Bank of England ‘must stop creating money out of thin air’

The Bank of England must stop “creating new money out of thin air” and focus on helping savers, a coalition of City figures, economists and think-tank leaders has warned.

In a letter sent to Jeremy Hunt, the group called on the Government to overhaul monetary policy by changing the Bank’s remit to focus solely on maintaining the value of the pound “by whatever means necessary”.

The signatories are launching a new “Honest Money” initiative to campaign for their reforms.

The Bank and Andrew Bailey, its governor, have endured heavy criticism in recent weeks, with inflation remaining at 8.7 per cent last month, while the base rate rose to five per cent in an attempt to control it.

Mr Bailey has been accused of acting too slowly to tackle inflation, insisting it was “transitory” for much of 2021.

Meanwhile, prominent figures such as Lord King of Lothbury, one of the Bank’s former governors, have accused it of fuelling price rises with excessive quantitative easing.

Now a group of economic thinkers – including Geoff Blanning, a former investment manager at Schroders, Dr Eamonn Butler, the director of the Adam Smith Institute, and Mark Littlewood, the director general of the Institute of Economic Affairs – has written to the Chancellor demanding a shake-up of the Bank.

In their letter, the coalition said: “We are living through an overwhelming cost of living squeeze, and millennials are likely to be the first generation since before the Industrial Revolution to be poorer than their parents.

“This is in large part because since the financial crash of 2008, the Bank of England has been creating new money out of thin air to fund the Government’s promises.

“Since March 2009, the money supply has surged by over 50 per cent from the Bank’s actions alone, and half of this – £400 billion – took place in 2020-21 to fund lockdowns.”

The letter accused the Government and the Bank of being “jointly complicit” in a “debt explosion”.

“More money in the system, without more goods and services being produced, leads to rising prices which hurts those on low incomes the most – especially young people and pensioners,” it said.

“It erodes people’s savings, reduces real terms wages and makes houses increasingly unaffordable for first-time buyers. Meanwhile, inequality increases as those with the most assets – especially financial assets – enjoy undeserved gains.”

The letter claimed that the monetary system is “now out of control and needs reform”, with Mr Hunt urged to “create a fairer system, as well as a faster growing economy with low inflation, by removing the power of the Bank of England to create unlimited quantities of new money”.

To do this, they recommended an amendment to the 1998 Bank of England Act, giving the Bank a single objective to “maintain the value of the Pound in savers’ bank accounts by whatever means necessary”.

Currently, the Bank has two goals: to achieve the Government’s target of keeping inflation at two per cent, while also supporting “the Government’s economic policy, including its objectives on growth and employment”.

The letter concluded: “The era of magic money creation (quantitative easing) must come to an end if we want to eliminate the risk of chronic or runaway inflation and return this country to an era of confidence and prosperity.”

A Treasury spokesman said: “We are fully committed to the Bank of England’s independence and the inflation target of two per cent.

“The Chancellor will respond to this letter in due course. But in his letter to the governor of the Bank in June, he was clear that high inflation is the greatest immediate challenge we must address.

“The Bank has the Government’s full support as they take action to return inflation to target.”