When the BoE spends, for example, £10bn of newly created QE money to buy gilts from non-banks, both the central bank money and the commercial bank credit money aggregates increase in tandem by £10bn. All else equal, our money supply increases with no corresponding increase in commercial bank debt. QE money is thus publicly issued, debt-free money.
The consensus is now emerging in the MSM that the gilts purchased by the BoE under QE will never be sold back into the market and that sooner or later they will be cancelled. The nation is monetising its debt.
If we make the plausible and increasingly accepted assumption that the recipients of the QE money promptly use that money to buy newly issued gilts, then we see that the publicly issued, debt-free QE money is effectively entering general circulation via government spending.
Wow! Isn’t this a part of what we are advocating? In theory this process can continue indefinitely, retiring old gilts and issuing new ones, continuously creating and spending into circulation new debt-free money.
Behind the curtain, the increase in base money due to QE eases inter-bank liquidity. Base money is the medium of settlement between banks, inaccessible to the general public, and the more of it there is, the less inter-bank lending is necessary.
As QE progresses, the ratio of central bank money to commercial bank money increases, all else equal. We might then ask, as a thought experiment, how our two-tier money system might function if these two money aggregates eventually become of similar size. In that case we might imagine that each real world transaction in commercial bank money could immediately be settled behind the scenes with a corresponding transfer of central bank money, rather as CHAPS operates today.
In such a scenario our present two-tier money system reveals itself as over complicated and fundamentally redundant. Why bother with a layer of expensive, commercially issued, borrowed-into-existence ‘broad’ money whose movements simply mimic the equivalent movements of the now adequate supply of underlying, publicly issued, debt-free ‘base’ money?
If in addition, as Positive Money proposes, the commercial banks no longer have the power to expand and contract the money supply then we could do away with their bank credit money for good and simply have plain unitary money.
I suggest therefore that the more QE happens, the more we can demonstrate the case for its logical conclusion, that is for full monetary reform, for a unitary money supply, wholly and publicly issued debt-free and circulating persistently as a common utility for us, its citizens, to run our economy. We would then be free from the onerous burden of the present rent-a-currency system.