Before the Bank of England was made independent, a very common university examination question in economic courses was to ask examinees to review the potential advantages and disadvantages of BoE independence. Having answered that question several times there was sufficient exposure to the topic to realize it did not really make any difference at all to the operational performance of monetary policy. The main point, grasped by Gordon Brown is that having the BoE classified as "independent" provided an insulation or insurance policy that government would not be blamed for any constituent prejudice resulting from poor decisions. The point being, governments could survive atrocious monetary policy decisions by palming off responsibility to the BoE and to maintain the mythology that the BoE is populated by experts whose opinions and decisions cannot be questioned by parliament or constituents. However, since the BoE is responsible for policy decisions and any prejudice traceable to those decisions is plainly the responsibility of the BoE, this raises the question of how can constituents seek compensation for damages arising from BoE policies. As an independent institution the BoE is completely liable, as is the case for any professional organization for damages arising from their professional advice, decisions and implementation actions. The attempt to claim that the BoE only carries out government policies holds no water when the whole objective of independence is to place decision making into the hands of people who are assumed to be competent.

The case against the BoE

The contributions of the BoE to the House of Lords Economic Committee evidence sessions on quantitative easing (QE) were quite unconvincing and the evaluation group admitted that after 12 years the BoE was still learning about the effects of QE. By 2010 it was already evident that QE was biased in favour of asset holders and traders whose wealth increased several-fold. The secondary effect was while ignoring the wellbeing of the majority of constituents or wage-earners, the later period of QE saw significant rises in goods and service costs linked to the intentional speculative rises in prices of assets used as production inputs, leading to a structural policy-induced inflation in goods and services. As a result, while many saw their real wages declining, increasing numbers passed that threshold where their take home pay was too little to cover basic essentials. This included a majority of those in this state who were fully employed. QE was driving and continued to drive constituents into poverty. Whereas the BoE should carry the can for this widening abuse of constituents the ideological cut back on public services initiated under George Osborne and enthusiastically supported by Mark Carney at the BoE took on the appearance of an ideological collaboration rather than the operation of entities operating in a way each independent from the other. This was before Covid-19 turned up and Russia invaded Ukraine.

Now, on top of this, the current governor of the Bank has suggested that workers demanding higher pay could make the situation even worse while avoiding taking any responsibility for the situation very much created by BoE policies. This sort of commentary is completely unacceptable when the current decisions by the BoE on interest rates will cause contraction and the likely precipitation of the economy into stagflation with people losing their employment.

Decision Analysis Briefs

A large part of the problem is that monetarism was a long track record of being unable to explain the mechanisms whereby cause and effect between monetary policy decisions and constituent wellbeing are spelt out as a basis for justifying policies. Most of the "explanation" is based on the completely useless Quantity Theory of Money (QTM) that is incapable to tracing the relationship between money volumes and the prices of goods and services or the impact of interest rates. The reason the QTM cannot project the impacts of monetary policy is because the most dramatic effects are in asset market prices and the QTM identity does not contain any assets as variables. The Real Money Theory, which contains most assets as variables and whose price rises drained funds from supply side production of goods and services, demonstrates clearly that the QTM exaggerates the impact of money on prices of goods and services.

Given this enormous gap in monetary theory and policy, we are now at a stage that is well passed the time to put this domain of economics on the spot by requiring that any policy decision is explained before any such decision in a Decision Analysis Brief (DAB)². This should provide a transparent explanation of the mechanisms or cause and effect quantitative functions that trace out the potential benefits of any monetary policy decision on money volume objectives or interest rates on the state of the economy and the benefits to be enjoyed by constituents. Until there are constitutional provisions that provide the people of this country with legal means to challenge poor decisions through procedures that enable the securing of compensation for damages imposed by policies it is unlikely that DABs will even appear. This is for the simple reason that the default position of monetary policy, originally linked to supporting the balance of payments, was to depress wages to enable companies to remain viable exporters. This principle still applies but the support goes to financial service companies and, as before, at the expense of wage-earners. All of this is camouflaged by double-speak of an "independent" BoE which is obsessed by financialization rather than real production and productivity the only basis for advancing the interests of the majority of wage-earners.

It is not without good reason that the Lords Economics Committee report on QE was entitled, "Quantitative easing: a dangerous obsession?", the current governor expressed the opinion that the term obsession was inappropriate. However, since the BoE could not explain the effects of QE and the fact that the QTM is completely flawed, it would seem that obsession is an understatement.

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¹  Hector McNeill is director of SEEL-Systems Engineering Economics Lab

²  McNeill, H. W., "The Briton's Quest for Freedom..Our unfinished journey", Decision Analysis Briefs, page 280, Chapter 26, Parliament, HPC, 2007, ISBN: 978-0-907833-01-7.

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