This post first appeared in 2020. Nothing has changed since, so I offer it again today in response to yesterday's post on this issue. It was one of a series of Mythbusters published at that time. A new video series on 'Economic Truths' (the opposite of myths) is now being planned. There might be quite a lot of them.
Mythbuster: The Bank of England is independent
Myth
The Bank of England is independent of the government
Replies
Reply - 1
The Bank of England has been wholly owned by the government since 1946. It's very hard for any organisation to be independent of the government that owns it. The Bank of England definitely is not.
Reply - 2
The government granted the Bank of England some independence in 1997, but kept a right of veto over all it does, which means that the independence is pretty limited in practice.
Reply - 3
The only real tool available to the Bank of England is quantitative easing, and the Bank only undertakes this with the specific permission of the Treasury, who underwrites all its risk when engaging in quantitative easing activities. In that case to claim that the Bank of England is independent really does make little sense.
Reply - 4
The Bank of England is independent of the government so long as it does what the government wants. The Bank of England Act of 1998 provides a Chancellor with the option of overruling the decisions of the Bank of England. That means that the Bank simply has a veneer of independence.
Evidence
The Bank of England was nationalised by the Bank of England Act 1946. This said it was:
An Act to bring the capital stock of the Bank of England into public ownership and bring the Bank under public control, to make provision with respect to the relations between the Treasury, the Bank of England and other banks and for purposes connected with the matters aforesaid.
The most recent Bank of England Act was passed in 1998. This described itself as:
An Act to make provision about the constitution, regulation, financial arrangements and functions of the Bank of England, including provision for the transfer of supervisory functions.
Most importantly, this was the Act that supposedly created independence for the Bank of England.
This has to be understood in context. The Guardian reported on the intention to create this independence in 1997, saying:
The Chancellor, Gordon Brown, set the seal on a frenetic first 100 hours of activity by the Blair government when he stunned the City and Westminster yesterday by handing control of interest rates to an independent Bank of England.
From next month, the Government's attempt to take the politics out of interest-rate decisions would mean the Bank would have 'operational control' of monetary policy.
What this makes clear is that the purpose of the move was political: it was to reassure markets that a new Labour government would be seeking to prudent with regard to government finances by passing control of interest rates to the Bank of England.
However, the reality was that all was not quite as it seemed. Section 19 of the 1998 Act said:
19 Reserve powers.
(1)The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.
(2)An order under this section may include such consequential modifications of the provisions of this Part relating to the Monetary Policy Committee as the Treasury think fit.
In other words, subject to some procedural arrangements which were not onerous for the government to comply with, the Chancellor could at any time overrule the Governor of the Bank of England and the Bank's Monetary Policy Committee. This then was 'independence' with a massive proviso attached, which was that what the Bank did was acceptable to the Treasury. The result has been a close working relationship.
This has been especially true since 2008. Since the time of the global financial crisis, which began in that year, the base rate of the Bank of England, which it used prior to the crisis to influence inflation policy, has been at 1% or less, and now (June 2020) stands at just 0.1%, which is a record low. In this situation it is generally accepted that monetary policy implementation through the mechanism of interest rate changes is ineffective, because any rate change is too small to have any real impact. This is the problem of what is called the 'zero-bound'.
In place of interest rate adjusts the Bank of England adopted what it called quantitative easing. The Bank of England says of quantitative easing that:
Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy.
Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds. You may also hear it called ‘QE' or ‘asset purchase' — these are the same thing.
The aim of QE is simple: by creating this ‘new' money, we aim to boost spending and investment in the economy.
Since 2009 £635 billion has been injected into the economy this way by the Bank of England buying government bonds. £10bn of other assets have also been bought. This is now by far the most important tool available to the Bank of England to influence the economy and control inflation, which is the task demanded of it in the 1998 Act. However, in January 2009, in a letter that now takes some hunting to find on the web, the then Chancellor of the Exchequer Alistair Darling set out the terms on which all QE has been provided, which means that the letter is worth sharing in full:
Three things should be noted.
First, the Treasury had to authorise quantitative easing, and has always had to do so since then.
Second, the Treasury authorised the assets to be invested in, and again, always has.
Third, the Bank of England is indemnified for all its gains and losses on QE transactions, which means the Bank of England is only the agent of the Treasury on all such transactions.
To therefore claim that the Bank of England is independent of the Treasury makes no sense at all. It simply is not. Its major policy is managed under the control of, and for, the Treasury.
Central bank independence is a policy goal of neoliberal economics that seeks to undermine democratic control of the economy and the accountability of the government for it, but it is not what happens in practice.
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Where are Britain’s mainstream media outlets discussing the implication (the government can create digital money at will) of the following key Bank of England document especially the so-called progressive ones? Nowhere to be found! Why? Because they operate in the interests of the rich who don’t like the tax implications of such ability for starters!
https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
We don’t see them discussing the BoE’s intended use (or indeed the existence of) the Ways & Means Account, referred to as the govt’s overdraft account at the BoE, in helping to pay for the Covid response either. Incidentally, I’ve been combing BoE data, not exactly my happy place, trying to find evidence that they did anything other than announce the possibility of this. I can’t find anything specific, only enough to arouse my suspicions, but that could well be down to my unfamiliarity with the subject material. If they never used it, why would they announce it, especially given that, as Positive Money pointed out at the time, it reveals there actually is effectively a Magic Money Tree? Here’s Positive Money on the big reveal https://positivemoney.org/archive/the-ultimate-magic-money-tree-has-been-unveiled-dont-let-the-government-tell-you-otherwise/
FYI
Announcement on BoE web site:
https://www.bankofengland.co.uk/news/2020/april/hmt-and-boe-announce-temporary-extension-to-ways-and-means-facility
And while I remember (forgot this one!) here’s the FT commenting on the BoE’s not at all independent decision to create money from nowhere into the Ways & Means Account to accommodate Direct Monetary Financing (DMF) of govt spending during Covid “The UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus, with the Bank of England agreeing to a Treasury demand to directly finance the state’s spending needs on a temporary basis.”
So it’s not like this doesn’t happen, and it’s not like the Establishment doesn’t know about it as here it is in the Establishment press https://web.archive.org/web/20200409173306/https://www.ft.com/content/664c575b-0f54-44e5-ab78-2fd30ef213cb
It appears to be just our Chancellor who has no idea how the BoE works, despite her many proud boasts about how she used to work there. Can we not take her to the Hague for this? Is there nowhere with any authority over government? Or is the rumour true that the govt are releasing non-violent prisoners by the cartload so there’s room for all the protestors they know will soon be thronging the streets? I notice in America (this just in) someone’s been shooting at Trump – how long before an exasperated and put-upon population starts resorting to similarly violent behaviour here?
Which begs the question: where is the Windmill Theatre & its daily “independence fan dance” located?
BoE or Treasury?
Perhaps it moves from one to the other depending on need?
“Your turn today dear – natives are restless, now keep those feathers moving we can’t afford to let the audience see the reality”.
It is all a performance – & no different form the stuff shown by the Windmill in its heyday – fantasy.
Absolutely. Fantasy and equally important, just like Murdoch’s Page Three, designed to distract. A basic structural opening tactic of con artists.
One other question: what did they buy, when did they buy it & how did the price of the asset move before it was bought.
Given the incestuous relationship – BoE/Treasury – finance sector I think you know where I’m going with this question.
ECB did something very similar in the mid-201Xs – I think they called it open market operations – I wonder how much money was made by those that were forewarned?
You cynic Mike
The whole of QE is designed to create a rake off
Thank you and well said, both.
At a meeting out of hours and where we could talk freely, about 2013, the Bank’s then chief economist and former head of financial stability, said as much and explained how the money “leaked” overseas.
I have no experience dealing in gilts with BoE but in the US it was not a money maker. In many ways QE was bad news for traders as volatility reduced as did customer activity…..both key elements for profit as a trader.
Why not just sell bonds straight to the BoE? Well the market fetishists demanded it to enable “price discovery” …. And it was not good. Far better if the BoE just operated to guide prices rather than buy fixed amounts at any price.
Thanks
In reply to Col Smithers: “I’m shocked – really – I am – who could possibly have thought of such a development”
I laughed out loud at what you wrote.
One assumes “nudge is as good as a wink – know what I mean” etc. When I have suggested I EU circles that ECB just buy straight off the companies concerned – I get shocked loooks – but “markets” old chap.
I remembered, vaguely, you had myth busted the BoE independence when I asked the question yesterday.
So, do we assume the Treasury, Tory Chancellors, and now a Labour Government are happy with the Bank’s interest rate policy and its knock on (or deliberate) effects on employment, inequality and the rest?
I think we have to
The following wording has disappeared from their web site:-
“Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy.”
“Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds. You may also hear it called ‘QE’ or ‘asset purchase’ — these are the same thing.”
“The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.”
Now QE it would seem was only introduced to fight inflation! Corrupt as hell!
I am saying nothing ….
Suggestion. This wording by the BoE is very useful & I will store it for later use. Perhaps it could likewise be recycled for later use e.g. I have suggested that Pill & other BoE ciphers be interrogated – their own words could be quoted to them – & an explanation asked ..”why.no injection of money etc into the economy?”.
Mr Schofield – do you have a screen shot by any chance?
As for was this deliberate? I incline towards the Winston Smith camp.
Mike Parr, as I say, the Wayback Machine is your friend https://web.archive.org/web/20201231204642/https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
No screen shot but you could Google the missing words and have better luck than I did. The WayBack Machine gets you part of the way back but as they say their information only represents the times they actually “crawled” BoE information. Nevertheless it’s obvious BoE management “spin” their information just like politicians to reflect an undemocratic authoritarianism clearly ignoring the fact that they are in reality civil service public servants. This “spinning” of documents is clear evidence they should cease to be independent. Since I believe Scammer & Co to be corrupt also you will not see the BoE “independence” removed during the course of this administration.
https://web.archive.org/web/20180201000000*/https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
The Wayback Machine is your friend here. In fairness, not that the BoE deserve it IMO, there have been multiple iterations of that page over time so apparent misdirection or concealment may not necessarily be what it appears, just changes of emphasis.
Apologies didn’t spot Bill Kruse had found the original post:-
https://web.archive.org/web/20201231204642/https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
Don’t agree with Bill though that the BoE is not “spinning” information which public servants should not be doing. The following two statements they make in the original document are critical for voters to understand how their fiat monetary system really works or at least stimulate them to better understand:-
“Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy.”
“But there’s a limit to how low interest rates can go. So when we needed to act to boost the economy, we turned to another method of doing so: we introduced quantitative easing.”
Certainly public services need boosting after 14 years of deliberate Tory Party under-funding but we have Scammer & Co pretending the only way this can be done is through private sector economic growth.
Those statements were correct. QE was a fiscal boost. QT is the opposite.
Indeed, note the words on the QE page explaining how when the Bank sells bonds back into the market; “the money we created to buy the bonds disappears and the overall amount of money in the economy will go down.”
So while Hunt was snivelling piously about having to sanction benefit claimants to fix the economy and Reeves prostrates herself supposedly on our behalf before the likes of Blackrock, the BoE was and is knowingly and openly shrinking the economy at the rate of tens of £bns a year.
A blog might follow….
Reply – 3; the government “underwrites all its [the BoE’s] risk when engaging in quantitative easing activities. In that case to claim that the Bank of England is independent really does make little sense”.
The BoE does not have the financial resources to command the independence it claims to have. The proposition is literally absurd.
It is worth noting that before 1946 the BoE was both the Government’s bank and a private bank. If you actually examine the history, the banking crises created by the BoE’s conflicts of interest, or complete ignorance about what it was doing (in the catastrophic banking crisis of 1825 the disaster was made worse by the fact that the BoE had no sense whatsoever of ‘a lender of last resort’ responsibility, and only stepped in when faced with falling headlong into the abyss, and had run out of options). Anything the BoE ever learns is provided at eye watering cost, and alarmingly high risk – by the British people, and Treasury. This basic problem is repeated endlessly. Some of it cannot be avoided – and as the sovereign issuer of the currency is the real lender and dealer of last resort; that can never change. An independent BoE is an oxymoron.
Agreed
Just reading “Napolean the Great” by Andrew Roberts.Covering the period after Napoleon siezed power,I found this interesting piece.
“Two years later. Partly by forcing the tax-collecting authorities to make deposits in advance of estimated yields.the finance minister Martin Guadin had balanced the budget for the first time since the American War of Independence “.
Then came the establishment of the Banque de France,set up with private sector funding,but not using the “unco- operative” Parisian banking system. It was theoretically independent of the government. Though the book says despite this pronouncement at the time the policy was “quietly dropped,and the bank did indeed help finance Napoleon’s wars”.
The bank did take powers to exclusively issue notes for French legal tender in 1808,(well before the BoE). And Napoleon appointed the Governers keeping a tight control over this “important institution “.
Another historical example of what state control of finances can achieve and also to the lies often used to cover what is really happening on monetary policy. Sadly in this case ,it was used to fund wars.There is aways the opportunity to use this power for bad as well as good.
We also ‘learn’ in more conventional anti-Napoleon history that one of the things that contributed to Napoleonic France’s defeat was that France had a less sophisticated financial system than the UK. Apparently Napoleon over relied on cash and contributions from the defeated.
Robert’s book was almost universally panned for being pro-Napoleon.
One could become paranoid.
Hmmm….
Oh, yes…and the much revered Duke of Wellington opposed the 1832 reform act.
I would add that the first quote I made re the national debt from Roberts, he actually references 3 other authors on it,* so was not his own original observation. Though it is an astute comment all the same , i.e a
government spending before it had the tax receipts. You seldom get such good economic points made in historic literature.
As to Wellington I would add he also caused increased poverty and hardship by taking a very heartless and orthodox view of the National debt, resulting in riots and violence on the street, not least on his own home apparently.
*Bertrand,”LaFrance,Horne “Age of Napoleon ” and Markham “Napolean “.So he had obviously done some research on the issue.