Excessive money creation leads to accelerating inflation and ultimately the collapse of the currency. The role of the Bank of England is to create the right amount of money, neither too much, nor too little, to support sustainable growth at the target rate of inflation. We are not doing it at the behest of the Government to help finance its spending. It is the independence of the Bank that allows us to create money without raising doubts about our motives. But just as it is crucial that governments do not control the printing of money, so too the unelected central bank must not determine the levels of taxes and public spending. Fiscal policy is a matter for elected governments. There has been some talk about the possibility that money created by the Bank could be used directly to finance additional government spending, or even that money could be given away. Abstracting from the colourful metaphor of “helicopter money”, such operations would combine monetary and fiscal policies. There is no need to combine them because, as now, once the Bank has decided how much money should be created to meet the inflation target, the case for the Government to increase spending or cut taxes to counter a downturn stands or falls on its own merits.
The usual role of a central bank is to limit this rate of money creation, so that an excessive expansion of money spending does not lead to inflation. But a damaged banking system means that today banks aren’t creating enough money. We have to do it for them. And as private sector balance sheets contract, public sector (government and central bank) balance sheets have to take the strain. The way in which the Bank of England expands the money supply is to purchase government gilts from the non-bank private sector and credit the bank accounts of people from whom the gilts are purchased. Please note that we are not giving money away. What is the effect of these purchases? They push up the price of gilts thus lowering yields. As the sellers of gilts use the proceeds to buy other assets, the price of those assets also tends to rise. Increases in asset prices boost wealth, and at the same time reduce the cost of borrowing for companies and households, which helps to stimulate spending and hence output. The size of these effects is of course uncertain. But there can be no doubt that our economy would have followed an even more painful path over the past few years in the absence of asset purchases. Some question the scope for further purchases, or their likely effectiveness. I do not have any concerns on the first point.