The Great Money Mystery

The Bank of England has flooded our economy with £200bn of new money to help boost growth; now, the Fed is pumping in another $600bn to America's. But where is it? And who has benefited? Nobody seems to know

by Faisal Islam / October 20, 2010 / Leave a comment

Published in November 2010 issue of Prospect Magazine

“Political Ravishment” by Gillray (1797): Prime Minister William Pitt loots the Bank of England by printing money to pay for a war

Many British schoolchildren will be familiar with the song “Magic Penny”:

Hold it tight and you won’t have any
Lend it, spend it, and you’ll have so many
They’ll roll all over the floor

Though written by an American, its popularity in this country is unsurprising. It was here, after all, that David Hume and John Stuart Mill developed the quantity theory of money, the basis for modern monetarism. So it is entirely appropriate that Britain is now engaged in the world’s biggest experiment in the creation of magic money. Quantitative easing (QE), as it is officially known, or “printing money,” as it is traditionally described, has seen a flood of magic pennies wash through the country. So far £200bn has been conjured up by the Bank of England since March 2009.

Britain is not alone; almost all the world’s major economies have dabbled in QE since the financial crisis struck in 2008. This year the European Central Bank (ECB) sheepishly joined Britain, the US and Japan. In the spring, it was widely assumed that QE programmes had run their course, having pumped the targeted amount into their economies. But now policymakers in big western economies are considering “QE2”: another burst of monetary mysticism.

Yet as the world’s central bankers reach for their magic cash machines again, odd, unintended consequences of QE with social, political and even diplomatic repercussions are coming to light. For a start, the world’s leading economists seem unable to agree whether it has worked or not. The IMF’s verdict in August 2009 was that QE is “not a panacea… does not have to be a curse… and is not a non-event.” So at least we know what it is not. But what it is remains a mystery.

“It was one of the many measures to get confidence back in the system,” says former chancellor Alistair Darling, the man who had to sign off on the Bank of England experiment. “Nobody really knows what impact it’s having,” he says with shocking candour. “Look at the Bank of England [monetary policy committee] minutes, even they are split.”

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Comments

Rob Slack
November 5, 2010 at 12:01
Silly trivialisation of a serious matter. The vast majority of people have no idea of what "money" is, even though most will think they do. (I don't say that to patronise; there is no more obvious reason why most people would have an understanding of money and its creation than most of us would understand the workings of a TV, even though we all use them). Whilst it is true (in a sense) money is created out of nothing, that requires explanation if it is not to confuse. We can never *know* if a policy has worked. That would require that we knew what would otherwise have happened...which is meaningless (so impossible).
John Kemp
November 5, 2010 at 12:24
It seems to me a second dose of QE is more or less inevitable, since no-one seems to have any other ideas of how to get the economy back on track. Especially if the US continues down that route, we will do what we usually do and tag along hoping they know what they're doing. A dangerous course as ever. If no two economists can agree on whether it's working or not, political factors will determine what action is taken regardless of the supposed independence of the BoE. IMHO anyway... (comment via facebook)
Alyson
November 5, 2010 at 14:36
I have no doubt that Brown and Darling 'saved' the world, in that they led the resue that stopped solvent banks from following fraudulent banks down the drain, and that initial QE was necessary to spread the debt incurred in this rescue. However the books now need to be transparently open to us all, so that all of us who are sharing the repayment of this rescue package, whether by lower value in our pay, or interest rates on our own loans, know exactly what we are paying for and to whom.
jim evans
November 5, 2010 at 18:28
Alison.....they saved the USA and the bankers...but I was always told that rich men become rich and remain so by skilled risk-taking and facing losses....and yet the losses seem to be ours as taxpayers and citizens of collapsing economies. OK Madoff went to jail...but all the financiers and politicians and media types just get richer while our social democracy is stripped of its remaining assets.
ao7
November 6, 2010 at 02:50
I'm surprised the article makes such a brief mention of the devaluation effect of QE, which seems its clearest effect, and for those hoping for export led jobs (most of the world), its most beneficial one. @ Rob Slack {no flame intended}: if we do something (e.g. raise interest rates) and notice an effect (e.g. assets requiring borrowed money, like houses, fall in price) and both are repeatable, and we have a theoretical framework, we can get close to knowing something works, within the confines of the dismal science. I'd like to excuse myself from serious philosophy and include an \other things being equal\. @ jim evans: one theme of the credit crunch had been the privatization of profit and the socialization of loss. Skilled risk taking is only one of the methods available. Somewhere in Willem Buiter's blog I remember him asking why bond holders should always be held safe, like they were at the foundation of the USA (maybe he was referring to Shay's Rebellion). This will cheer you up: \Sept. 29 2008 (Bloomberg) -- As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.\
jim evans
November 6, 2010 at 17:19
Thanks for that confirmation ao7 but i think the socialisation of loss goes back a long way and most certainly to a time when the First World War ruined the UK and gave the USA superpower status. After that all it took was a Wall street Crash or two (with the odd genocide and war for good measure) and Wall Street reigned supreme....able to rebuild Germany and Japan and then turn China/India into its workshop of the world while Uncle Sam just lived off all his investments and did the odd bit of bloody regime change in Iraq and Afghanistan while taking over the Soviet Union through controlling its very own expanded EU. British people "lost" and continued to lose throughout this process....so it`s nothing new!
DAVID_CUTTS
November 7, 2010 at 16:52
If we can't tell whether a measure to increase the quantity of money (and thus risk inflation) is working to benefit the economy as a whole, but we can tell that it benefits bond traders, then it should be stopped forthwith and re-examined. I think that if I wanted to stimulate the economy by buying bonds I would buy special ones in a new public works fund, or something more specialised like a home insulation and industrial energy saving fund.
jim evans
November 11, 2010 at 09:39
David Cutts makes an excellent point but it will be completely ignored by our politicians and the financial authorities because they are victims of the global financial system rather than executives able to exercise control over it.....think Emperor`s Clothes crossed with the Sorcerer`s Apprentice to get a feel for their position.....or you could just recall the film Titanic! All the devices that kept Wall Street in control are now exposed by the crafty Chinese and their use of Wall Street`s old usury/fraud techniques....capitalism doesn`t need all that hot air about democracy and freedom and free markets and religions...all it ever needed was lashings of cheap desperate labour (and scarcity of resources) to exploit and an authoritarian nationalistic military "communist" government to take over the world.
vimothy
November 11, 2010 at 16:30
Faisal, Interesting article; I have some criticisms here: http://vimothy.wordpress.com/2010/11/10/obligatory-qe-post/
jon
November 13, 2010 at 16:14
"But if they use this borrowing to pay back bank debt, then it acts as a drag on bank lending and pulls down the desired growth in the broad money supply." and why is that growth desired? so that businesses can be healthy again? in short, "if businesses can get healthy again all on their own, then this medicine won't be needed! and that would be dreadful for the producers of the medicine! especially since it enriches them on the people's dime, without any say in the matter from anyone whatsoever!" well who fucking cares? don't you know what money is? yes let's bring make-work activity to the level of financial markets. gee, what could go wrong?
Rob Slack
October 26, 2011 at 10:05
Idiot. Only an idiot would write of "magic money"; it just supports the many idiots who think that; the "money from thin air" brigade. An economics commentator should know better.
Rob Slack
October 26, 2011 at 10:13
I've just realised I posted some time ago. My feelings remain pretty much unchanged. @ao7 ao7 says: NOVEMBER 6, 2010 AT 2:50 AM But in a single "experiment", where it is impossible to be sure "other things equal", we can never know what are effects (though as you say, if what happens conforms to theory we might feel we know). The best we can ever do is compare outcomes to forecasts of outcomes in the "no action" case.
Peter L. Griffiths
June 18, 2012 at 17:08
Quantitative easing simply means the central bank handing money over to the other banks to spend extravagantly or lend to defaulting debtors.
Carney’s recent musing on UK jobs and housing bubbles | Faisal Islam on Economics
December 12, 2012 at 14:41
[...] nominal GDP targeting may more accurately reflect what the BoE has already been doing sotto voce for three years. Thirdly, I restate my surprise, made in the initial “Carney-val” euphoria, that some [...]
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September 20, 2013 at 02:07
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October 1, 2013 at 08:55
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Peter L. Griffiths
September 29, 2017 at 15:20
Traditionally the Bank of England had two main functions firstly to issue the irredeemable promissory notes and secondly to preserve the solvency of the financial system particularly by guaranteeing the deposits of the Commercial Banks. Until about the 1980s , every week the Bank of England issued the so called Bank Return showing a balance sheet with Other Government Securities on the Assets side being complimented by Notes in Circulation on the Liabilities side. Very few experts on banking seem to understand that these Other Government Securities constituted a Deficiency Account. The bank of England no longer issues a Bank Return, so confusion reigns supreme, particularly since this system was copied by other central banks.