August 4, 2021

Power doesn’t always corrupt, but it is habit-forming. One needn’t be a conspiracy theorist to suspect that experts err on the side of maintaining their relevance. So will we ever be rid of them?

In the case of Britain’s bankers, I suspect not. After all, if the past year has taught us anything, it’s that they can provide something that the politicians will always want: money. 

There was a time when the function of a central bank was to regulate the wider banking system, set interest rates and keep inflation under control. Though an important role, it was a limited one.

But then, in 2008, the global banking system almost collapsed. The shock was such that slashing interest rates wasn’t enough to revive the economy. And so the central banks embarked upon a course of quantitative easing (QE) — i.e. creating money electronically and using it to buy up government debt and other financial assets.

This was meant to be a temporary measure. As soon as things went back to normal, the plan was to reverse the process of QE. The central banks would sell off the assets they’d purchased and electronically destroy the money they’d created. Job done; the balance restored.

But things didn’t go back to normal. By 2012, vast amounts of money had been created — £375 billion in the UK alone — but there was little sign of inflation and not much growth either. And so QE was never “unwound”. Politicians realised this was an endless fountain. In the wake of Brexit, the Bank of England conjured up enough funny money to buy a further £70 billion of government bonds.

Now with Covid, the QE binge has become an orgy. All the central banks are at it. In the UK, we’ve plucked another £450 billion from the magic money tree. To put it another way, our national debt now stands at over two trillion pounds, but getting on for half of that is owed to the Bank of England.

It’s getting hard to deny that the central banks are printing money to finance government spending. The central bankers won’t admit to that, of course. They’ll say that QE is just the equivalent of an interest rate cut and intended to stop inflation from turning into deflation.

However, that alibi is wearing thin. Firstly, there’s not much risk of falling prices right now — quite the opposite in fact. And, secondly, one can’t help but notice that the more QE there is, the more the Government borrows.

But why worry? Isn’t owing money to the Bank of England better than borrowing it from the Chinese? And given the fragile state of the economy, isn’t borrowing preferable to tax hikes or spending cuts?

There is the risk of inflation, of course — a real concern right now. Then there’s the risk that the money markets might run out of patience — and start charging higher interest rates on government debt. When a government owes £2.2 trillion, like ours does, then every 1% increase in the interest it pays on that sum costs an extra £22 billion a year — or roughly half the defence budget. 

But there’s a more disturbing possibility: that economic gravity doesn’t reassert itself — and that the QE orgy continues.

Ultimately, this would be terrible for democracy. When governments rely on their own citizens for money, they become beholden to them. The principle of “no taxation without representation” puts nations on a path to universal suffrage and keeps them there.

However, governments that get their cash from elsewhere — oil revenues for instance — can afford to ignore their people. As the absolute monarchies of the Middle East prove, “no representation without taxation” is also a potent political force. 

So what happens if central bankers replace taxpayers as the key source of government finance? We saw what happened in Greece, which ceased to be sovereign state as soon as it became dependent on the European Central Bank. The Greek people voted for a government of the populist Left, but extreme austerity was imposed anyway — and continues to this day. Similarly, Italy is controlled by the EU establishment — the Prime Minister is Mario Draghi: a former President of the European Central Bank.

In Britain, we can be thankful that Brexit has removed that possibility. But what’s the point of giving the Eurocrats the slip, if we replace them with a homegrown caste of over-mighty central bankers?

Take the Bank of England’s “net zero mandate”. The Old Lady of Threadneedle Street already interferes in the market by using QE money to buy up corporate bonds from the private sector. Purchases total £20 billion so far. This amounts to a major subsidy for the qualifying businesses — who are able to borrow more and at a lower cost. Deliberately skewing this to favoured companies would mean using QE to pick winners — a bizarre position in which to place a central bank.

I’m all in favour of green government policy. But these are decisions that should be made democratically in Parliament, not by unelected central bankers picking winners. 

Meanwhile, the central bankers could become more powerful yet if the Chancellor goes ahead with a scheme to introduce what he calls “Britcoin” — a digital currency overseen by the Bank of England. This could have all sorts of benefits — from reducing transaction costs to ensuring that our national currency isn’t displaced by a cryptocurrency or Facebook’s Diem system.

But there are dangers to Britcoin too. For instance, a digital currency administered by the Bank of England could be used to monitor our purchases and transfers, thus ending the privacy that comes with using cash. In theory, the Bank could also apply its climate mandate to our transactions — for instance, imposing a penalty on purchases deemed to be unsustainable. 

And then there’s the risk that a central bank digital currency (CBDC) would destabilise the banking system. 

At the time of the last financial crisis, governments moved fast to prevent bank runs. With a few exceptions, they succeeded. That said, their job was made easier by the fact that most of us don’t want to empty our accounts and store our savings as banknotes under the mattress. However, if we could withdraw our money in the form of digital cash and keep it in a safe with the Bank of England, that would present fewer obstacles. Conceivably, the entire private banking system could collapse within minutes if enough people went online to transfer their bank balances into their Britcoin accounts. 

I’m presuming these possibilities will be anticipated, and preventative measures put in place before an official digital currency is launched, but there’s no doubt that any such move would further expand the role of the Bank of England. 

How can we stop this? Ideally, our elected representatives would be dealing with this stuff on our behalf. But I doubt that most of them are capable. The next time you meet a politician, ask him or her to explain quantitative easing to you. Or ask them where the money that banks lend to their customers comes from. If they say “from savers”, then they haven’t got a clue. 

If we can’t rely on our politicians to provide effective oversight, what can we do? One solution would be to end our addiction to QE — though I’m not convinced we’re willing to endure the austerity that would entail. Another would be to end the independence of central banks. But this would mean putting politicians in full charge of the QE printing press — and do we really want to risk that?

Unless there’s an inflation crisis that brings the whole pack of cards crashing down, the most likely scenario is that the central banks continue to grow in power — until we stop thinking of them as banks at all, and instead as parallel governments.