On 5 April 2020, the Governor of the Bank of England, Andrew Bailey, ruled out the possibility of the Bank of England using ‘monetary financing’ to support the government in its attempts to mitigate the economic damage caused by the Coronavirus lockdown. By monetary financing he meant the practice of printing money and distributing it directly to the government, firms and households in order to support consumption activity. This is also known as ‘helicopter money’, a term invented by Milton Friedman to vividly illustrate the possibility of a government printing money and distributing it by any means necessary in an economic crisis. For the moment, Chancellor Rishi Sunak has decided not to seek monetary financing from the Bank of England. This post considers how the government might seek to bypass the Governor and implement a policy of helicopter money, if the Chancellor changes his mind.
The economic context
The rationale for helicopter money is to quickly boost economic demand by providing consumers and firms or the government with money that can be spent immediately on consumption and investment. Its use might become necessary if conventional monetary policy, which tries to boost consumption and investment by lowering interest rates to make borrowing more attractive, is no longer effective. A global pandemic is the type of crisis which might require some form of helicopter money and respected policy-makers, including Lord Turner (former Chairman of the Financial Services Authority) and Sir Charlie Bean (formed Deputy Governor of the Bank of England) have suggested it. The Bank of England has already announced that it will provide a temporary overdraft facility to ease the government’s cashflow problems, which is a first step towards direct monetary financing of government spending.
The big problem with helicopter money is that the increase in demand it is designed to create may also lead to hyperinflation, which is why the Governor of the Bank of England is opposed to it. Whether hyperinflation is a serious risk is a matter for economists, but the possibility of hyperinflation should inform any analysis of how the government could force the Bank of England to print helicopter money. Ideally, the government would use its legal powers in a way which preserves, or at least does the least damage to, the Bank of England’s reputation for independence and commitment to the inflation target, because that is the basis for price stability.
The legal options
The Bank of England’s independence was created by the Bank of England Act 1998. The Act amended the Bank of England Act 1946 (which nationalised the Bank) to exclude monetary policy from the government’s general power to issue directions to the Bank. In its place the Act created a Monetary Policy Committee within the Bank of England which has the power to set the Bank’s benchmark interest rate and thereby seek to regulate economic output and inflation. Section 11 of the Bank of England Act 1998 sets the objectives of the Committee. First, it must maintain price stability i.e. a steady rate of inflation. Second, subject to the first objective, it must support the government’s economic objectives. Under Section 12 of the Act, the government must define price stability and its economic objectives in a written notice to the Bank of England which is published and laid before Parliament. It must give notice at least every 12 months. This is typically done at the same time as delivering the Budget and on 11 March 2020, the Chancellor Rishi Sunak, duly re-confirmed that the inflation target would remain at 2% and that the government’s economic policy was to achieve strong, sustainable, balanced growth.
However, the government also retained an emergency power in Section 19 of the Bank of England Act 1998, which might allow the government to impose a helicopter money policy on the Bank. The provision allows the government, to issue directions to the Bank forcing it to undertake a particular policy “if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.” The power can only be exercised following consultation with the Governor of the Bank and includes a Henry VIII power to make consequential amendments to the Act itself. Any order made under Section 19 is subject to the made affirmative resolution procedure.
Of course, the government could also try to pass primary legislation requiring the Bank to print money and either hand it over to the government or directly distribute it to firms and households.
The best way forward?
The option which would arouse the least controversy would be to redefine the Monetary Policy Committee’s objectives using Section 12. There are no limits on how frequently the Chancellor can amend the objectives. Although the Act prioritises price stability over other economic objectives, it does not define the time period over which price stability should be achieved. During the long period of weak economic growth caused by Government austerity policies from 2010, George Osbourne, the Chancellor at the time, redefined the Committee’s objective as the achievement of price stability over the medium term and thereby accepted difficulties in achieving the inflation target in the short term. However, changing the objectives might not be enough to overcome the Committee’s conservative attitude towards helicopter money.
Issuing a direction under Section 19 and thereby taking direct control over monetary policy would guarantee a result. Section 19 is sub-titled “Reserve powers” but the text is not entirely clear about whether the power can be exercised by government acting alone. The provision requires that the Treasury consult the Governor and that “they” consider the measures to be in the public interest (the additional requirement of extreme economic circumstances is clearly met at present). Although this is clearly within Parliament’s power and practically achievable since it would be difficult in such a crisis for Parliament to oppose a measure designed to help households survive, it would significantly increase the risk of hyperinflation.
Previous exercises in unconventional monetary policy, like Quantitative Easing, have not led to dramatic increases in inflation, partly because independent central banks have retained the trust of consumers and investors, which has anchored inflation expectations even as demand has increased. By taking that anchor away in order to implement helicopter money the government would risk unleashing hyperinflation and Parliament would find it difficult to re-establish trust in its commitment to central bank independence, thereby undermining any attempts to combat hyperinflation by re-anchoring inflation expectations in the future. Normal controls on emergency legislation like sunset clauses and post-legislative scrutiny might ameliorate some of the negative consequences by emphasising the temporary nature of the policy, but they are really designed to restrain an executive which is intent on keeping the powers it has gained during an emergency, whereas in this instance the executive would really want to delegate power back to the Bank of England but face difficulties in convincing households and firms that it would not take the powers back again if necessary.
Of course, the government retains the nuclear option of asking Parliament to repeal the Bank of England Act 1998 and thereby abolish the independence of the Bank of England, but, given the success of central bank independence at controlling inflation around the world, it is unthinkable that any government would pursue this option.
If the Chancellor decided to support a helicopter money policy, he would have no straightforward mechanism for imposing his will on the Bank of England. Even the emergency power in Section 19 presents a potential legal problem, in addition to the negative political and economic consequences of undermining the Bank of England’s independence.
This conclusion will not surprise economists, for whom the existence of an independent central bank is a fundamental assumption when trying to build models of the economy. But it is perhaps a surprising conclusion for lawyers who may have assumed that the United Kingdom’s strong central government ultimately determines macroeconomic policy, particularly in times of crisis. The reality suggests that the Bank of England’s legal framework requires a high level of functional collaboration between the Treasury and the Bank to determine and achieve macroeconomic policy goals.
Alex Schymyck teaches Public Law at Queen Mary University of London and the London School of Economics.
I am grateful to Professor Alison Young and Professor Michael Gordon for their helpful comments on a draft of this blog.
(Suggested citation: A. Schymyck: Helicopter Money: Could the government force the Bank of England to print money?, U.K. Const. L. Blog (15th April 2020) (available at https://ukconstitutionallaw.org/))