In 1921 the Bank of England was granted the monopoly of printing money for England and Wales. It remained a private bank until 1946 when it became nationalised and came under the jurisdiction of the Treasury department, which brought it under the
control of the government.
This means that when the government feels more money is needed to bail out the country, such as the financial crash of 2008 & Covid-19, the amount of money printed is determined by the Government.
The more money printed the less valuable it becomes. Modern day money is backed by the US dollar. The Federal bank is supposed to keep enough gold in its reserves to cover the Allies’ currencies. The Federal bank has printed so much money over the years that it does not have enough gold in its reserves to back its own money let alone anyone else’s. This means that the other currencies are no longer backed by gold. They are in fact 'fiat' money – only as valuable as people believe them to be. The more money in circulation the weaker it becomes, and the higher inflation goes up. The only way to revalue money is to reduce the amount in circulation or to bring in a new currency and write off the old one, so you are effectively starting from scratch.
If our money was still backed by gold, then revaluing gold would have been an option for strengthening it and reducing inflation.
I’ve mentioned inflation a couple of times, so what is it?
Inflation is the decline in the purchasing power of a given currency. It is the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising. In other words, the less valuable the money is the more you must pay for an item or service, hence the price of the item or service increases. The more money in circulation, the less valuable it is so the higher the prices will be. Obviously, deflation is the opposite of inflation, so the less money in circulation the more valuable it is and the less you have to pay for an item or service. The ideal scenario would probably be somewhere in between.
I think now we should look at the UK’s debt.
According to the National Debt Clock the UK’s debt is over £2 trillion, though some say it is more like £4.8 trillion. That, according to the Debt Clock website, works out to be £78,000 for every person in the UK so, if we all paid the Government £78,000 the country would be out of debt, providing of course they used it to pay off the debt. Who has £78,000? I certainly don’t......and if I did, I wouldn’t give it to the government to squander.
Q: So how did we get into debt?
A: It all began in 1692 with William the III (of Bank of England fame). He wanted to build a navy he felt he deserved but didn’t have the funds to do so. Several rich Londoners saw an opportunity to make some money and decided to come to his rescue and lend him the funds. This was the start of our national debt.
Most of the time money was borrowed to pay for continental warfare. This meant that debt went up during wartime and down during peacetime. However, the national debt began to rise in the 1980’s despite there being no major or long-lasting wars, and has continued
to rise ever since. So why is this?
Government policies and attitudes changed. Money borrowing was no longer seen as the means to solely fund wars. It was now seen as a means to pay for services such as pensions, education and the NHS, which would have previously been taken from taxes. Money borrowing was seen as an easy method of financing. This change in attitude has allowed the country’s debt to get out of control. The financial crisis and the Covid-19 scandal have not helped matters.
Then there is the interest on top, which is determined by the lenders at the time of borrowing. UK lenders tend to base their interest rate on the Bank of England base rate. The base rate is determined by the Monetary Policy Committee (a government body).
As a large percentage of the government’s lenders are UK based (insurance companies, pension funds and the Bank of England through the asset purchasing facility (APF)) it is of advantage to the government to keep the interest rate down. The lower the interest rate the less the debt is as there is less interest added to the debt.
The Asset Purchasing Facility (APF) was established in 2009 by the Bank of England with the purpose of purchasing high quality financial assets, such as commercial paper, bonds & syndicated loans. It had an initial budget of £50 billion. The government, and those above it, would like to see negative interest rates as this would reduce the debt even more and would enable them to borrow more money without incurring a large debt as they would be receiving interest instead of paying it, so effectively your debt goes down without you making any repayments.
As a borrower this is great.
As a lender, not so good. As a saver this is bad news as it means you have to pay to keep your savings in a bank or investment. In this circumstance your money would actually be worth more if you kept it under the mattress than it would if you kept it in a bank.
The only thing preventing the government from bringing in negative interest rates is cash. This is yet another reason why they want to get rid of cash. Negative interest rates have the potential of causing a rush on the banks. The banks are not financially set up to cope with a rush and would all have to close if there was one.
Comments & Questions Welcome
to be continued ... "Most banks operate a fractionated service. This means they only have to keep 10% of your money in their vault".
Alison Gale
POSTED ABOVE 12 JUNE 2023
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