Renault: It is a little game we play. They put it on the bill, I tear the bill up. It is very convenient.
from Casablanca (Warner Brothers, 1942)
More than twenty years ago, at a Christmas drinks bash in rural Sussex, I fell into conversation with a former naval officer then taking up a senior lay position in the Church of England. He was putting right my impression that the (then recent) decision to admit women to the Anglican ministry would inevitably lead to female bishops in quick time.
The two things were completely different, he said. Why? Because women bishops would require completely new legislation. Why? I repeated. Because, he explained, making women into bishops was … completely different.
A similarly circuitous argument came my way about fifteen years later when speaking to an official at the Debt Management Office (DMO), the agency that issues gilt-edged securities and other British government paper. In response to the economic crisis, the Bank of England had just embarked on its ‘quantitative easing’ (QE) programme, under which it has conjured huge sums – totalling to date £375 billion – out of thin air and used them to buy assets (mainly gilts) in the open market.
The idea was to inject new money into the economy. But QE also had the agreeable side effect of providing a ready market for gilts, many of which were now being snapped up by a different arm of the same state that had issued them, this different arm using state-created money.
Not that the policy was quite so blatant. The Bank was able to buy only in the ‘secondary’ market, i.e. from people who had already bought gilts from the DMO. It was not allowed to buy them direct from the DMO.
To do so, I was told, would amount to the ‘monetisation’ of public debt, and would be a thoroughly bad thing. Again, I asked why, and was told that it would contravene the Maastricht Treaty. As for why the authors of Maastricht were so down on the monetisation of public debt, this was – but, of course, you guessed – because it would be a thoroughly bad thing.
Jeremy Corbyn MP doesn’t agree. His economic proposals contain the following suggestion:
One option [to promote growth] would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects: Quantitative easing for people instead of banks.
Almost at once, the Labour leadership candidate was accused of threatening the country with Zimbabwe-style ruin. True? False? Hysterical nonsense? Sound common sense?
Providing an answer requires a grasp of the nature of QE within the wider context of how money in general is created.
QE aside, the only publicly-created cash in circulation is made up of notes and coins. The vast majority of money in the economy results from the private creation of credit by the commercial banks through a wonderful wheeze called ‘fractional reserve banking’. This is how it works. You deposit £100 with the bank, which then lends out £90 of it on the basis that, on average, you will be likely at any one time to ask for just £10 of it. That £90 is then deposited in the banking system, where it can be used to make new loans … and so forth.
All perfectly legal, although such behaviour – pretending to have custody of someone’s property while actually hiring it out for a fee to someone else – would prompt a visit from the Fraud Squad in most other lines of business.
For years, the rights and wrongs of this system have been debated, with a broad coalition ranging from church groups to radical politicians objecting not only to the ‘privatisation’ of money creation but also to the fact that such private money is, by definition, created only because someone has gone into debt; it is ‘debt money’.
In recognition of the extraordinary privilege of fractional reserve banking, the banks themselves were, until 1971, kept on a very tight rein, with the Bank of England imposing physical controls on the amount they could lend. After a successful campaign to free themselves from most of these constraints, the way was clear for ever-greater lending and ever-greater asset bubbles all the way up to the August 2007 credit crunch.
In the wake of the crunch, shell-shocked banks withdrew from their role as credit creators and the Bank stepped in, via QE. Great clouds of official verbiage were employed to ‘explain’ that this was a one-off, that it was not really conjuring money out of thin air and that all the gilts acquired would eventually be returned to private hands.
Alas, some of these gilts have already matured, meaning they have reached their redemption date. The Treasury has paid the face value plus interest to the Bank, the Bank has returned the money to the Treasury, and the gilts have been cancelled. Many more, perhaps all, will mature while still in the Old Lady of Threadneedle Street’s tender care. In other words, public debt has been ‘monetised’, in defiance of Maastricht, of international norms and of the pre-2007 conventional wisdom. The liabilities concerned have vanished as if by magic.
Now let us suppose the money originally raised by selling those gilts went to build a motorway or a railway line, which is entirely possible. That, surely, would represent Corbynism avant la lettre?
On that subject, here is a line from a 1989 work, by another Labour MP, that I found inspirational then, and still do:
We can … pay government bills for specific purposes by Bank of England cheques issued on the instruction of government. The credit power of our reserve bank deserves to be used just as much as that of the private banks.
Austin Mitchell, Competitive Socialism (Unwin Hyman Limited, 1989)
It ought to go without saying that ‘people’s QE’ is not an unlimited remedy for our discontents. Unchecked, it would lead to very serious inflation.
But bear in mind that the peak of British inflation during at least the last hundred years was not triggered by Corbyn-style ‘people’s QE’ but by the above-mentioned 1971 deregulation of private credit creation. The Retail Prices Index hit 27 per cent in the summer of 1975.
Corbyn-style QE would be launched against the background of near-zero inflation.
Somewhere, I have a multi-million Zim dollar banknote.
I think ‘President Jeremy’ has some way to go before then.