Book Review: The Bank of England and the Government Debt (1928-1972) (Another way of looking at MMT?)

A new book by William Allen who worked for Bank of England from 1972 to 2004 on monetary policy formulation and financial market operations.

John Wood reviews the book:

 Central banks do more than conduct monetary policies aimed at price level and employment objectives. They also — and this was the Bank of England’s (the Bank’s) original and primary task for most of its history — raise money (issue/sell securities) for governments, and in the course of debt management support orderly and otherwise attractive markets for those securities, including gilt-edged bonds in the UK, or gilts, so called because their paper certificates had gilded edges. The purpose of this book “is to describe the [Bank’s] operations in the gilt-edged market” from 1928 to 1972, “and to suggest possible reasons why they were at times conducted in a way which most economists found quaint and incomprehensible” (p. xiii). The author worked for the Bank from 1972 to 2004 on monetary policy formulation and financial market operations, and his book endeavors with a good deal of success to connect these activities.

The market for gilts has largely been conducted by the brokers and jobbers (dealers/market-makers) of the London Stock Exchange since the eighteenth century. (UK bonds are also known as Treasury stock, and historically were among the main securities traded on the Stock Exchange.) Not being an Exchange member, the Bank dealt through a broker, the Government Broker, the senior partner of Mullens and Co. A primary goal, and the one emphasized in this book, was “to maintain the liquidity of the gilt market,” and in this connection act as market-maker of last resort. This role of central banks “has been discussed extensively in the context of the crisis of 2008-09,” but the present study shows that the Bank had long acted in this manner, and even, at times, as market-maker of first resort (pp. 2-3). “The term ‘market liquidity’ refers to the ease with which large amounts of an asset can be bought or sold; ease embraces both the amount of time it takes to complete the transaction, and how close the transaction price is to the price ruling in the market just before the transaction was undertaken” (p. 6).

The Bank’s financial activities depended on the monetary policies chosen by the government. In particular, its interventions were dictated by the government’s frequent preferences for interest rates that differed from market equilibria. The Bank acted pretty much as a price taker during the 1930s, when yields rose with recovery from the Great Depression, but was a substantial buyer during World War II as it supported interest-rate ceilings on government debt. From after the war to near the end of our period, the Bank (along with other central banks) was torn between the often contradictory goals of a fixed exchange rate and full employment, forcing devaluations of the pound from $4.20 to $2.80 during Labour’s “cheap money” policy in 1949 and to $2.40 in 1967, which was a delayed reaction to the Tories’ growth policies of the late 1950s and early 1960s. Among the unfortunate side effects of the misalignment of policies were foreign exchange controls and the suppression of private demands (including investment) by means of controls on consumer credit and bank lending.

Interesting.

This is another way of looking at MMT.

MMTers say the central bank works a lot with government than we are made to think.  Much of central bank policies are done while actively managing the government debt. The central banks not just buy the debt but also manage the yields. Pre-central bank era they did so based on government orders and post-independence era, do it by stealth. Infact legally too, central banks change their balance sheets by changing the composition of government bonds.

Thus, even if you disagree whatever MMTers have to offer you cannot deny this is how central banks actually work!

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