Further news from HM Treasury

Following my previous correspondence with the Treasury I had to ask why it seemed to be fine for private banks to create money by issuing loans at will, yet if the Treasury were to create any money it would be inflationary.

Here is the reply (as ever, click to enlarge):

The key response to my original query is this “to be clear both types of money creation are potentially inflationary“. So that was exactly the point I originally made. It seems to me that John Glen has just admitted that the reason he originally gave as why government should not create money is, in effect, no more or less detrimental than suggesting that private banks should not create money.

Monetary financing in its broadest sense involves government expenditure financed by the creation of central bank reserves. This would result in a permanent increase in the monetary base and undermine the stability of inflationary expectations.

This suggests we never tax – hurray!

Except that we do. And any ‘modern economy’ (and many not so modern) always has.

The credibility of the Government’s commitment to price stability is essential for anchoring inflation expectations and subsequently helping to achieve price stability.

Means, I think, that low inflation tends to breed more low inflation – that’s basic psychology.

The institutional separation between monetary policy and government debt management

is, for me, difficult to understand and I don’t think it follows from the previous sentence – but presumably government debt management is also known as fiscal policy?  Anyway it …

is recognised as a key strength by most major credit ratings agencies, and reflects the creditworthiness of the UK as a borrower.

Credit ratings agencies? Really? The ones that are owned by the banks themselves and which classed all that subprime debt as AAA? That’s got to be really important. Never mind that as long as the UK borrows in Sterling it can never, ever be obliged to default.

All in all a less satisfactory reply than previously.

But if he’s still speaking to me, I shall introduce tax and keep up the correspondence!


  1. Bruce Gray -

    Money creation in and of itself does not cause inflation. There is no empirical evidence post gold standard to support that contention despite all the ramblings of the monetarists inhabiting the central banks. Inflation is based on the supply and demand of money vs. the supply and demand of goods and services in the economy. If there is slack in the productive economy, then money creation will have minimal impact on inflation, regardless whether it comes from private or central banks.

    One could argue that excessive bank money creation actually leads to debt deflation as the interest charged borrowers often exceeds GDP. As private banks create more money, thanks to the magic of compound interest the growth in interest payments at some point exceeds the growth in income necessary to service that debt, pushing more of the private sector into savings position and the economy towards recession.

    1. Peter May -

      Good points, thank you. Perhaps that’s why the letter keeps referring to ‘inflationary expectations’ rather than actual inflation itself!

Comments are closed.