What Has Become of the £375Billion Created by the Bank of England Under Quantitative Easing?

17/02/2015 10:36 | Updated 18 April 2015

Have you ever wondered what happened to the £375billion, equivalent to £6,000 for every man, woman and child in the UK, created by the bank of England electronically? This colossal sum of new money is created through the programme called Quantitative Easing (QE), and pumped into the financial markets by the purchase of government bonds.

The campaigning group Positive-Money estimates that this money pushed share prices up by 20%. The idea was that those benefiting from this would invest this new wealth in the real economy. But the reality is that this new wealth simply went into more financial products, to benefit them even more from rising share prices.

Positive-Money concludes that for every £1 created under QE only 8p trickled down to the real economy, with the rest getting trapped in financial markets, making the rich even richer.

Suppose the Bank of England had designated a fraction of that sum, say £10billion, as sovereign money for the government to spend on projects that benefit the whole of society, such as building desperately-needed social housing, schools, investment in green energy, etc. What would be the outcome? Positive-Money calculates that every £1 spent that way generates £2.80 worth of economic activity.

So £1 created under QE contributed 8p to the real economy, while the same £1, if invested in infrastructure projects, would generate £2.80 worth of economic activity in the country.

In our current system, money is created, in the form of debt, by private banks every time they make a loan, or created under QE by central banks. In both of these cases we end up with an economy that benefits the very few, and is prone to boom and bust cycles that enrich the top 5% and penalize the bottom 95%.

Positive-Money's aim is to democratize money creation and banking by taking the power to create money from the hands of commercial banks and moving it into the hands of a transparent and accountable body. Currently 97% of the money supply is created by commercial banks electronically simply by making loans to customers (excludes QE money). Only 3% is created in the form of coins and notes by the government-owned bank of England. The advantages of democratizing the money supply are summarized thus:

"Taking the power to create money out of the hands of banks would end the instability of boom-and-bust cycles that are caused when banks create too much money in a short period of time. It would also ensure that banks could be allowed to fail without bailouts from taxpayers. It would ensure that newly created money (by commercial banks and the bank of England) is spent into the economy, so that it can reduce the overall debt burden of the public, rather than being lent into existence as happens currently."

Only the Green Party has the vision to make such a fundamental reform party policy. It asserts that:

"The existing banking system has failed and is no longer fit for purpose. The Green Party believes that the power to create money must be removed from private banks. The supply of our national currency must be fully restored to democratic and public control so that it can be issued free of debt and directed to environmentally and socially beneficial areas such as renewable energy, social housing, or support for community businesses."

The major plank of such reform will be to give the power to create money (cash and electronic form) to a National Monetary Authority (NMA) that is accountable to parliament. The money created in this way will be strictly managed and controlled by the NMA so that it is sufficient to support full employment while avoiding general inflation in prices.

Now that the Green Party is making these reforms party policy, when will the other parties have the courage to do the same? The maddening thing is that politicians are so awestruck and mesmerized by the "moneymen" that they keep pumping more and more money into their coffers in the hope that something will trickle down to make the machine work.

Politicians and opinion-formers, please stop listening to the "moneymen". Go back to first principles and start using some common sense.