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Open letter to Richard Drax MP, Options for Stimulating the Economy – Time for ‘Helicopter Money’?

February 28, 2013
Dear Mr Drax
Given the slower than expected reduction in the deficit, and continued stagnation in the economy, I am trying to find out what new ideas the government and the Bank of England are exploring to get things moving and get the deficit down faster. I would be grateful if you could forward this to both the Chancellor, and Deputy Governor of the Bank of England, Paul Tucker, for their comments.
Speaking to the Treasury Committee yesterday 26 February, Paul Tucker put forward negative interest as one of the options he was exploring. This does not mean ordinary bank customers would suffer negative interest on their savings; instead banks would suffer negative interest on their deposits at the Bank of England. This is supposed to stimulate bank lending. Reaction to this idea has not been favourable; for example Erik Britton, director of Fathom Financial Consulting, explained the idea and told the Today programme on 26 Feb that negative interest rates would not work “because there’s no demand for the lending” from either demand firms or households. Also the BBC reports (, “Newspaper review: Concern over negative-interest idea: The Times leads on the suggestion by the deputy governor of the Bank of England, Paul Tucker, that negative interest rates should be considered to kick-start the economy. Negative interest means a central bank charges banks to hold their money – which should encourage them to lend more of their funds instead. The paper says the proposal has been greeted with disbelief in the City and provoked horror among pensioners whose savings have already been hit by low interest rates. The Independent talks of ‘despair for savers’.”
A seemingly more promising idea which promises to deliver a fiscal stimulus at no direct cost to the exchequer is the creation of ‘helicopter money’. Under this scheme the Bank of England would create new money free of debt to give to the government to use in any way it chooses. It could use this money to pay off some of the national debt, but it would probably be more effective to use it to stimulate the economy in some way; and hence create more real jobs and increase the tax take, as well. The usual argument against this is that it might cause high or even run away inflation, but this would not happen under current circumstances of low demand, decrease in the broad money supply M4, and net private sector saving. The idea is supported both by Lord Turner, (‘DEBT, MONEY AND MEPHISTOPHELES: HOW DO WE GET OUT OF THIS MESS?’, speech to Cass Business School, 6 Febuary 2013), and Martin Wolf, (‘The case for helicopter money’, Financial Times, February 12, 2013).
Can you please ask both the Chancellor and Paul Tucker whether they have looked at the option of ‘helicopter money’ and what their conclusions were? You need to ask both as the essence of this proposal is monetary/ fiscal co-operation.
Commercial banks create 97% of our money in the act of advancing loans. The idea that in doing this, banks have to wait for an increase in central bank reserves has been shown to be false. To avoid high inflation resulting from excessive money creation it is therefore necessary in general to restrain commercial banks from lending too much. Normally the Bank of England relies on using the base rate for this purpose. At present this lever is ineffective, but unnecessary. When the economy recovers, experience shows that interest rates may be insufficient to restrain banks from creating another asset price bubble – some quantitative restriction on the amount of credit they can create may be needed. The two requirements: to kick-start a stagnant economy and restraint in a boom, can be met by a simple monetary reform. As Lord Turner notes, a group of economists at the University of Chicago responded to the Depression by arguing for severing the link between the supply of credit to the private sector and creation of money. Henry Simons was the main proponent. But Irving Fisher of Yale University supported the idea. Under this plan, known as The Chicago Plan, only the state or the central bank would create money free of debt. In a paper published by the IMF in August 2012, IMF economists Michael Kumhof and Jaromir Benes applied state of the art economic modelling to the Chicago plan. The results supported all the benefits claimed by Fisher. A slight variant of the Chicago Plan, promoted by the campaign group Positive Money is more consistent with the separation of monetary and fiscal policy in the UK. Michael Kumhof informs me that he expects that the macroeconomic effects would be very similar.
Can you please ask Paul Tucker:
Has he considered direct quantitative restrictions on credit creation by commercial banks as an instrument of macroprudential policy?
Has he considered adopting some variant of the Chicago Plan? Is he aware of the IMF study?
Has he discussed these things with the Treasury?
yours sincerely
David Smith
That’s what I wrote to Mr Drax. To keep things simple I couched it as though we need growth to get the economy going and to provided more genuine jobs. My Green colleagues point out that continuing economic growth is unsustainable. Somehow we have to allow everyone who is capable of working the chance to earn enough for a decent life without using more natural resources. This could be achieved by using much of the ‘helicopter money’ to cut the deficit or even the national debt whilst using the rest in a highly targetted support for things like ‘Green Jobs’ – especially better insulation of houses.
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