonnell

In his first speech as Labour’s shadow chancellor, John McDonnell has stated that the Bank of England should remain independent but that a debate on the Bank’s mandate is necessary. The new shadow chancellor also indirectly suggested that QE for the People should only be used to boost economic activity when aggregate demand is low.

Central Bank Independence

In his speech the new shadow chancellor said that operations of the Bank of England requires democratic scrutiny but that he now fully endorses an independent central bank:

“I want us to stand back and review the major institutions that are charged with managing our economy to check that they are fit for purpose and how they can be made more effective.

“I will also be setting up a review of the Bank of England.

“Let me be clear that we will guarantee the independence of the Bank of England.”

This represents a significant turn around in the new shadow chancellor’s policy position. Roughly three years ago John McDonnell had suggested that he would

“in the first week of a Labour government…[end] the bank’s control over interest rates”

Similarly, just before the previous election he wrote that he was in favour of re-asserting ‘democratic control’ over interest rate setting – implying (correctly) that interest rate setting had served the interests of the banking sector.

Positive Money welcomes a democratic initiative at ensuring the Bank of England is fit for purpose. But we’d also welcome the shadow chancellor’s intent to keep the central bank independent. Some advisors to the ‘Corbyn Camp’ have argued that central bank independence is profoundly anti-democratic.

We disagree with this view for a number of reasons. To begin with, it is the democratically elected government who creates the mandate for the Bank of England. It effectively tells the Bank of England its objectives and what tools it can use to reach those objectives. It is then up to the Bank of England to independently decide how best to use those tools to achieve the target. As Simon Wren Lewis describes,

“In essence all the Bank of England normally does is decide how to change interest rates to hit a target decided by government.”

It is also important to understand how the nature of relationship between the Treasury and Bank of England would change if the latter weren’t independent. It is of course correct that the Bank of England and the Treasury work very closely on a day-to-day basis. However, currently the Bank of England will come up with proposals on how it wants to use the tools at its disposal, and will then get approval from the Treasury. This is a fundamental difference between the Treasury approving things put forward by the Bank of England, opposed to the Treasury telling the Bank of England what to do and how to do it.

People’s QE – Only When Aggregate Demand is Low

By ending central bank independence and previously suggesting that People’s QE could be used as a primary tool to finance infrastructure projects, it initially seemed as if the Corbyn Camp was suggesting that People’s QE could be as means to fund budget deficits when it was politically expedient to do so.

However, in stating “We’ll use active monetary policy to stimulate demand where necessary” shadow chancellor McDonnell seems to be suggesting that a People’s QE type of programme would only be used when aggregate demand is below a desired threshold. Under the Bank of England’s current mandate this implies that People’s QE would only be used when inflation levels are below (or are expected to go below) 2%.

Interestingly, the new shadow chancellor did suggest that the mandate of the Bank of England should be reviewed, so that new indicators for aggregate demand are considered. The shadow chancellor for example stated:

“We will launch a debate on expanding that mandate to include new objectives for its Monetary Policy Committee including growth, employment and earnings.”

This is also a sensible move. There are strong arguments that inflation targeting is ultimately an ineffective policy, and that it would be better to aim for another target.



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Frank Van Lerven

Frank is our Research and Policy Analyst, and is responsible for our research on current events. Frank also leads our research in Public Money Creation and Quantitative Easing. Prior to working on the availability of credit under a Sovereign Money system, Frank also researched issues related to the 1844 Bank Charter Act and its implications for contemporary monetary policy. With a Research Master’s in Advanced Political Economy (cum laude) and a BA in African Development Studies, Frank is especially interested in how Western financial systems (and models) influence developing economies.
  • jamesmurraylaw

    Thanks Frank.

    It would be very useful if PM could examine the Labour’s PQE and other related proposals as they are evolving and compare them to PM proposals so we can all see where there are differences, and the import of those differences.

    • Frank van Lerven

      Hi James, we are on it…as you may know the Corbyn camp haven’t actually produced anything tangible as of yet. But Im working on distinguishing all of the proposals from a technical standpoint – then we will move forwards with explaining it all in accessible format. In essence, rest assured, its on its way!


      • jamesmurraylaw

        Thanks Frank – heartening indeed, and I look forward to it.

        Labour may well have gone over to the dark side (Modern Monetary Theory) as pushed by Murphy, Mitchell et all – but at least they have put the topic of SMC onto the national consciousness.

        I notice also that if McDonnell was not appointed then our fellow runner Michael Meacher may well have had a look-in as possible shadow chancellor.

        • RJ

          Labour policy has little to do with MMT. MMT mostly explains how the money system actually works . Their understanding of this is outstanding exp relating to treasury payments. They fully realize that PQE is a nonsense term as it is completely different to QE. As is the statement regarding deficit denial.

          • Barney Rubble

            ***MMT mostly “tries to” explain how the money system actually works*** Despite the fact that MMTers speak in absolutes and universal laws – all knowledge is fallible…MMT is theory/perspective that offers insight into the monetary system…

          • RJ

            “all knowledge is fallible”

            Like if someone jumps off a tall building …

            MMT is MOSTLY a factual explanation as to how the money system works and the consequences of this.

            Other parts like the desirability of a job guarantee and the IMPACT of QE is theory.

          • jamesmurraylaw


            I hear what you say but it seems merely assertion and has little by of evidence.

            Please do tell us why you assert:

            1. “Labour policy has little to do with MMT”

            2. ” MMT mostly”

            explains how the money system actually works”
            Do you agree with their explanation?
            Do you see where they differ from PM?
            Which do you prefer?

            3. “Their (I assume Labour’s) understanding of this is outstanding exp relating to treasury payments.”
            Why do you say this – as if it is obvious?

            4. “They fully realize that PQE is a nonsense term as it is completely different to QE”
            Where have Labour admitted this?
            Have they substituted PQE for another clearer term?
            I am sorry to be pedantic but I am sure you will agree that mere assertion is never ‘proof’.

            Best regards

          • RJ

            I will fully reply to 1 and 2 and expand on QE / PQE when I return. But by this

            “Their (I assume Labour’s) understanding of this is outstanding exp relating to treasury payments.”

            I was referring to MMT not Labour. Labour I’m afraid seem to not have a clue. This was obvious when they bought into the neo-liberal deficit denier nonsense. Firstly what is a deficit denier. How can someone deny a deficit if they are running one. (Although Osborne seems to get away with it). But secondly Corbyn and McDonnell has bought hock, line and sinker the implication that Govt deficit are bad bad bad even if it’s used to fund an essential asset like housing. This is clearly nonsense even with making no allowance for the debt bond asset (RESULTING DIRECTLY FROM GOVT DEFICITS) that the non Govt sector obtain. Its the ONLY way the non Govt sector can NET save.

            “They fully realize that PQE is a nonsense term as it is completely different to QE”

            They = MMT.

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