It is sad to see the Bank of England, once the cornerstone of British prosperity, now a debased institution that is incompetent, idle and dishonest. These are heavy charges to fire at a once great organisation, but each is true.
The job of the Bank is set out in law; it must keep inflation within a range around a 2% target. It has failed. It also has a long-standing responsibility to maintain confidence in the currency which it does not seem to realise is part of its job.
The inflation failure was caused because the Monetary Policy Committee took no notice of monetary policy. To help the government pay for Covid it printed billions of pounds and was then slow to react even when its own chief economist, Andrew Haldane, warned that inflation was about to takeoff. It dismissed these fears and pretended that price increases were temporary, so inflation soared to 11.1% at its peak in 2022. In comparison, Japan saw a peak closer to 4%.
This failure of policy making by the notably independent Bank of England continues to have consequences for British families. The cost of living crisis was caused by its inability to do its job. Unlike the Federal Reserve in the United States, its obligation to control prices is not tempered by another objective such as economic growth. It is a simple, single rule and the Bank bungled.
This failure came about because it believed its own propaganda, while the MPC was more concerned to meet its quotas for diversity of background than to have any diversity of opinion.
Its solution to the 2008 financial crisis and to covid was “monetary easing“, a polite term for printing money. It was a sensible answer to the credit crunch but not to the supply disruptions that were caused by Covid. The billions of pounds that were printed meant that too much money was chasing too few goods which was inevitably inflationary. Unfortunately, the bank did not even understand what it was doing wrong.
It also became deeply political during this time, not least by enforcing the green dogma on lenders. The Prudential Regulatory Authority still boasts on its webpages that it “was the first central bank and supervisor authority to set supervisory expectations for PRA-regulated Banks and insurers (firms) management of climate related financial risks“. This discouraged investment in oil and gas exploration especially in the North Sea. It also has nothing to do with the Bank’s role, it was egregious political interference in a highly controversial area which, since Russia invaded Ukraine, has proved both foolish and damaging to the UK economy.
After failing on inflation and politicising risk management, the Bank now seems set on undermining the currency because it does not understand the illusion of paper money. Money is supposed to be a unit of account, a means of exchange and a store of value. A unit of account is easy to achieve. The other two are more complicated as “fiat” currency, that is to say money that is not backed by a real asset, such as gold or silver, is entirely a matter of confidence. The value of a bank note is zero, yet it is accepted as a means of exchange because the seller knows that he will be able to use it to pay for other goods and services. Notes are still a means of exchange even when they fail to be a store of value. This is shown as pound notes continue to be accepted even though over the last 112 years they have become worthless.
In 1914 if a customer went into his bank with a £1 note he could have demanded and would have received a gold sovereign in return. These coins are still minted and have just under a quarter of a Troy ounce of gold in them, they have the monarch’s head on the obverse and St George slaying the Dragon on the reverse. Powerful symbolism to indicate the strength and value of the currency and indeed the country. Historically coinage was used as a way of showing the authority of the ruler and the solidity of the money.
The sovereign you could have received for £1 in 1914 is now worth nearly £800 in its gold value where is the pound note is still worth a pound. Inflation has destroyed the value of paper money whereas the gold coin kept its value for centuries; it was worth a little more in 1914 then it was in 1661 just after the restoration of Charles II.
The devaluation of paper currency proves its illusory quality. It has not been, and will not be, a store of value; even with inflation at the target of 2% prices double every 35 years. Heroic figures help to maintain the illusion while rabbits do not. When paper currency was backed by gold it did not need these designs; the words “I promise to pay the bearer on demand“ were sufficient. However, as inflation debased the currency so it became necessary to boost confidence by putting the Queen‘s head on one side and then important figures on the other. This made notes look more serious. Now the opposite is happening and the anodyne approach, taken by countries that have little history or are too politically divided to accept individual heroes, is proposed which further undermines their store of value.
It fails to learn from the history of coinage which always used to be an expression of power and of the United States, which does not endlessly fiddle with its notes. This continuity has helped the dollar to preserve and even enhance its global preeminence.
The idleness of the Bank is shown by its employment practices. On its website it claims to employ over 5000 people, although in other places it says 4000 people so may not even know who it employs, some of whom it allows to work not only from home but from abroad for 40 days, the equivalent of two months, a year. This is effectively paid truancy. The Bank restricts the equipment that it staff may take abroad because of the security risk, so must realise that its employees, sipping piña coladas in Havana, will be unable to work because they cannot take their laptops with them. As the institution that is responsible for the cost of living crisis, this is a contemptuous way to treat the taxpayer who funds their salaries.
Sadly, it is also dishonest as it did not tell the truth over its decision to change its notes. The Governor, Andrew Bailey, said it had to be done for security reasons when he stated that “the Bank’s foremost objective is the security of our bank notes, which includes tackling the threat from counterfeiting”. Unfortunately, this is humbug, it was a political decision. A freedom of information request has now revealed that Bank commissioned research said that the great figures from our history were “contentious and not representative of the UK’s cultural and natural diversity” and such figures represented “a backward looking vision of the United Kingdom that carries too great a risk of division and controversy”.
This incompetence, idleness and dishonesty is a consequence of the politicisation of the bank which started under Mark Carney. He hated Brexit and made the Bank an active participant in the referendum campaign. He also imbued it with his personal green agenda. Bailey has done nothing to stop this, so we yearn for the return of Lord King who was the last proper Governor, a man who respected the proprieties of the Old Lady of Threadneedle Street.
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