LAST week Parliament’s Treasury Select Committee, that august body appointed by the House of Commons to examine the actions and policies of the Treasury, HMRC and associated public bodies, announced an inquiry into the Bank of England’s plans to move from a policy of quantitative easing towards one of quantitative tightening.
In its call for evidence and input into this inquiry, the committee blandly notes that, between 2009 and 2021 as part of its policy of increased quantitative easing, the BoE put its virtual printing presses into overdrive with new currency to the sum of £895billion. This policy was adopted despite Labour Chancellor Alistair Darling having initially insisted in 2009 at the start of the ‘credit crunch’ that ‘nobody is talking about printing money’.
It turns out that somebody somewhere was talking about precisely that, with the gargantuan pot of new currency the BoE went on to print during this period being used to buy government bonds, thereby funnelling money into the pockets of government at rates far lower than those the markets would have been prepared to accept. No need for government to exercise sobriety in its spending, or subject itself to the restraints imposed by the need to maintain broader investor confidence in its actions. Short of cash? Just get the Chancellor to flick the switch on the monetary hosepipe running out of Threadneedle Street. Thus the BoE went from holding no UK government gilts at all before the 2008/09 financial crash, to holding £726billion in November 2022.
That this feckless money creation exercise was going on at the same time that government ministers such as Theresa May and Amber Rudd were insisting in election debates, or in response to questions from hard-pressed members of the public, that ‘there is no magic money tree’, is of course yet more damning evidence of the disconnect between appearance and reality in our political system. Those making these statements can only have been knaves or fools, while the picture of financial probity presented to the public was in fact the polar opposite of the reality. Putting that aside, it is the consequences of this astonishing monetary profligacy to which the Treasury Select Committee is now finally turning its attentions.
In addition to examining the likely consequences of the move from QE to QT, the MPs on the committee have announced that they will be considering whether the BoE’s decade of quantitative easing played any role in the outbreak of double-digit inflation over the last year.
That the committee even needs to ask this question is astonishing. Economists attached to the Austrian School were warning of the likely effects of the expansion of the currency supply for years before 2022, while even an economically illiterate person such as I can understand that vastly increasing the supply of currency while the supply of goods remains the same or even falls is simply a recipe for higher prices. Following a decade of steadily rising asset prices, the sheer scale of the printing and spending splurge in 2020, combined with the dislocation of supply chains caused by lockdown, has finally tipped the financial system over into sustained high inflation.
So the monetary chickens are finally coming home to roost. In the UK in December 2022, inflation measured by the Consumer Prices Index, including owner occupiers’ housing costs, was 9.2 per cent year-on-year, while for food the rate was nearly 17 per cent. The effect of this is to hit the poorest hardest, as the price of everyday essentials soars while wages lag behind. Ordinary working people find themselves struggling more and more to make ends meet, caught up in a financial whirlwind not of their making. Meanwhile government ministers make empty professions of sympathy and concern, while behind the scenes the powers that be look on with satisfaction as inflation slowly brings the government’s mountainous pile of debt down to a more manageable size.
Yet, while it seems clear that one of the immediate causes of this must be the huge expansion in the currency supply over the last decade, our current situation prompts the question of whether it is our use of a fiat currency which is the fundamental problem. Since the collapse of the Bretton Woods system in 1971, with its ending of the convertibility of the US dollar to gold, all the major currencies of the West have been nothing more than bits of coloured paper, backed by nothing and subject to creation at will by central banks at the behest of governments. Since that time, both the pound sterling and the dollar have lost 99 per cent of their value as measured against gold, a collapse easily illustrated by looking at the value of a gold sovereign, the most widely used coin of the 19th century. Before 1931 and the UK’s abandonment of the gold standard, one of these coins was worth one pound; one such now sells for nearly £400 from the Royal Mint. It is worth noting that, in the era of fiat currencies, this loss in value is a feature, not a bug (to use a current trendy term). Hence the fact that the BoE is required by the government to target an inflation rate of 2 per cent, meaning that the government and financial establishment actively want the ‘pound in your pocket’ to lose some of its value each year.
Having returned Britain to the gold standard in 1925 when he was Chancellor of the Exchequer, Winston Churchill later came to regard this as a great mistake, influenced no doubt by the criticisms of well-known economists of the time such as John Maynard Keynes. While the level at which the pound was returned to the gold standard was perhaps too high, and while the UK was forced to abandon the gold standard again in 1931, in principle there seems to me to be something to be said for a monetary system which forced governments to be honest with our money. It cannot be a good thing for governments to be able to avoid hard political choices, or honesty with the electorate, by conjuring money out of thin air, only to inflate away the debt they have created at real cost to the working people they purport to govern. Perhaps the gold standard’s time has come again?