We've written here several times over the last few years about the way in which money is created in the West. So regular readers will understand that the supply of money is not created in the main by central banks, but by commercial banks - they create it out of thin air every time they make a loan.
This isn't the kind of thing that the authorities much like to talk about it is hard to maintain the idea that central banks are in absolute control of monetary policy when everyone knows that commercial banks print 97% of the new money every year as and when they feel like it.
So we have been interested to see the subject making its way into the mainstream. First, in the first quarter of this year came the the Bank of England Quarterly Report, which described the process pretty clearly: "In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new money."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Then came FT columnist Martin Wolf. A few weeks ago he too described the way in which money is really created, and then last week he suggested a few improvements to the current system. Why, he asks, should the ability to print money rest to such a large degree in private hands? Is it this that gives us boom and bust? And if so what should we do about it?
These are big questions and ones we will be discussing at length at the MoneyWeek Conference on Friday (there are a few tickets left). But there is definitely a growing sense in government that things aren't quite as they should be.
Douglas Carswell, among others, reckons that taking away the government guarantee on deposits would sort things out pretty well (see our interview with himand this roundtable discussion), while Martin suggests that only the government should have the right to print money, create inflation and pocket the proceeds of doing so.
However in the short term the most likely move will be towards credit controls whereby the Bank of England puts restrictions on how much banks may lend out, and how. There is a little of this about at the moment (banks have to hold less capital against mortgages than business loans for example, something that encourages them to make more mortgage than business loans). But there are more precise ways to do it.
The Japanese have long used something called "window guidance" as a way of telling the banks exactly how much may be lent to any one sector at any one time. And if you look at the restructured Bank of England, you will see, as I discussed a few months ago,that the Financial Policy Committee has the ability to control the supply of credit to different sectors at different times, something CLSA's Russell Napier calls "capitalism with Chinese characteristics", and we could also call "capitalism with Japanese characteristics".
What it means is that the Bank already has the power, should it choose to use it, to fully direct and control the creation of money inside the UK economy.
Will it use it? Hard to tell. But the much-discussed mortgage market review, whereby the banks have to make sure that borrowers can afford to repay their loans before they make them, might give us a hint.
The Bank of England, via the FCA, is telling the commercial banks how they may lend. It isn't a particularly stringent credit control, but it is still a credit control.
Banks have been creating money without much in the way of controls since the 17th century. Is this the beginning of a revolution?
-
Most expensive street in Britain to buy on has houses with '£10m average asking price', Rightmove findsNews Rightmove found Buckingham Gate, close to Buckingham Palace, was the most expensive street in the country. Do you live near one that's been included on the list?
-
Smaller companies: starting to turn?The long-awaited turnaround in smaller companies is unlikely to happen just because shares are lowly-valued. However, an improving economic and interest rate backdrop could spark renewed interest in the sector. M&A activity is also providing support for the smaller companies sector
-
Beating inflation takes more luck than skill – but are we about to get lucky?Opinion The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank of England may be about to get lucky.
-
Rishi Sunak can’t fix all our problems – so why try?Opinion Rishi Sunak’s Spring Statement is an attempt to plaster over problems the chancellor can’t fix. So should he even bother trying, asks Merryn Somerset Webb?
-
Young people are becoming a scarce resource – we should value them more highlyOpinion In the last two years adults have been bizarrely unkind to children and young people. That doesn’t bode well for the future, says Merryn Somerset Webb.
-
Ask for a pay rise – everyone else isOpinion As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why you should do that too.
-
Why central banks should stick to controlling inflationOpinion The world’s central bankers are stepping out of their traditional roles and becoming much more political. That’s a mistake, says Merryn Somerset Webb.
-
How St Ives became St Tropez as the recovery drives prices sky highOpinion Merryn Somerset Webb finds herself at the epicentre of Britain’s V-shaped recovery as pent-up demand flows straight into Cornwall’s restaurants and beaches.
-
The real problem of Universal Basic Income (UBI)Merryn's Blog April employment numbers showed 75 per cent fewer people in the US returned to employment compared to expectations. Merryn Somerset-Webb explains how excessive government support is causing a shortage of labour.
-
Why an ageing population is not necessarily the disaster many people think it isOpinion We’ve got used to the idea that an ageing population is a bad thing. But that’s not necessarily true, says Merryn Somerset Webb.
