An incoming Labour government could and should stimulate the economy by restoring all the benefits (worth about £20 bn a year) which the Coalition Government has reduced or denied to the low-paid, the sick, the disabled, the poor and the underprivileged. The case for doing so is based not only on social justice and on restoring the integrity of our society but on making good the deficiency of demand that has handicapped our economy as a consequence of austerity.
This would be achieved by creating £20 bn of consumer credit at the Bank of England to fund the policy during that first year. The costs of that credit creation for Government expenditure would be nil and the benefits would be immense. If we assume the average UK tax take of about 42%, government income would rise by about £8.4 bn; but because much of the extra purchasing power might be spent on food and other non-taxed necessities, the tax take might be about half of that – say 21%. On the other hand, the extra spending would have a multiplier effect of about 2, so that the total effect on the UK economy would be a stimulus of about £40bn. Even allowing for a lower than average tax take, the Government would still gain revenue of £8.4 billion, the economy would receive a stimulus of £40 billion (a likely addition to economic growth of about 2.6%) and many of the dire effects of the Coalition’s austerity programme would be negated. The financial condition of Britain’s poorest would be ameliorated; the poor would be more able to afford to eat, heat their homes, pay their bills, and live better lives without worrying where the next penny was coming from.
That policy could be continued in the following years but as the additional government taxes came in from economic recovery the credit required to be created would reduce accordingly eventually becoming nil within the lifetime of the parliament as economic growth increased due to investment credit economics.
The Credit Restoration of the Royal Bank of Scotland
The bad debts of the Bank of Scotland should be immediately purchased in their entirety by the Bank of England, using targeted quantitative easing. Again, it would cost the Government nothing. The Government would have bought assets worth (say) 50% of their book value for nil expenditure. The total bad debts of the RBS are estimated at £38 billion, so the Government would gain assets of about £19 billion in return for no appreciable cost whatsoever. Furthermore, the RBS would cease rejecting loan applications from SMEs, where they are urgently needed but where about three out of four are currently being turned away. There is no good reason why the RBS should continue to do this, when normal business could be resumed immediately.
Through this means, which could be applied to stabilise other British banks as necessary, one of the main and continuing consequences of the Global Financial Crisis – the overhang of bad debts that inhibit the banks from lending – can be negated. Interestingly, one of Richard Werner’s major findings from his inquiry into the reasons for the Japanese stagnation over recent decades was the inhibiting effect of bad debts on the willingness of the Japanese banking system to maintain an adequate level of credit creation and therefore of liquidity. In this instance, we have the chance to learn from Japanese mistakes. We should be clear that the objection based on moral hazard pales into insignificance by comparison with the huge economic advantages from pursuing this course.
Many of those who call themselves economists and many politicians who imagine themselves to be competent will be stunned by these proposals, if the past is any guide. As Keynes commented, “the difficulty lies not so much in developing new ideas as in escaping from the old ones, which ramify, for most of us brought up as we have been, into every corner of our minds.” And as John Kenneth Galbraith, who was a member of the FDR administration when the investment credit creation policy was adopted by the US Government, has said, “the creation of money is so simple that the mind is repelled.”
We should remind ourselves that there is nothing new about the creation of credit by the Bank of England. No less than £375 bn of credit was created to stabilise the liquidity and preserve the operation of British Clearing Banks and £80 bn of such credit was created to support Vince Cable’s proposal to extend business loans to industry.
The novel aspect (in British terms at least) of our proposals is that the proposed credit is to be focused on useful social and economic objectives – on the establishment of more prosperity among the poor and disadvantaged, upon the minimal cost fixing of the RBS and other banks and upon the creation of the kind of bank support for industry and commerce that has existed for centuries in Germany, for about a century in Japan and for about a third of a century in China.
The primary objective of the incoming Labour Government’s reforms should be the establishment of a United Kingdom of abundant capital resources and the placement of Britain’s future industries on a sound economic footing. Inseparable from that first objective is the reformation of the British banking system to ensure its future stability and effectiveness. Another objective would be the fulfilment of the Government’s duty of care to the people – the relief of the groups disadvantaged by the actions of the recent Coalition Government and the restoration of full employment as a government objective. Finally, measures should be taken to ensure the permanence and continuity of these reforms through major changes in the machinery of Government. We set out now our proposals for achieving these objectives.
The re-nationalisation of the Bank of England
The Bank of England should be brought once again under Government control. It is unwise for any government to allow any natural monopoly to be fully independent, and the control of credit creation is such a central aspect of government policy that direct control is required.
The operating objectives of the Bank of England, as a central departmental agency of government policy, will be redefined as the promotion of economic growth and the control of inflation within the guidelines of a national industrial and social development plan.
Gordon Brown’s proclamation of the “independence” of the central bank was widely applauded at the time and remains a cardinal – and unchallenged – element in policy today. Yet handing monetary policy over to the tender care of a central bank is simply a reinforcement of the current and increasingly discredited orthodoxy that inflation is the only concern and proper focus of monetary policy and that its treatment is simply a technical matter that is properly the preserve of unaccountable bankers, and is not to be trusted to politicians. Quite apart from the undemocratic nature of this approach, we have paid a heavy economic price for allowing the bankers’ interest to prevail over the interests of the economy as a whole.
It is easy to see why the bankers – and the economists who work for them – should support this. It is less easy to see why the politicians should so readily have accepted it. Yet the answer is fairly clear. It has suited the politicians well to be able to argue that the travails of the economy arise as a consequence of inexorable economic forces which must kept in check and marshalled by expert technicians. Our governments have thereby been able to disclaim any responsibility for policies for which they should be ultimately responsible.
As a matter of interest, this very issue was succinctly discussed by members of the Japanese Committee on Financial System Research (Kinyu Seido Chosa Kai) as it considered whether to revise the 1942 Japan Law that established the Bank of Japan’s primary objective as the promotion of economic growth. On that Committee, Dr Shimomura represented the Ministry of Finance, while his opposite number was Mr Shigeo Matsumota, representing the Bank of Japan.
Dr Shimomura is reported as having “stressed the inevitable subordination of the central bank to the government from two standpoints – that the policy of the central bank should be managed and operated in full coordination with the general economic policy of the Government and that the Government on its part is called upon to hold itself responsible to the nation for the outcome of its financial policy.”
Mr Matsumoto on the other hand “emphasised the necessity of maintaining the independence or neutrality of the central bank from the Government on the ground that the central bank is first of all assigned with the task of contributing to the stabilisation of the currency value’.” 
What is clear is that an economic policy that breaks the shackles of current orthodoxy would necessarily have to be removed from the exclusive and self-interested control of bankers. It would need to be driven by politicians who saw the need to ensure that the wider interest is carried into policy and is an essential element in setting its direction and gaining for it the necessary support.
© Bryan Gould and George Tait Edwards 2015
1. From “The Political Economy of Japanese Monetary Policy” by Thomas E Cargill, Michael M Hutchinson and Takatoshi Ito, The MIT Press, Cambridge Massachusetts and London, England, p24.Tags: Domestic (UK)
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This post was written by Bryan Gould and George Tait Edwards