Labour’s annual conference yielded some big news for money reformers last week: the Shadow Chancellor announced a review into the mandate of the Bank of England. For the first time since the 90s, a major party is questioning how the Bank of England controls money creation in the UK economy.
Positive Money supporters can be proud of their role in bringing this issue onto the political agenda. Over the past year, over 12,000 signed a petition to the Prime Minister, hundreds wrote to their MPs and dozens met with parliamentary candidates during the election campaign.
Addressing the conference, the Shadow Chancellor John McDonnell, said:
“I will also be setting up a review of the Bank of England”,
“It is time though to open a debate on the Bank’s mandate that was set by Parliament 18 years ago.
The mandate focuses on inflation, and even there the Bank regularly fails to meet its target.
We will launch a debate on expanding that mandate to include new objectives for its Monetary Policy Committee including growth, employment and earnings.”
This exercise will be one of several reviews examining the UK’s major economic institutions, including a review of the Treasury to be conducted by Lord Bob Kerslake, the former head of the civil service, and a review into the operation and resourcing of HMRC. Labour also plans to establish an Economic Advisory Committee to advise on the development and implementation of economic strategy with members including Joseph Stiglitz, Thomas Piketty, Simon Wren Lewis, Ann Pettifor and former MPC member Danny Blanchflower.
Ann Pettifor and Simon Wren Lewis have championed alternatives to our the UK’s monetary policy orthodoxy, and many Positive Money supporters will be encouraged that they are to play a central role in developing Labour’s economic strategy.
The details of the review into the Bank of England are expected to be revealed shortly, including the question of who will lead it.
For the past year, Positive Money has been calling for the establishment of a money commission to consider whether our monetary system is effectively serving the public interest. For too long, the UK’s main parties have accepted the current monetary policy framework as a settled issue, despite the fact that some of the world’s leading economists have cited money creation as playing a central role in precipitating the last financial crisis.
If the review concludes that the Bank of England needs a different mandate, it will inevitably have to tackle the question of whether interest rates are a sufficient tool to meet its new target.
Positive Money argues that even with the Bank’s current goal of keeping inflation at or near 2%, adjusting interest rates does not effectively influence bank lending and money creation. Raising interest rates before the 2008 crisis failed to stem the dangerous inflation in house prices, and lowering interest rates after the crisis failed to encourage business lending. Without quantitative easing, the UK economy could have been plunged into recession. With interest rates at near-zero, the Bank wouldn’t have the same option in the event of another crisis.
If the mandate is changed, for example to include growth, jobs and earnings, the need for new monetary policy tools will be even more urgent. We believe that Sovereign Money Creation (otherwise known as People’s QE or Monetary Financing) should be a tool to be examined first and foremost in this investigation.
We will continue campaigning for the government to support the establishment of a money commission, but there is no doubt that Labour’s review into the Bank of England’s mandate is a crucial step forwards for all those who seek a monetary system that serves the long-term interest of the UK economy.