[A-List] How the Proposed Bank of England Act Works - Part One

[Bill Totten]

I think I forgot to reply to this, Tony. Although I think this proposed
Bank of England Act overall is superb and much better than anything
England, Canada, the US, or Japan have now, I agree completely with your
comments on "independence". Why should any citizen of a democracy want
such a vital thing as his or her nation's currency to be governed by any
body independent of the government s/he helps elect?  Bill


you On Sun, 8 Aug 2010 14:12:07 -0400
"Tony B." <tal1 at cogeco.ca> wrote:

> "The MPC will continue to be politically independent and neutral. This is
> very important, as it prevents harmful political 'tinkering' with the
> economy. It is important that the MPC can not be overruled by
> politicians, whose decisions will be swayed by political matters rather
> than the long-term health of the economy."
> 
> 
> This is where I have real problems with the 'proposed Bank of England
> Act'. To wit: the Bank of Canada is "politically independent and
> neutral", i.e. it is independent of both parliament and the Minister of
> Finance.
> 
> ...But, of course, it is not independent of corporate lobbyists...and so
> is now totally controlled by them.
> 
> This idea that being 'politically independent and neutral'  is 
> self-contradictory and unworkable given that the central bank would
> still be functioning within a capitalist system, i.e. in a system whose
> whole raison d'etre is manipulation of the economy towards profit,
> monopoly, exploitation and corporate hegemony.
> 
> Thus, the proposed 'Bank of England Act' would represent a viable
> proposal *in a socialist state*....but not within the existing ecomomic
> system. First it would never get off the ground, i.e. the capitalist
> elite would never sanction it. Second, even if it were to get off the
> ground, it would likely be brought crashing down to earth in short
> order, again by capitalist imperatives.
> 
> I reckon that all this falls under the heading, 'revolution vs
> reformism'.
> 
> Tony
> 
> 
> 
> 
> ----- Original Message ----- 
> From: "Bill Totten" <shimogamo at ashisuto.co.jp>
> To: <a-list at lists.econ.utah.edu>
> Sent: Saturday, August 07, 2010 8:49 AM
> Subject: [A-List] How the Proposed Bank of England Act Works - Part One
> 
> 
> > Creating New Money
> >
> > Like adding oil to a car engine, the economy needs a certain amount of
> > 'new' money each year to continue running smoothly.
> >
> > While many journalists and academics have slated the Bank of England's
> > 'Quantitative Easing' scheme as 'printing money' and being
> > inflationary, these same commentators are usually ignorant of the fact
> > that the money supply has been increased by an average of 7.6% per
> > annum for the last thirty years - almost entirely as a result of the
> > money creation within the private banking system. Since this newly
> > created money was all matched by the same amount of debt, it laid the
> > foundation for the recent financial crisis.
> >
> > However, had the money supply not grown at all over the last thirty
> > years, we would have suffered thirty years of economic stagnation. So,
> > while too much new money can cause inflation, there is still a need
> > for an annual increase in the money supply.
> >
> > Our reform would make it impossible for this annual increase in the
> > money supply to be provided by commercial banks - in other words, we
> > would take control over the nation's money supply out of the hands of
> > private companies and put it back in the hands of the state.
> >
> > We would then need to replace this money creation with an alternative
> > source of new money. The following section explains how we do this.
> >
> > Who Decides How Much New Money Should Be Created?
> >
> > The existing [Bank of England] Monetary Policy Committee (MPC) will
> > become responsible for making decisions on how much new money should
> > be injected into the economy in each period of time.
> >
> > They will stop making decisions to raise or lower the base interest
> > rate and will instead make a decision to increase or reduce the money
> > supply. They will likely take a twelve-month or two-year view of the
> > economy, and then smooth any increase in the money supply over each
> > month.
> >
> > The MPC will continue to be politically independent and neutral. This
> > is very important, as it prevents harmful political 'tinkering' with
> > the economy. It is important that the MPC can not be overruled by
> > politicians, whose decisions will be swayed by political matters
> > rather than the long-term health of the economy.
> >
> > The Committee will also still be subject to all the rules regarding
> > transparency of its decisions, and the amount of the authorised
> > increase in the money supply will be made publicly known.
> >
> > Note that they will not be creating as much money as the government
> > needs to fulfil its election manifesto promises - the needs of the
> > government will not be considered. As discussed in 'Guarding Against
> > Inflation' {*}, suggestions that this reform would cause a 'Zimbabwe
> > situation' have no basis in reality.
> >
> > {*}
> > http://www.bankofenglandact.co.uk/how-it-works/guarding-against-inflation/
> >
> >
> > How Will The Monetary Policy Committee Make The Decision?
> >
> > The Monetary Policy Committee would authorise the creation of as much
> > new money as they believe the economy (in other words, companies and
> > households) needs to function healthily, and no more. There are two
> > main measures that they can use to guide their decisions.
> >
> > Firstly, the Committee will continue to base its decisions partly on
> > the basis of 'inflation targeting' - the policy of trying to ensure
> > that inflation stays within a small range - such as between 1.5% and
> > 2.5% per annum. In other words, they should try to ensure that any
> > change in the money supply is neither inflationary nor deflationary -
> > neither too much nor too little. Note that for this to be effective,
> > the measure of inflation used must be redesigned to take account of
> > asset price inflation (such as a housing price bubble). It is
> > pointless to attempt to make decisions affecting the whole economy
> > using a measure of inflation that ignores inflation of ten per cent
> > per annum in house prices when housing is the most expensive item in
> > anyone's 'basket of goods'.
> >
> > Secondly, the MPC can also refer to changes in the use of overdrafts.
> > If the average overdraft balance was increasing, it may suggest a
> > shortage of circulating money in the economy, and point to the need
> > for more money to be injected into the economy. Alternatively, if the
> > average overdraft balance was decreasing, it may be an indicator that
> > there is 'enough' or too much money in the economy and that the
> > Monetary Policy Committee should hold off on increasing the money
> > supply for one or two months.
> >
> > The Mechanics of Creating New Money
> >
> > When the Monetary Policy Committee has authorised the creation of a
> > specified amount of new money, it will be created in the following way:
> >
> > 1. The government will hold an account, known as the 'Central
> > Government Account' with the Bank of England.
> >
> > 2. The Bank of England's Issue Department will simply increase the
> > balance of this account by the amount authorised by the Monetary
> > Policy Committee. They will not simultaneously reduce the balance of
> > any other account - by making a credit without making a matching
> > debit, they are creating new money.
> >
> > 3. The government can then withdraw the money from its Central
> > Government Account and add it to tax revenue, and then use it in
> > accordance with the principles discussed below.
> >
> > In contrast to printing physical cash or coin - which costs around
> > three pence for every one GBP created - a creation of money by the
> > method is costless. To create GBP 20 billion or GBP 200 billion both
> > requires one authorised official with the right passwords and a
> > computer connected to the Bank of England's central accounts system.
> > Of course, it would also require witnesses and formalities to be
> > observed, but all in all, GBP 20 billion could be added to the economy
> > in a little under twenty minutes.
> >
> > http://www.bankofenglandact.co.uk/how-it-works/creating-new-money/
> >
> > http://www.billtotten.blogspot.com
> > http://www.ashisuto.co.jp
> >
> > 
> 
> 
>