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Friday, 20 April 2012

What Do You Really Know About The Bank of England?

There's a lot of confusion about how the Bank of England operates. That's not entirely surprising because, frankly, you're not meant to know.

To make it simple to understand let's imagine we've wiped the slate clean and we're starting up a brand new economy. There is no National Debt, there's no money in circulation, and you are the new Chancellor of the Exchequer. The Prime Minister has just popped through from Number 10 and told you of his plans to build roads, schools and hospitals. Along with all the other Government expenses for this month, he's going to need £1 billion pounds.

You sit confused for a moment - it's your first day in the job after all - until a helpful civil servant passes you the phone. It's the Governor of the Bank of England and he's happy to lend you the £1 billion. It's a great deal too because he's only going to charge 1% interest. Problem solved, you do a little jig then sit back and flick on the telly to watch Jeremy Kyle - you want to keep in touch with how ordinary people live.

Let's keep it simple from now on, just so we all follow the thread.

The Bank of England deposit £1 billion in the Government coffers. To do so cost the Bank of England approximately £1,500 in printing costs. So, for a £1,500 investment, the Bank is now owed £1 billion pounds by the Government (ie. taxpayers). Plus 1% interest.

The Government contracts with various companies to carry out the works and distributes the money to them in payment. These companies, in turn, distribute the money in wages to their employees. There is now £1 billion in circulation.

To pay back the Bank, the Government collects various taxes from the workers and businesses. Eventually they collect the £1 billion back in and pay their debt to the Bank. Everyone's happy.

But wait! The Bank is still owed £10 million in interest. Unfortunately the Government has used all the money in circulation which it collected as taxation and has nothing left to pay the interest charges. What to do, what to do.....

Not to worry, the Bank has an answer. We'll lend you the £10 million at 1% interest. And, of course, for the next part of your programme, you're going to need another £1 billion this month. We'll lend you that too. At 1% interest. Ad infinitum.

I urge anyone who doesn't believe me that this is exactly how the Bank of England and the Government operate to do their own research. It isn't an unusual system. It is how central banks and governments operate the world over - with very few exceptions and perhaps we'll deal with those exceptions in another blog; you might just spot a connection between the countries that don't operate this system!

But it gets worse. Despite some legislative sleight of hand (particularly in 1946 and 1977), the Bank of England has always been a privately-owned corporation and remains so to this day. Regardless of what anyone tells you, it is not Government owned and never has been. Again, do your own research.

So why do our Government operate under such a system? They are legally able to print their own money, interest free. Thus they could print £1 billion for a one-off cost of £1,500 with no-one to make repayments to and no interest charges. What effect do you think that might have on your taxes? On the economy? On the National Debt?

They toil under the same system in the United States. For Bank of England read Federal Reserve - another privately-owned, profit-making corporation. Two American Presidents suggested that the Government should start printing their own debt-free money - Abraham Lincoln and John F. Kennedy.

I'll return to this subject at a later date. For those that are interested, it'll give you some time to do that background research.

2 comments:

  1. Replies
    1. You highlight a great introduction to the subject, cynicalHighlander.

      Anyone wishing to learn more about central banking would do well to watch 'The History of Money' video.

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