Why the authorities are not issuing Bradbury pounds

Following a request I have now reminded myself of the so called Bradbury pounds.  It is a very similar device to creating money and buying gilts through the Bank of England, a nationalised bank which is therefore backed by and working with the Treasury. The authorities do not think it would be a good idea to print more money now, as it could prove inflationary. When they did choose to print they did so by a different route, which did not make a lot of difference to the idea. Buying up government bonds allowed them to spend more in the public sector without facing a debt or interest rate constraint on their spending.

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39 Comments

  1. Ummer.farooq
    Posted June 21, 2014 at 1:52 pm | Permalink

    Peace of God & paradise be for you from above,

    As much as Bradbury pounds may sound nice, as far as I understand it would have removed God’s protection and keeping the door of risk open to us. It was the Bradbury pound that led to the bank of england notes. We should have avoided the Bradbury and remained firm with commodity monies. But Gordon brown sold UK gold at its lowest and informed the market he was going to sell it. The only gold we have is that which is on peoples knuckles.

  2. margaret brandreth-j
    Posted June 21, 2014 at 2:28 pm | Permalink

    Apparently they are quite a relic and can be bought on ‘ebay’

    • APL
      Posted June 21, 2014 at 4:48 pm | Permalink

      margaret brandreth-j: “Apparently they are quite a relic and can be bought on ‘ebay’”

      A couple of years ago, there was a batch of 10 -/- notes going in the local tat shop, … for £10 each.

      Probably reflected the inflation adjusted value at the time.

      • Mark
        Posted June 21, 2014 at 8:54 pm | Permalink

        Not so far out – the RPI was about 7% of today’s value in 1969.

      • margaret brandreth-j
        Posted June 21, 2014 at 9:15 pm | Permalink

        I have got one of those in a little gold box; must give it to my grandchildren and then it maybe worth even more!

  3. They Work for us
    Posted June 21, 2014 at 3:05 pm | Permalink

    Everything posted on the strength of Sterling reinforces my view that our wages and salaries (and hence the value of our labours) is based on an inverted ponzi scheme. If we were all to spend our “money” before it could suffer from inflation the uks finances would go bust. Particularly if we could put our paper money into say gold without govt controls.
    The present set up seems to the financial equivalent of how real our democracy is when the three parties won’t follow the wishes of the electors. Govt is just too big and the rapacious tax and spend policy has to end.
    Devaluing sterling is theft from the people who paid in it.

    • Anonymou
      Posted June 21, 2014 at 9:08 pm | Permalink

      “… of how real our democracy is when the three parties won’t follow the wishes of the electors.”

      Dr Redwood justifies this disobedience in an earlier post as “We must satisfy the minority regardless of the wishes of the majority”

      It is an excuse for not doing as the electorate wishes.

      There is no mystery as to why the general public have disengaged from politics.

      The mystery is why they still persist in pretending that we have choice and that we haven’t seen through it. Do they do this under the delusion that they are still relevant and important ? “They are all the bloody same.” is a common phrase and that’s because it’s right.

      Reply That is not what I said.
      Elected politicians have to make judgements for the national interest and to avoid minorities being oppressed. The majority often wants contradictory things.

      • ian wragg
        Posted June 22, 2014 at 5:41 am | Permalink

        So when are you going to start making decisions in the national interest.
        CMD giving away £11 billion in foreign aid.
        Decimating the armed services.
        Signing up to the EU arrest warrant.
        Giving away our rebate for no CAP reform
        the list is endless where you waste our money and make stupid decisions contrary to common sense. Windmills, China building nuclear stations, shutting down perfectly good power stations as directed by an unelected entity.
        No English Parliament etc etc etc…..

  4. Denis Cooper
    Posted June 21, 2014 at 3:24 pm | Permalink

    The erroneous train of thought that leads to demands for the Bradbury pound starts with an obstinate insistence that the Bank of England is not really a nationalised bank but still has clandestine private owners, usually of a certain religious persuasion, who are secretly syphoning off its profits.

    I’ll say now that I’m really not prepared to spend more time arguing about this with people who believe that allegations made by some US commentator in a video on the internet carry more weight than an Act of Parliament on the UK statute book.

    It is basically very simple: to fund the government’s budget deficit the Treasury borrows money from investors by selling them bonds, known as gilts; when QE is in operation the Bank of England creates new money and uses it to rig the gilts market by buying up gilts from investors, whereupon the Treasury can sell more gilts to much the same set of gilts investors at much the rate; the Bank ends up owning a large stock of gilts, presently to the tune of £375 billion, while the new money it created to buy the gilts migrates in the opposite direction to the Treasury, which then uses it to help pay the government’s bills.

    And because the Treasury owns the Bank, as it has done since 1946, it also owns all the profits that the Bank may make as well as having to accept any losses; so the interest paid by the Treasury to the Bank with respect to the Bank’s holdings of gilts potentially gets recycled back to the Treasury; and so in effect the Treasury is indirectly borrowing from the Bank at no interest, making it pointless for the Treasury to start issuing its own new currency into circulation, as it did with the Bradbury pound back in the First World War when the Bank was still privately owned.

    • acorn
      Posted June 21, 2014 at 5:28 pm | Permalink

      Nearly there Denis. Have a read of Neil Wilson on the Consolidated Government Sector. http://www.3spoken.co.uk/2013/06/the-consolidated-government-sector.html .

      Also, if you study the “Whole of Government Accounts”, you will find that they treat the Treasury and The Bank of England as one and the same. That is any interaction between the two is cancelled out. As you say, the concept of the government’s Treasury, paying interest to itself via the Central Bank is a nonsense in the real world. https://www.gov.uk/government/publications/whole-of-government-accounts-2012-to-2013 .

      In a sovereign fiat currency issuing economy like the UK, there is no operational need for the Treasury to issue debt in the form of Gilts. This is a self-imposed political constraint. You can only buy Gilts with Pounds. The only place you can get Pounds is from the government, which must have spent those Pounds into existence in the first place.

      • Denis Cooper
        Posted June 22, 2014 at 9:12 am | Permalink

        Well, I think I am completely there in the essentials, and have been since the spring of 2009 when it became apparent that the Bank of England was not in fact buying up a range of private sector assets and some gilts, the pretence that Darling had promoted through his letters to the Governor, instead it was spending virtually all of the newly created money on buying gilts from investors while in parallel the Treasury was selling new gilts to much the same set of investors at much the same rate.

        By May 6th 2009 it had finally attracted the attention of Fraser Nelson writing in the Spectator:

        http://blogs.spectator.co.uk/coffeehouse/2009/05/the-alarming-trends-surrounding-quantitative-easing/

        “The alarming trends surrounding quantitative easing”

        “The Bank of England today confirmed that less than 1% of the £44.5bn it has printed has gone to buy company loans – it had indicated that as much as a third of the £150bn pool would go to companies. Instead, it is a mechanism to help the government issue the £240bn of gilts it’s issuing this year. Why is this important? Because if the markets think QE is actually a way of one department of the government printing money for the other departments to spend (a la Weimar Germany), then confidence in the currency collapses. And right now, it looks very much like the Bank of England’s asset purchase programme is a device to buy state debt, masquerading as an attempt to target inflation.”

        But thereafter, silence on the subject, for reasons I find hard to fathom as it would clearly have been to the advantage of the Tory party to explain to the public what was actually going on.

        There are a number of different ways that this trick can be described for the half-educated layman ; above I have said that the Bank was rigging the gilts market in favour of the issuer, the Treasury; there is also a parallel with EEC intervention policies that lead to the accumulation of a butter mountain and a wine lake and so on, in this case with the Bank having a large stock of gilts taken off the market and stored safely away in its vaults where they can do no more harm to the government’s finances for the time being; it can also be described as the Treasury indirectly borrowing from the Bank; in your first reference it says “QE is a token exchange – Gilts for Bank Reserves”, and the process can also be described as the Bank and the Treasury indirectly swapping their respective IOUs, with the Bank getting the Treasury’s IOUs, gilts, and the Treasury getting the Bank’s IOUs, money, which it can use to pay the government’s bills.

        I would also mention that the exchange had to be indirect because while the UK is not in the euro it is still subject to the EU treaty provision, Article 123 TFEU, which explicitly prohibits national central banks from buying bonds direct from their respective governments, and also stops them extending overdrafts to their governments; which is why the ECB also had to operate indirectly to buy bonds issued by the governments of distressed eurozone states on the secondary market, not straight from the governments.

        • acorn
          Posted June 22, 2014 at 7:42 pm | Permalink

          The BoE bought Gilts in preference to private debt, because it can use it to control reserves, hence control LIBOR bank rate. It will also use it to unwind QE, along with “repo” contracts.

          The BoE was never intended to purchase corporate debt, the pension funds were supposed to do that by investing the reserves created by QE in new projects and products and budding entrepreneurs. That is how QE, a monetary process, is supposed to work. QE has proved ineffective.

          It doesn’t matter if the BoE or the Treasury create the new money, they are one and the same. The BoE operates with a balance sheet, the Treasury doesn’t. For instance, FfL was made to look like a BoE operation and nothing to do with the government’s fiscal deficit. The WGA accounts tell you that the Treasury created £36 billion of Guilts to fund it “off balance sheet”. Nobody felt a thing; markets didn’t crash; Gilt prices didn’t notice.

          • Denis Cooper
            Posted June 23, 2014 at 5:23 am | Permalink

            If it was the case that “The BoE was never intended to purchase corporate debt”, then one must ask why Darling sent letters to the Governor saying that it should purchase private sector assets such as corporate debt, and why the Bank set up its summary of its asset purchases to include results for corporate bonds and secured commercial paper as well as gilts:
            http://www.bankofengland.co.uk/markets/Pages/apf/results.aspx

            With real numbers for the private sector assets actually purchased, but at their peaks never anything like as much as anticipated in Darling’s letters and now zero.

            I think the answer is fairly simple: QE would only help the Treasury to fund the government’s budget deficit if the Bank was buying something that the Treasury was selling.

      • Mark
        Posted June 22, 2014 at 9:57 am | Permalink

        Not quite so: a fiat currency must have some basis of credibility, otherwise it will be rejected in favour of a foreign one or barter. Just printing money when the government needs to pay its bills instantly debases the currency, and you’d soon get hyperinflation. History is full of these failures of government – Decline and Fall of the Roman Empire gives an interesting(!) account of some of the consequences.

        If a government runs a balanced budget then it has no need to borrow or to arrange for any more currency than is required for transactions in the economy. If it wishes to spend in deficit then borrowing at interest offers some guarantee that spending will not be reckless, but purposeful. For this reason, the present low level of interest rates on new government borrowing are an economic disaster. They allow government to waste money on things like HS2 or poorly negotiated PFI deals (sort of a modern equivalent to the Roman emperors paying their soldiers while taxing their citizens).

        • acorn
          Posted June 22, 2014 at 6:16 pm | Permalink

          The currency gains its credibility by vertue of it being the only currency you can pay your taxes with.

    • Mark
      Posted June 21, 2014 at 8:41 pm | Permalink

      Entirely correct – as is JR – at least until any attempt is made to wind down QE balances, which will result in real borrowing rather than money printing, or if the balances are written off, a confirmation of a permanent inflationary injection into the money supply that is equivalent to default on a portion of the government debt. However, since we have to go back to the days before the Bradbury pound to see no long term inflation, in effect government has been defaulting almost continuously (with a gap for the Great Depression) through inflation since the outbreak of WW I.

      It is very revealing to plot the constructed consumer price index that dates back to 1688 (the year of the “Bloodless Revolution”) available in the Bank of England’s Three Centuries of Data spreadsheet on a logarithmic scale.

      http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/threecenturiesofdata.xls

      The index was at about 1.00 when the Bank was formed in 1694, and rises to 110.83 in 2009 (using the CPI measure since 1975 to flatter the figures somewhat). The price level remains stable for a century before inflation associated with the Napoleonic Wars and the suspension of convertibility of sterling notes into gold between 1797 and 1821, much of which is squeezed out of the economy by the time of the Great Exhibition (1851), before ending the 19th century in a period of remarkable stability at about 1.40. The inflation caused by WW I and the Bradbury Pound and the second period of suspension of convertibility (1914-1925) is immediately visible as the first entry into the modern inflationary era. Entirely in accordance with monetary transmission theory, the inflationary effect is delayed about two years before it kicks in. The inter-war years are marked by the last period of falling prices in the history.

      The spreadsheet also contains other historical information that is relevant on fiscal and trade balances, money supply, bank rate, gilts yields, exchange rates etc. allowing the interactions to be examined on a long term timescale. It is a pity that there isn’t a long term house price index included to match the Dutch Herengracht Index which goes back to the mid 17th century.

      • Denis Cooper
        Posted June 22, 2014 at 10:47 am | Permalink

        Thanks, very interesting.

        I think if you go back further than 1694 there were earlier periods of price inflation, often but not always associated with debasement of the coinage.

        And QE has effectively debased the currency, maybe not in terms of its external exchange rate against other currencies but in terms of its internal purchasing power; a couple of months ago I suggested in a comment here:

        http://johnredwoodsdiary.com/2014/04/26/labours-approach-to-the-cost-of-living/

        that £375 billion of QE had added an extra 7.5% to CPI over the preceding five years, over and above the 2% pa target.

        As the £375 billion has been spent into the economy when the government paid its bills and it is now in private hands there is no feasible way that the government could cancel it to reverse its inflationary effect; it could only be clawed back through taxation, and passed back to where it came from when the Treasury repaid the Bank on its stock of gilts.

        Even so it would take fifteen years of CPI inflation running at 0.5% below target to reverse the 7.5% or so excess inflation that it has caused.

    • Posted June 21, 2014 at 9:53 pm | Permalink

      Yes I’d agree with the point you make in the last paragraph. Because the BoE is now nationalised , technically it is owned by the Treasury Solicitor, there is no need for Bradbury pounds. In a way all pounds are now Bradbury pounds. I’d also agree with your comment on the conspiracy nonsense.

      The question is whether bond sales are necessary to fund government spending? I would argue that they are more related to monetary policy. They act, maybe not now but in normal times, to drain off excess reserves in the banking sector and stop the overnight rate falling too low. Those reserves have become excessive because of government spending. So the spending comes first and the bond sales happen later.

      If the £ is an IOU of government , as the BoE say it is, then there is no way that the government can borrow them back. Anymore than you or I can borrow back our own IOUs.

      If I need a kilo of sugar, I can get it from a neighbour and pay with an IOU in the same way as government pays for it. If I need some more then I can ask another neighbour and pay with another IOU. The conventional wisdom is that governments should not do this to any large extent but instead they should issue bonds. That would be like issuing a bond to my initial neighbour promising to pay back two kilos of sugar – in 10 years time. Note that the spending comes before the bond issue.

      That works out at about 3.5% pa interest. So I then get back my original IOU and can then respend that, supposedly responsibly, with yet another neighbour. But what about the new bond IOU I have issued? I am not really borrowing I’m just issuing IOUs of different types.

      Governments can never repay their IOUs. They can only hand out new ones. Or, they can confiscate them through the process of taxation. But that isn’t repaying! At least most people wouldn’t call it repayment.

      • Mark
        Posted June 22, 2014 at 10:05 am | Permalink

        So long as the activity of government is economically beneficial, then taxes can be regarded as a club subscription for public goods and services, and not as confiscation. However, when government debases its own activities by handing out unearned money to its supporters that would not otherwise be given in charity or investing in vanity projects that destroy value it ceases to be a club providing for the public good.

      • Denis Cooper
        Posted June 22, 2014 at 11:10 am | Permalink

        Money is a form of IOU issued by the Bank, while gilts are a form of IOU issued by the Treasury to borrow money to help other departments of the government to pay their bills; they are both arms of the state, but under the present arrangements while the Bank is wholly owned by the Treasury it is not actually a part of the government, any more than the courts or the army are parts of the government:

        https://www.gov.uk/government/organisations

        The Treasury “Works with 7 agencies and public bodies”; the UK Debt Management Office which sells the gilts is one of them, but the Bank of England is not one of them, it is by law an independent central bank.

        So we have two arms of the UK state indirectly swapping their respective IOUs, gilts from the Treasury going to the Bank and money from the Bank going in the opposite direction to the Treasury; I guess that the Treasury could have chosen instead to start issuing its own money, another form of IOU, in parallel to the familiar money issued by the Bank, but there would have been little point in doing that as under QE as practised it is in effect borrowing the usual money from the Bank at zero interest; and of course it would have been too easily understood by the general public, while QE is still not widely understood after more than five years.

  5. acorn
    Posted June 21, 2014 at 4:31 pm | Permalink

    Bradbury Pounds were Gold Warrants. It was too difficult to obtain and ship physical Gold in WW1, so you got an IOU from the Treasury you would get some Gold when the war was over.

    “The Government is issuing Stirling £1 and 10s notes. Also making Postal Orders legal tender. A supply of Government Notes will be forwarded to you [Banks] as soon as possible . These must be issued in preference to gold and so far as Notes are available, gold must not be issued. We have been officially informed that an ample supply of this new currency will be in circulation without delay.”

    Foreigners preferred the BoE notes to Treasury notes, but both were similarly convertible to Gold; theoretically. A few years later the BoE took over the issue of all notes, tried to resurrect a Gold Bullion Standard which Mr Keynes said would not work, and it didn’t. Central bank collapse followed and WW2. Oh, and FIAT currency that isn’t convertible to anything other than more fiat currency.

  6. sm
    Posted June 22, 2014 at 12:50 am | Permalink

    QE involves the use of intermediary dealers who take a cut. Am i right in understanding Bradbury pounds did not suffer this additional friction or skim.

    • Denis Cooper
      Posted June 22, 2014 at 8:20 am | Permalink

      Thanks, I forgot to insert the usual phrase “minus transmission losses” in my description of what JR aptly called the “money-go-round”, for example here in August 2009:

      http://johnredwoodsdiary.com/2009/08/14/the-money-go-round-quantitative-easing/

      “The Bank of England buys let’s say £5 billion of government bonds from investors. Shortly afterwards the UK government issues another £5 billion of bonds to meet its immediate cash needs by borrowing. Very often the bonds the Bank buys are similar in interest and length of time to repayment as the new bonds the government is issuing.

      Who benefits from these transactions? Dealers in bonds do, as there is more turnover and more commission. Investors in bonds may do, as often the terms offered on the new bonds they buy may be slightly better than the terms surrendered on the ones they sell back to the authorities. Foreigners benefit, as some of them just sell their government bonds for cash, and move out of sterling if they are nervous of the UK future. The biggest winner is the government, which finances its large deficit relatively easily.”

      But I don’t suppose that it would have been cost-free for the Treasury to start to issue its own new currency for general circulation in parallel to that already being issued by the Bank; it was certainly easier – apart from anything else, it avoided any need to legislate to change the legal tender rules – and it may well have been cheaper to induce the Bank to create more of the familiar currency and pass it to the Treasury via the gilts market, even with those transmission losses.

      However there was also the overriding political need for the Labour government to fool the electorate about what was being done, with stories first about how the Bank was going to remove “toxic assets” from the financial system, and then about how the Bank was going to inject more money into the economy and free up seized markets by buying up various kinds of assets, high quality assets for which there was at that time no liquid market, when it ended up with virtually all the new money being spent buying gilts, assets for which there was a huge and highly liquid market; and the primary purpose was always to make sure that the Labour government didn’t run out of money to pay its bills and didn’t have to make drastic spending cuts during the year before the general election.

    • Mark
      Posted June 22, 2014 at 9:11 am | Permalink

      I imagine that Waterlow & Sons (or whoever did the printing) got some of the friction that isn’t required when the money is “printed” as electrons instead of physical notes.

  7. Posted June 22, 2014 at 4:26 am | Permalink

    Bradbury pounds were essentially government IOUs issued by the Treasury rather than the BoE. Does it make any difference? Possibly it did during WW1 as the BoE was still in private hands, but it makes no difference now. Both the Treasury and Bank of England are part of government and they could well be merged. It would make no real difference to the workings of the economy.

    I have heard the argument that Bradburys were somehow issued “debt free” and were therefore a good thing. The BoE issues money “debt free” too. in the sense that the monetary base ( all printed currency and currency held in digital form) issued by the BoE is not included in the national debt. So in theory, the National Debt could instantly be reduced to zero, or even converted into a National asset, simply by issuing enough money to buy back all bonds and other government securities which are considered part of the National Debt.

    Apparently, the accounting method isn’t quite the same in the USA. There was recently an idea that the US government could get around its debt ceiling restrictions simply by creating trillion dollar coins. Coins there aren’t considered to be part of the National debt. Why not? Does this make any sense?

    The only realistic and conceptually supportable definition of National Debt should include all government liabilities from all issued bonds and securities right down to the the liabilities of 1p coins. Then it is easy to see that all the notes and coins in our wallets and purses are our assets only because governments accept them as their liabilities. Governments therefore have to be in debt so that everyone else can be in credit according to standard bookkeeping principles. Therefore talk of paying off the National debt is nonsense. It is neither desirable nor feasible.

  8. Posted June 22, 2014 at 2:25 pm | Permalink

    Dr. Redwood,

    Thank you for responding to my request for comment on the Bradbury Pound. As I understand it from your answer and from the comments of others, since the BoE was nationalised by the Labour government in 1946, ownership of the Bank of England is now vested in the Exchequer and consequently in the tax-payers of the U.K., since the Chancellor of the Exchequer has no money except that provided through taxation.

    This raises further questions in my mind.

    If the BoE is one with the Exchequer, what function does it perform which cannot be performed by the Exchequer itself. Why do we need to create money through the BoE and sell Bonds to investors, rather than the Exchequer just creating the money? If the authorities do not think it would be a good idea to print more money now because of the risk of inflation, what is the purpose of so-called Quantitative Easing authorised by the BoE?

    You say the Bradbury Pound is a very similar device to creating money and buying gilts through the Bank of England, a nationalised bank. It would seem to me that there is an essential difference between the two methods. To whom are the printers of money answerable?

    For the Exchequer, the Chancellor is answerable to his government colleagues and ultimately to the electorate. That is not true of the Governor of the Bank of England, who answers for his decisions to the Bankers’ Bank.

    So who was it who authorised the tax-payer to bail out the private banks who were too big to fail because of their reckless and greedy investment policy? Was it me and my fellow taxpayers? Was it the Governor of the Bank of England – or was it the Chancellor of the Exchequer, acting in my name?

    John Wrake.

    Reply All the actions of the Bank in printing money and handling the banking crisis were under the Chancellor’s supervision and ultimately under the control and scrutiny of Parliament. The idea of the Bank advising on how much QE and deciding for itself on interest rates is to have some “independent ” judgement of professionals beneath the Chancellor, but in crisis or when Parliament wishes the Chancellor is in charge. There is no extra QE currently underway. Bradbury pounds or QE pounds will be inflationary unless there is considerable spare resource in the economy and insufficient credit creating power in the commercial banks.

    • Denis Cooper
      Posted June 22, 2014 at 7:58 pm | Permalink

      “If the BoE is one with the Exchequer, what function does it perform which cannot be performed by the Exchequer itself.”

      Well legally the Bank is not one with the Exchequer; it has been wholly owned by the Treasury since 1946, but under the Bank of England Act 1998:

      http://www.legislation.gov.uk/ukpga/1998/11/contents

      it is supposed to be one of those independent central banks which had become so fashionable, with Section 10 removing the power of the Treasury to give the Bank instructions in relation to monetary policy.

      There is a Section 19 which allows the Treasury to exercise reserve powers and effectively suspend the normal independence of the Bank in relation to monetary policy, with the consent of both Houses of Parliament, but those reserve powers have never been invoked.

      And this is where I depart from JR’s portrayal of Parliament being in control of the creation of vast sums of new money to indirectly help the government to fund its budget deficit, because as far as I can see it is a matter of the Chancellor – be it Darling or be it Osborne – deciding to run off a few more billions and only telling MPs after he has made his decision, there has never been a single vote of MPs to approve the next tranche of QE.

      Reply The Chancellor signs off money printing. Parliament could at any time ask him about it or demand a vote on it. It is just that so far it has not been contentious with enough MPs.

      • APL
        Posted June 23, 2014 at 8:29 am | Permalink

        JR: “Parliament could at any time ask him about it or demand a vote on it.”

        But it doesn’t.

        The sole purpose of the original Parliament was to control the spending of the Crown, now that the executive has usurped the Royal prerogative, if Parliament isn’t providing oversight of the executive then it isn’t doing the one thing is should be doing.

        In which case, why are we paying you all, £64,000 per annum?

    • Posted June 22, 2014 at 9:36 pm | Permalink

      Yes Bradbury pounds, like any other pounds, will be inflationary or reflationary if they had released and spent into the general economy. If the pounds are chasing resources which do not readily exist then the former but the latter if they serve to utilise resources which would otherwise be lying idle.

      QE is somewhat different. The dire prophesies of rampant inflation when QE programs were announced in the USA and UK have proved to be unfounded. QE is simply an asset swap of bonds for cash. The banks handed over their gilts and other securities in exchange for cash which they have held in their reserves.

      But banks don’t lend out their reserves. The ££ and $$ have not entered general circulation therefore there has been no rampant inflation in either country.

      Reply But QE can lead top inflation if the banks can lend the cash on, or if the QE devalues the currency

      • Mark
        Posted June 23, 2014 at 10:23 am | Permalink

        QE cash was invested by banks in commodities and financial markets. That produced inflation in both asset classes. The FTSE was down at 3,500 in March 2009, and boosted to 5,500 by year end. Gold, oil and agricultural commodities have seen large price increases. Of course commodities are a more global market, so the QE involved in boosting them is mainly via the US – but London is a key trading centre for many of them.

        In the case of oil, banks were already heavily invested when the financial crisis broke – and they liquidated their positions in 2008 to realise some cash, which led to the price falling from nearly 150 $/bbl to 35$/bbl in just six months. We’re back at more than treble that.

        The evidence is not just in the prices, but also in the changes in market open interest data.

      • Denis Cooper
        Posted June 23, 2014 at 2:47 pm | Permalink

        “The dire prophesies of rampant inflation when QE programs were announced in the USA and UK have proved to be unfounded.”

        I suppose that an extra 8% on CPI due to QE over four of five years can’t really be described as “rampant” compared to the double digit annual inflation rates we once had, but it is still an 8% decrease in purchasing power over and above the planned 2% a year decrease.

        “he banks handed over their gilts and other securities in exchange for cash which they have held in their reserves.”

        Firstly it was much less commercial banks than insurance companies and pension funds and other gilts investors; secondly it was almost entirely gilts; and thirdly overall the money they were paid by the Bank for their previously issued gilts was used by them to buy new gilts from the Treasury, replacement gilts, and once the Treasury had got hold of that money it was spent into the economy when the government paid all its various bills.

      • Posted June 23, 2014 at 11:57 pm | Permalink

        The only sensible approach to money; whether it is cash, gilts , stock etc is to consider them all to be IOUs. Some are IOUs of commercial banks but in the case of government issued money the difference is only in detail. ie do the IOUs pay any interest. There is nothing fundamentally different between any of them.

        If someone owes me money but they don’t have cash but they do have gilts, do I refuse the gilts? Of course not. I just take them and either swap them for cash or use them to settle my own debts. In that way they are just like money. They are money. The argument that I can’t spend them at Tesco and that makes them somehow different is quite feeble and meaningless in an economic sense.

        • Denis Cooper
          Posted June 24, 2014 at 10:17 am | Permalink

          “The argument that I can’t spend them at Tesco and that makes them somehow different is quite feeble and meaningless in an economic sense.”

          I’d love to see you try to do it, when the lady at the checkout would quickly bring you down to earth in a practical sense by refusing to take your gilts and sending you away without your groceries.

          • Posted June 24, 2014 at 11:11 pm | Permalink

            “Is a gold sovereign an IOU?”

            A metalic coin would be a partial IOU unless the value of the metal in the coin exactly equalled its face value.

            That would be a dangerous situation for the issuer of the coin as it would be open to anyone to melt them down and use the metal for their own purposes. The coins could be skimmed by filing off small amounts and the resulting coin passed off as fair wear and tear.

          • Posted June 24, 2014 at 11:25 pm | Permalink

            I’ve had problems spending £50 notes and had to leave the store without my groceries! So £50 notes shouldn’t be counted as money? There are high value banknotes which are only used between banks. They wouldn’t be accepted at Tesco either. So they aren’t money?

            Its interesting to note how the post war Labour government managed to nationalise key industries like Steel, the Mining industry, and the railways.

            They simply created stock such as British Transport Stock paying 3% which they swapped for railway shares. So the government got the shares the shareholders got their stock paying a guaranteed 3% which replaced the dividends they would have had for their shares.

            Was this less inflationary than simply printing the money and buying back the shares? Mainstream economics would say yes. I can’t see how it makes much, if any, difference. The government stock is readily convertible. Holding £100 of government stock paying 3% is just like having £100 in a savings account paying 3% interest.

          • Denis Cooper
            Posted June 25, 2014 at 10:25 am | Permalink

            Of course £50 banknotes are money, and moreover they are legal tender unless they’re a withdrawn issue:

            http://www.bankofengland.co.uk/banknotes/Pages/fiftywithdrawal/default.aspx

            So if you’ve had problems with £50 banknotes you should be able to imagine the infinitely greater problems you’d have if you tried to pay with gilts, or for that matter with some unfamiliar money issued by the Treasury.

          • Posted June 25, 2014 at 11:30 pm | Permalink

            Denis,

            Its probably too difficult for anyone who has had classical economic training and had it instilled in them that cash is magically different from other government IOUs , but try it this way:

            A government bond/gilt has the same status a postal order used to have in the days when the Royal Mail was publicly owned.

            A postal order was also pretty much of the same status as a Bradbury pound. During WW1 the government were also promoting the idea that postal orders like Bradbury pounds could be used instead of banknotes.

            Any child who received a postal order in a birthday card knew they were real money even though they couldn’t directly be spent at Tescos. The “Tesco test” can’t be any sort of reason to count one kind of government IOU in the National Debt but not count another. If that’s the level of thinking, it is no wonder the economics profession, like most of the western economies they advise upon, is in such disarray.

        • Mark
          Posted June 24, 2014 at 11:31 am | Permalink

          Is a gold sovereign an IOU?

          There is rather a difference between a barter economy where exchange of goods is used as money and an economy lubricated with a proper money supply. Gilts come in a minimum size of £100 nominal, so not much good if you just want to buy a newspaper. Gilt prices change, much as exchange rates to foreign currencies. Transfer of ownership requires payment of brokerage.

          The reality is that financial instruments and other near cash alternatives have different degrees of the key monetary attributes – divisibility, durability (both physically and as a consistent store of value), resistance to counterfeit, ease of use (transportable, ready acceptance, low/zero transaction cost), liquidity (you must wait 7 days before you can access money in a 7 day account).

          Reply Gold sovereigns and paper money are both promises to obtain goods or services to the face value of the instrument, and both rely on confidence in them. Both can be devalued (against other currencies/money) by market movements.

          • sm
            Posted June 24, 2014 at 10:59 pm | Permalink

            A gold coin has no counterparty promising to pay anything. It is what is no more or less.

            A government has less control of it without being overt . A fiat pound can be devalued easily,quickly and doesn’t require seizure or such imposts. Influencing the price of real gold for delivery is much more difficult. Unless of course you have it on hand to sell on cheap…then a while later you find have none to sell. Why would that be?

            Then its a case of who picks up the tab…no guesses who it wont be.

            Index linked & Inflation proofed EU/UK mandarins, Council/Quango/BBC equivalents? Bank bosses?

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
    Published and promoted by Thomas Puddy for John Redwood, both of 30 Rose Street Wokingham RG40 1XU
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