Under cover of the tumult of Westminster politics in recent weeks, the far-left leadership of Britain’s Labour Party recently released a new plan to alter the fundamental role of the Bank of England in the British economy.
The plan — co-authored by Graham Turner, who is regarded as a likely pick for Governor of the Bank of England if Labour wins the next election — would have Britain’s central bank adopt a new set of objectives, similar to the ‘dual mandate’ pursued by the US Federal Reserve. If the plan were to be put into effect, not only would the Bank pursue a 2% inflation goal, as it already does, but it would also adopt the new goal of promoting ‘maximum employment’, as well as new productivity targets.
More worryingly though, the new plan would aim at “integrating” the Bank of England’s monetary and macroprudential policy with the government’s “industrial strategy.” In practice, this would mean the Bank would be required to use its regulatory powers, as well as its control over credit expansion, to arbitrarily steer cash toward whichever industries and businesses happened to be favoured by the government of the day. This policy — which has been given the deceptively inoffensive name of ‘credit guidance’ — would likely involve the Bank of England adjusting the capital requirements for commercial banks in such a way as to manipulate them into extending more loans to the manufacturing sector and other “critical areas of technology,” and fewer loans to the supposedly unproductive residential and commercial real estate sector.
This desire to diminish the role of real estate in the British economy also led to one of the more bizarre proposals put forward by the plan. Contrary to banks’ widespread use of real estate as collateral for loans in the present, Labour’s new plan would force banks to “show they are raising the share of loans backed by intellectual property instead.” Even leaving aside the questionable validity of the very concept of intellectual property, this article would not be the first to point out that banks might be less willing to extend loans at all if they were forced to secure those loans on shaky estimates of the value of the copyright to a self-published volume of the borrower’s poetry, for example, or perhaps the patent on a contraption the borrower invented in their garage, rather than the more certain value of brick and mortar.
All of this is not to deny that Britain’s economy is currently struggling under the weight of a dangerously overblown housing bubble, and any sincere attempt to deflate that bubble would certainly be welcome. However, if Labour wish to use the Bank of England to prick the housing bubble, they must first understand that the Bank itself played a large part in inflating that bubble to begin with. While it’s true that a patchwork of price-controls, planning restrictions, and other assorted regulations have restricted the supply of British housing, the Bank of England’s low interest rate policy and resultant cheap mortgages have stimulated an artificial surge of demand in the housing sector, pushing prices up to prohibitive heights. Regardless of who’s in control of the Bank after the next election, they should aim to remove this root cause of the problem, rather than merely patching it with new policy.
Although the British press is not typically known for its devotion to free markets, the media reaction to Labour’s new plan for the Bank of England has been quite negative, likely due to the perception that it is a threat to the sanctified tenet of ‘central bank independence’. London’s Evening Standard, for example, described the plan as government “meddling” in the affairs of the Bank, while another mainstream article decried the “weaponisation” of the Bank by a plan which “reeks of central planning … [and] statism.” It is certainly true that Labour’s new plan puts forward many dangerous ideas which deserve to be criticised. However, the media’s criticisms of the new plan would ring significantly less hollow if those same criticisms were not equally applicable to the very institution of central banking itself, which that same media is so quick to defend.
For example, the news media are correct to point out that permitting the government to use ‘credit guidance’ to arbitrarily pick winners and losers in the economy is indeed “straight out of the central planning handbook.” But the same is also true of the central banking status quo, which likewise distributes arbitrary benefits and penalties without arousing any complaint from the mainstream press. When writing in the 1720s, Richard Cantillon — the forgotten founder of modern economics — pointed out the redistributive effects of money creation: the first receivers of the new money get the benefit of being able to spend it at its previous value before the market has a chance to register the increased supply, whereas the rest of us are stuck with the downside of having the value of our savings inflated away. These same ‘Cantillon effects’ abound in our modern economy because of the way central banks, by their very nature, enable and drive credit expansion and money creation, benefitting the first receivers of the new money (mainly financial institutions and government agencies) at the expense of smaller businesses and individual savers.
The mainstream press are likewise right to attack the interventionist “meddling” of Labour’s plan to make the Bank of England pursue explicit, government-set targets for employment and growth. If only those same outlets had not, for so many years, overlooked the Bank of England’s equally interventionist commitment to “support the economic policy of the Government, including its objectives for growth and employment.”
It is undoubtedly true to say that Labour’s new plan for the Bank of England would harm the British economy — compared with both the laissez-faire ideal and the present situation — and we should be pleasantly surprised that the mainstream press has criticised it so readily, perhaps reflecting the slowly-growing place of free market and ‘Austrian’ ideas in the zeitgeist. In reality however, the real emphasis should be on the fact that Labour’s “central planning” proposal is separated from the ‘respectable’ central banking status quo only by a difference of degree, not of kind.