Correspondance with the Bank of England (ongoing)

By matslats, 11 June, 2010
I can't find the answer to this question.
I understand that the Bank of England is wholly owned by the government.
I understand that the National Debt is owed in large part to the Bank of England Does that mean that the National Debt is owed by the government to the government? Is there a paradox here?
Many people are trying to grapple with these issues on thefinancelab.ning.com
As you know, the Bank of England is a public sector institution wholly-owned by the Government – the entire capital of the Bank is, in fact, held by the Treasury Solicitor on behalf of HM Treasury.

The Debt Management Office (DMO) issue British Government Stocks on behalf of Her Majesty’s Treasury in order to borrow money for the Government. These stocks often known as gilts can be bought by individuals, companies, banks, pension funds, other governments etc.

However, at present because of the Asset Purchase Facility (APF), also known as Quantitative Easing (QE) a little under £200 bn of gilts have been purchased by The Bank of England Asset Purchase Facility Fund Ltd (BEAPFF) a separate legal entity from the Bank of England. The dividends on the gilts are paid by the Government to the BEAPFF. Similarly any dividend/interest earned on the other assets purchased are paid to the BEAPFF. These are of course outright purchases of assets and can be sold back to the market.

For further information on the bookkeeping side of the APF, may I refer you to Charlie Bean’s speech of 13 October 2009 to the London Society of Chartered Accountants in which he goes into some detail on how QE appears in the accounts: https://www.bankofengland.co.uk/speech/2009/charles-bean-speech-at-cutl…

Thank you once again for writing to the Bank. I hope that I have been able to clarify these matters for you.

(Alexander Baron) Whatever it may say, the Bank of England is NOT owned by the government. The Government may have nominal ownership. but it is control that matters.
Thank you, Mr Beaton for explaining quantitative easing.

I'm sure you get many inquiries about this. However my question referred to business as usual and the interest on the national debt, which I understand is a significantly larger burden on the taxpayer than the interest on QE money. It understand that many countries borrow their money from private banking corporations who consequently have the government over a barrel. But if the B of E is owned by the government, surely the interest on the national debt goes straight back into the nation's coffers?

For the sake of clarity, please bear with me as I repeat my question.

-I understand that the Bank of England is wholly owned by the government.
-I understand that the National Debt is owed in large part to the Bank of England
-Does that mean that the National Debt is owed by the government to the government?
-Is there a paradox here?

So who is the interest on the national debt being paid to?

Thank you for your further e-mail. May I make it clear at the outset that the National Debt is not owed in large part to the Bank of England. As I indicated in my previous e-mail, the National Debt is owed to those individuals, companies, banks, pension funds and foreign Governments etc who have purchased Government Stock. Central banks do not traditionally buy their own Government’s debt.

Thus, the interest on the National Debt is paid to those individuals and companies etc who own Government Stock.

If you wish to discuss the matter further you may wish to give me a call on the number below...

Thank you Mr Beaton, this is the answer I needed.

If understand correctly, your statement:

Central banks do not traditionally buy their own Government’s debt.

contradicts wikipedia:

A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency.

Your answer also begs the questions:

  1. What, then, do central banks do?
  2. What was the purpose of nationalising the Bank of England if not to save the government borrowing from private corporations?

    I'm sorry if all this is rather elementary, but once I understand I shall try to disseminate the information so that my colleagues in the Finance Lab can better understand how their currency is responsibly managed. You might also use my questions as the basis for a fact sheet or an FAQ if you are so inclined.

Thank you for your further e-mail. Having glanced at the article to which you refer I can certainly understand your questions.

Whilst it is true that the Bank of England does buy and sell relatively small amounts of government debt in the secondary market as part of its open market operations, it is prohibited from buying government debt directly from the Government in order to finance the gap between Government revenue and expenditure, which is the point at issue in your e-mail. May I refer you to question/answer 6 at the following link which provides a definitive answer: bankofengland.co.uk/monetarypolicy/qe/askqa.htm

With respect to the other activities carried out by the Bank of England , may I refer you to our website in general and the following links in particular: https://www.bankofengland.co.uk/monetary-policy https://www.bankofengland.co.uk/faq/banknote section 'General banknote questions'

May I also refer you to our pamphlet, ‘Your money - What the Bank Does’ at: http://www.bankofengland.education/what-the-bank-does/index.html

Finally, the Bank of England was nationalised by the post war Labour Government in 1946. For the reasons behind this you may wish to contact HM Treasury at the address below...

When you finally pin the simple, logical point – why does the government borrow at interest (and the amount will soon become unrepayable without great austerity) when it could borrow from the Bank of England at no interest? – your correspondent will either say:-

  • it is illegal (probably contrary to Maastricht) –
  • or inflationary (that’s there usual response)
  • or say it ‘squeezes out the private sector

The fourth possibility is what happened with Peter Challen and I in correspondence with the then Governor of the Bank – when we had him in the corner, he simply ended the correspondence. And then, if you complain to your MP, the next trick is to tell the MP that there has been a long correspondence and so there’s a limit to endless questions (with the clear implication that you are some form of vexatious litigant). [Rodney Shakespeare]

What I find most interesting, apart from the bank not actually being the prime lender to the government, is that there is a prohibition from Europe on the bank buying government debt directly. This raises all sorts of questions which I regret I don't have time for. Such as:
  • why would Europe make such a prohibition?
  • what difference does it make whether the bank buys debt directly or indirectly?
  • what is the legal difference between a commercial bank and a state-owned central bank?
  • Do such prohibitions apply to private central banks?

But really, I do not have time for these questions, and I suspect neither do you. I would like to return to my original question, rephrased in the light of your answers.

What does the people of Britain gain by paying for a commodity (money) which they could produce themselves for free?

If you could answer without jargon that would be extremely helpful. I believe my question is simple enough not to need a complex answer. here are some examples of answers I would understand.

Because private banks offer greater monetary stability than governments over the electoral cycle
If so, I would like to be pointed appreciate your pointing me towards independent evidence of this.
Because issuing money is somehow not the role of government?
This would be a constitutional matter, which would have changed since tally sticks, I suppose, and would be well documented.
Because the government is somehow unable to break the monopoly private banks have on issuing money?
This would necessitate some kind of drastic action.

Please understand my concern here. It seems to me that we are collectively paying the first fruits of our labours to private corporations who barely even work for it. Without a comprehensible answer I would fill the cognitive gap by projecting my fears into it.

I seek only the reassurance that my government is sovereign, and is attempting to act in the best interests of the electorate.

From today’s perspective, it is easy to accept unquestioningly that a piece of paper that is relatively inexpensive to produce is worth, ten, twenty or fifty pounds. People have faith in what they represent and their value. If a person holds a £20 banknote, regardless of how much it costs to produce, he/she will expect to be able to buy goods and services for the value of that note. The reason you can do so is because the other party to the transaction also has faith in the value of the note and what it represents. Gaining and maintaining public confidence in the currency or, to put it another way, preserving its value and integrity, is a key role of the Bank of England and one which is essential to the proper functioning of the economy. The Bank must ensure that the currency maintains as stable a level as possible, in other words, that the value of its notes is not eroded by inflation. This is the role of monetary policy, which is one of the Bank’s main responsibilities. It must also guarantee the integrity of its notes; making sure that they are as difficult as possible to counterfeit, that they are readily and securely available to the public upon demand, and, subject to these constraints, that they are attractive and easily identifiable both to the human eye and to note reading machines.

My question was not so much about the role of the BoE but about the policy of the government (i.e the people) of borrowing money at interest from private corporations instead of issuing its own money, as is its sovereign right.

Governments do not have to borrow money from banks. They do not have to pay interest. Many economist believe that issuing money is the job of governments. The US constitution states as much. And yet it seems every country except China, (whose economy thriving, by the way) pays this crippling levy to institutions who 'issue' money merely by making ledger entries.

So why would a government pay 10% of its tax income on interest? that's as much as the How does that make the currency any more credible? Isn't it just a massive drain on the economy? £73bn by 2015. The have to devalue the currency just so they can afford the interest! It seems like madness to me.

This is the same question I asked about 4 exchanges ago. I sense an economic elephant in the room, but I'm not an economist, and need help to see it.

While the Governor has mentioned and emphasised the need for the UK to reduce its fiscal deficit, as we have already explained to you in previous emails, responsibility for managing the UK Government’s borrowing lies with HM Treasury. You may wish to contact them, asking them to explain their policy: The Correspondence and Enquiry Unit 2/W1 HM Treasury 1 Horse Guards Road London SW1A 2HQ

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Geoff (not verified)

13 years 10 months ago

Hi Matthew,

Good for you, taking the initiative to ask the B of E directly!

My guess for an answer to your question is that the bank's magic fractional-reserve wand doesn't work on debt-money created within the same bank, not even a central bank. In order to convert this money into capital to leverage further loans, another bank must place it on their books and then wave their magic wand over it. I suppose this is justified as diversification of risk among the banks. On the other hand, in a systemic crisis, when any of them sneezes ...

Ring a-ring o' roses,
A pocketful of posies.
a-tishoo!, a-tishoo!.
We all fall down.