We need to be cautious about catch-all solutions. Campaigners who claim that every trouble would be addressed by their particular remedy – a land tax, say, or changes to the school curriculum, or some form of alternative energy – are generally monomaniacs. Modern government involves a lot of trade-offs and is messy. All the easy stuff was already done.
Therefore, I will not make any exaggerated statements about monetary policies. Instead, I’ll say this. A surprising number of apparently unrelated problems – the decline in living standards, the rise in house prices, the widening gap between those who own assets and those who don’t, the fact that we are close to being overtaken in real GDP per head by South Korea, the sense of generational unfairness, the doctors’ strike, even the way in which government departments spray money around on woke campaigns – have been exacerbated by one policy.
The policy was not a result of a popular demand or a vote in Parliament. The Bank of England imposed it as a response to the financial crisis of 2008. Our central bank began printing money in March 2009 in a manner that would have embarrassed a Latin American government in the 1970s.
They called it “quantitative easing” and, while people were aware of it, few realised how radical and transformative it would be.
Until then, the Bank of England’s tool for stimulating economic activity was lowering interest rates, but that tactic had been exhausted. In fact, I think that it was partly because of the Bank of England’s low interest rates for such a long time that the crash occurred.
In March 2009, there was little room to cut the rate further. The Bank of England decided to create money in order to at least blow some air into the bubble.
“Inflation is caused by too much money chasing after too few goods,” said Milton Friedman. The impact of QE wasn’t immediate. The extra pounds created were not loaded on to pallets and transported around the country. The extra pounds were used for bond purchases and to recapitalise the banks. They delayed the inflationary impact of their actions.
The central banks, encouraged by the apparent ease with which they could get away with their actions, kept on going. It was a response to an emergency that was initially intended as a temporary measure. But it became a policy tool. The financiers, who had first access to the money, became addicted. Each new injection seemed to have less of an effect. The cold-turkey scarier, as the highs lasted shorter.
In 2020, right when QE was to be ended, the pandemic struck. Naturally, the Bank of England – with the tacit support of many politicians, who preferred the long-term pain of money printing to the sharp shock of spending cuts – responded with yet more QE.
These numbers are literally unreal. As a result of the Bank of England’s actions since March 2009, the amount of money in circulation has increased by more than 50 per cent. Since 2020, hundreds of billions of dollars have been added to this pool.
There was no escape from the consequences this time. The money could have been loaded onto pallets as it allowed the banks to buy bonds, with money which was then given out in furlough payments and business grants.
As Gertjan Vlieghe, a then member of the Bank of England’s Monetary Policy Committee, put in in April 2020: “If we were the central bank of the Weimar Republic or Zimbabwe, the mechanical transactions on our balance sheet would be similar to what is actually happening in the UK right now.” It was an extraordinary admission even if, as he added, the difference is that the Bank of England was not being told what to do by the government.
What does this all mean? It is obvious that Britain now feels poorer. The value of the pound falls, and the country starts to look less prosperous in comparison with other nations. These effects aren’t felt equally. People whose wealth is mainly in money – that is, people who live on their salaries – have been much more badly hit than people who own houses, stocks or other hard assets.
Cash-based savings have been hit with a heavy tax. The debasement of the pound means that their bank accounts have lost their value, but so has the government’s debt. Inflation moves wealth away from private savers and towards the state.
To me, money printing is also the primary reason for the strikes in public services. When trade unions complain that their members’ salaries have fallen, they are not wrong. They contributed to the problem by insisting on a long-term lockdown and thus prolonging the QE.
It would be like giving the patient more medicine that made them sick. Rishi knows that the excessive spending of the state is the root cause, not the solution.
I’m afraid that he may be in the minority. One of the worst effects of QE has been to undermine our senses of value. When we read of hundreds of billions of pounds being spent on lockdowns, we can’t understand why our own pet cause shouldn’t have a few hundred million.
Civil servants, in particular, are guilty of this failure. They spend newly created money on their favourite projects. Despite the talk of cuts, taxpayers are funding 10,000 jobs in “Equality, Diversity and Inclusion” (EDI) at an annual cost of £557 million a year. That is on top of the £150 million worth of paid days spent sending officials on training courses covering EDI, race, sexuality and unconscious bias.
Billions more go on quangos which are, so to speak, indirectly woke: the Quality Assurance Agency – which checks on university course standards – demanding “decolonisation”; the Arts Council tying grants to an agenda linked to a campaign that backs “unlearning whiteness”; and so on.
We don’t usually think of identity politics as a consequence of loose money. But, according to a report by Conservative Way Forward which totted up the figures, woke grants cost taxpayers £7 billion a year – £19 million a day. It is money like this that governments spend if they don’t have to live within their budget. Identity politics would struggle without the cash.
Can monetary policy be turned into a cause popular? Maybe. The surprise winner of Argentina’s primary elections last week, Javier Milei, bases much of his appeal on sound money and spending cuts. The shock-haired anarcho-capitalist economist who has named his English Mastiffs after Milton Friedman Murray Rothbard Robert Lucas has a good chance of becoming president in the November elections.
In many countries, politicians who speak of restoring gold standard banking or eradicating fractional reserve bank are seen as a bunch of nuts. In Argentina, inflation is over 100 percent.
We are not ready for a British Milei – things are not yet that bad here. We can make sound money a popular issue in a modest manner. Last month, I signed a letter sent to the Chancellor by the Honest Money Initiative.
We don’t want full-fat Austrian economy, with fractional reserve banks eliminated (though, if I were to recommend a film to help you understand the problems with the current system: Ex Nihilo: Truth About Money. It was released two weeks ago by Cobden Centre and is available for free online).
No, what we really want to do is tweak the rules governing Bank of England. We would remove its right to print unlimited amounts of money and give it a legal responsibility to maintain the value of sterling. What could possibly be more moderate than that? What could be more conservative? What could possibly be more popular, then?