We should be wary of 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 is a messy business, involving difficult trade-offs. All the easy stuff has already been done.
So I am not going to make exaggerated claims about monetary policy. I will instead 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.
That policy was not demanded by the population at large or voted through by Parliament. It was decreed, rather, by the Bank of England in response to the 2008 financial crisis. Starting in March 2009, our central bank, in common with others around the world, began to print money on a scale that would have embarrassed a 1970s Latin American junta.
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. Indeed, it seems to me to be partly because the Bank of England had kept rates so low for so long that the crash happened in the way it did.
In March 2009, the base rate was 0.5 per cent, leaving little room for further cuts. So the Bank of England, determined to blow at least some air back into the bubble, began magicking up money.
“Inflation is caused by too much money chasing after too few goods,” said Milton Friedman. But the impact of QE was not immediate. The extra pounds called into existence were not loaded onto pallets and driven around the country. They were used to recapitalise banks and fund bond purchases. Their inflationary effect was thus delayed.
Emboldened by their apparent ability to get away with it, central banks kept going. A response that had been intended as a one-off reaction to a global emergency effectively became a standard policy tool. Financiers, who enjoyed first access to all the new moolah, became addicted to it. Each new injection of QE seemingly had less effect. The highs became shorter, the cold turkey scarier.
Then, in 2020, just when QE was scheduled to be wound up, the pandemic hit. 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.
The numbers are almost literally unbelievable. 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. Hundreds of billions have been added to the pool since 2020.
This time there was no getting away from the consequences. The money might as well have been loaded on to pallets, in the sense that it enabled banks to buy bonds with money that was then handed out through furlough payments, business grants and other benefits.
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 all this mean? Most obviously, it means that Britain feels poorer. As the pound drops in value, so the country begins to compare unfavourably with the wealth of nations elsewhere. But these effects are not felt evenly. 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.
Those whose savings were in cash have been subjected to a swingeing tax. The debasement of the pound means that their bank accounts have lost their value, but so has the government’s debt. Inflation shifts wealth from private savers to the state.
Money-printing is also, to my mind, the proximate cause of the public-sector strikes. When trade unions complain that their members’ salaries have fallen, they are not wrong. But they helped bring the problem about by insisting on the longest possible lockdown, thus prolonging QE.
To give in to the strikers would be to dole out more of the medicine that sickened the patient. Excessive state spending is the cause of the problem, not the solution, and Rishi Sunak knows it.
But I fear he is in the minority. Another malign consequence of QE was to destroy our sense 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 are especially guilty of this failing, throwing the new-minted money at 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. That is the kind of money that governments spend when they are not forced to live within their means. Without the cash, identity politics would struggle to get off the ground.
Is it possible to turn monetary policy into a popular cause? 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 economist, who describes himself as an anarcho-capitalist and has named his English mastiffs after economists Milton Friedman, Murray Rothbard and Robert Lucas, has a real shot at becoming president in November.
In most countries, politicians who talk about restoring the gold standard or ending fractional reserve banking are regarded as cranks. But not in Argentina, where inflation is running at more than 100 per cent.
We are not ready for a British Milei – things are not yet that bad here. But we can, in a more modest way, turn sound money into a vote-winning issue. Last month I co-signed a letter to the Chancellor of the Exchequer organised by a new lobby group, the Honest Money Initiative.
We are not asking for full-fat Austrian economics, complete with ending fractional reserve banking (though if you want to understand what is wrong with the current system, I recommend the new film Ex Nihilo: The Truth About Money, released a couple of weeks ago by the Cobden Centre, and free to watch online).
No, all we want is to tweak the rules governing the Bank of England, removing its right to print unlimited quantities of cash and giving it a statutory responsibility to preserve the value of the pound. What could be more moderate? What could be more Tory? Come to think of it, what could be more popular?
