Lord William Wallace writes… Working within an unreformed Westminster

The Liberal Government took the first step in reforming the House of Lords in 1910-11. Since then it’s been hard work to push constitutional reform further. Life peerages were introduced in the 1950s, creating a House of over 1000 members in which, as one Tory woman life peer once told me, ‘the hereditaries treat us like day boys’ in a public school.

Tony Blair realised that a frontal approach to Lords reform would tie up his government for months, and negotiated a partial further reform with Lord Cranborne, the Conservative leader in the Lords, behind William Hague’s back (and with Paddy Ashdown’s support). Under this, most hereditaries were withdrawn; the exempted 92 were presented as hostages until a full reform towards a directly or indirectly elected House was achieved, at some point within the next 10-15 years.

When the coalition government was formed, the Liberal Democrats demanded that the next stage of Lords reform should be included. I was the minister responsible for taking the issue further in the Lords, against the resistance of Tory, Labour and many cross-bench peers. Backbench Conservatives in the Commons refused to vote for a timetable motion on the Lords reform bill, threatening to delay other government business for months while arguments rolled on. If Labour had given active support, the Bill would have succeeded; but, as so often, Labour preferred to stick with the old rules of two party politics, and the Bill failed. My hopes of standing for the regional elections for the second chamber as a candidate in Yorkshire sank with it.

The Sunday Times has now decided to highlight the presence of three dukes, several earls and many hereditary barons in our oversized second chamber. There’s nothing new about that. It should have added that the majority take the Conservative whip (though some recently have defected to the Cross-benches); the government front bench includes several hereditary peers as ministers and whips. The immediate issue is whether to renew ‘by-elections’ for hereditary places once the COVID-19 emergency ends, or let the hereditaries fade away. The wider issue is about Parliament as a whole and the role of a second chamber.

For all the myths of parliamentary sovereignty, the UK – when a government has a clear majority of MPs – is run by a strong executive, wielding powers that Prime Ministers have taken over from monarchs. 100 MPs on the government payroll, and an equivalent number on Labour benches, keep backbenchers under control and marginalise other parties. Johnson has little time for the Commons, let alone for opposition criticism – and even less for the detailed scrutiny which is what the Lords provides. A reformed Lords would become more legitimate, and therefore more powerful. Labour front-benchers agree with ministers that this would ‘challenge the Commons’: by which they mean make life more difficult for the government (to which Labour hopes in time to return).

So we are stuck with a semi-representative Commons (a majority of 80 seats on 43.5% of votes) and a non-representative Lords. Liberal Democrats in the Lords work within this deeply unsatisfactory Westminster system, managing to raise awkward issues the government would rather avoid and to change and improve legislation. Most amendments to Bills are made in the Lords, with ministers often modifying clauses in response to careful criticism.

The UK desperately needs political reform and constitutional restructuring. Even the Director of the right-wing Institute of Economic Affairs, in the Times of March 22nd, called for real devolution within England. If the UK is to hold together, we will have to move towards a federal structure. Within that structure a second chamber would represent the nations and regions, powerfully.

Boris Johnson prefers the illusion of popular democracy, hiding the reality of centralized authority. Labour has traditionally supported a strong central executive, and a weak Parliament. Popular disillusion with Johnson’s style of government may lead to renewed interest in constitutional change – or to a new surge of anti-system populism. We all need to argue for the former. But meanwhile the Liberal Democrat contingent in the non-democratic Lords will do its best to push for liberal causes within a deeply illiberal Westminster and Whitehall.

* William Wallace is Liberal Democrat spokesman on constitutional issues in the Lords.

Read more by or more about .
This entry was posted in Op-eds and Parliament.


  • I’ve always great deal of respect and admiration for William over the years, and appreciate all the dilemmas and uncertainties he faces trying to make the unworkable work.

    Short of taking Westminster (and the Lib Dem Party) to the TV Repair Shop, perhaps senior Lib Dems ought now to reflect afresh why there are some of us north of the Border who have had enough of being ruled by such an anachronistic undemocratic authoritarian system with all it’s Gilbertian eccentricities. Westminster values are not our liberal values of democracy, human rights and progressive reform.

    Said High Hiedyins (a great start to have the name William Wallace) ought to carefully reflect that when the Liberal Party was the dominant political force in Scotland over a hundred years ago (holding fifty eight of the seventy Scottish seats) , there was considerable support for Scottish Home Rule (not of the milk and water devolution variety) within the Scottish Parliamentary Liberal Party. They were not Liberal Unionists who amalgamated with the Tories in 1912.

  • John Marriott 23rd Mar '21 - 10:32am

    I would have a lot more time for Lib Dem Lords and Ladies if they collectively handed in their ermine and reverted to plain Mr, Mrs or Ms (or whatever title floats your boat). I suppose the counter argument is a bit like the Post Code Lottery. You’ve got to be in it to win.

  • John Marriott 23rd Mar '21 - 1:46pm

    No, mate, in JM’s world, it’s more like putting your money where your mouth is! I don’t know about dropping death. I’m sure that there are many people out there, who can be bothered to read my contributions, who probably reckon I’m dead from the neck up already!

  • I’d much prefer a John Marriott Preservation Society to a John Marriott Memorial Society.

  • The position now is we need a federal system to replace the current centralised system as soon as possible and certainly within the next few years.
    The UK is now at the point the Soviet Union was in the late 1980s where centralism was failing. The example how Germany’s devolved federal system dealt much better with the Covid crisis than the UK.
    Here in Wales, we couldn’t move or spend on improved infrastructure without approval from central UK. England doesn’t even have any local state assemblies.
    We may not be able to wait for another few years, especially outside the European single market and customs union.
    Reform is required now if you want to the UK to stay together.

    It may even now passed the point of return in which the only way to progress is to let Scotland then followed by Wales to go independence. I know here in Wales that many are giving up on the UK and I am not that sure whether a new UK will be as redundant as Benelux to rather to proceed to a federal European Union and for Wales, Scotland and England to join the EU as new nations.

    What do your members feel about how to proceed?

  • David Raw:
    If the position in Scotland is anything like in Wales, there are possibly more liberals in Scotland even now than in England.
    Here in Wales, there are certainly more liberal thinking people (it was the nation that gave us David Lloyd George). The problem for the Welsh Liberal Democrats is they are not going anywhere soon with wanting to keep Wales in the UK and remain outnumbered by Tories in England.
    The way forward is to accept that Plaid Cymru IS functionally the real Welsh social liberals and urge greater co-operation within a wider membership of the ALDE in the same way as for the Alliance party in Northern Ireland.

  • John Marriott 23rd Mar '21 - 5:01pm

    @David Raw
    Thanks. The cheque is in the post.
    In view of the sad news this morning, I feel that any further comment on my part about the Upper House at the moment would merely be digging myself into an even bigger hole!

  • @ John M. Yes, John. for a while Tony and I were at school together at Bradford Grammar before he went off to QUEGS at Wakefield, so I’ve known him off and on for nearly seventy years.

    Deep down he was a very good bloke, the best sort of Liberal who never trimmed on his radicalism or his principles. He was always loyal to his friends, to his Party despite all its provocations and backsliding, and he didn’t approve of George Dangerfield even though they were both alumni of Hertford College. He was even loyal season ticket holder at dear old Bradford Park Avenue Football Club – so he had sticking power. He was fortunate in being married to Heather who has a heart of gold.

    The Party owes Tony a great deal, especially when it had success in local government.

    Very much missed. RIP Tony.

  • Rif Winfield 24th Mar '21 - 1:06pm

    First let me say how saddened I am to learn of Tony Greaves’s death yesterday. Having known Tony since the start of the 1970s, he will be greatly missed by all his Liberal friends – those in the Liberal Democrats and those outside. My thoughts are with Heather, to whom I send my sincere condolences and deep sympathy.

    William’s article highlights how interconnected are our views on the devolution of central power to the nations and regions of the UK, and our views on the replacement of the House of Lords by an accountable second chamber of Parliament. Liberal proposals do need to be sharpened up – (1) with an elected second chamber, should the first chamber (the Commons) be reduced in numbers? My preference would be for a Commons of 400 members elected by STV, and for a second chamber also of 400 members elected from the nations and regions; but how do we prevent the second chamber being a mirror or shadow image of the first? (2) should the two chambers be elected at the same time, and for the same terms of office? (3) what powers should an elected second chamber hold – is it just a revising chamber, or should it be able to strike down legislation passed in the Commons, or just to delay its enactment? (d) What should be the relationship between Government ministers and the two Houses; bearing in mind that being a government minister is a full-time occupation, should we separate the responsibilities of the executive from those of the legislative; a logical step, albeit a radical one, would be to make government ministers responsible to Parliament, but remove their right to vote – adopting the French system of having anyone appointed as a minister having a deputy who takes over their voting rights in Parliament.

    Please start to put some meat on the bones of the proposals! Or we may find that |Liberal proposals are sidelined by other parties.

  • Nigel Jones 24th Mar '21 - 2:50pm

    Our democracy is fragile (as Biden says) and starting to go in the wrong direction. It is about more than the House of Lords, though changes there seem one place to begin. Rif Winfield raises vital questions that need wide discussion about a new second chamber, but maybe we can hope that changes there can prevent the decline of House of Commons and increasing power of government ministers from going too far.
    The other important changes needed are in the voting system and in reversing the decline in resources for local government. I see these two areas needing to be changed simultaneously with reforming the second chamber. Unless we can get some momentum behind all three very soon (which means working with other parties and non-aligned groups) we will see a rise in what William Wallace calls anti-system populism. Boris is encouraging the latter very ably because his general positive personality is so attractive to so many people and not only the traditional Conservatives; hence the red wall support which in our area of North Staffordshire is about more than just Brexit. Indeed he seems to convey the feeling that his changes are in line with traditional British values and therefore makes many people feel very comfortable with them. As long as he can make people feel hopeful about their economic future, he may get the support he needs at election times.

  • Joseph Bourke 24th Mar '21 - 3:10pm

    Wiiliam Wallace as usual has his finger on the pulse. He refers to the Institute of Economic Affairs call for real devolution within England. This has been a longstanding campaign of the IEA https://www.theguardian.com/politics/2015/nov/04/free-market-thinktank-calls-for-creation-of-federal-uk-by-radical-devolution
    “The UK’s approach to devolution is incoherent and unstable.” “It’s clear that the only long-term stable solution is to create a proper federal state with a very small number of powers held at UK level. All other issues should be the responsibility of separate governments in Scotland and the rest of the UK (or England, Wales and Northern Ireland). There should then be a sweeping decentralisation of regulation, tax and spending powers to local government. With very few exceptions, each layer of government must raise what it spends.”
    This does indeed need serious thinking. Special commissioners have been called in today to act as advisors to Liverpool City Council following the publication of the Caller report. Liberal Democrat candidate for Mayor of Liverpool, Councillor Richard Kemp
    says “The post of Mayor was imposed on Liverpool It gives too much power to one person. Liberal Democrats would seek to abolish it and offer the people of Liverpool full consultation on all the options for governance open to them.” https://www.liverlibdems.org.uk/it_s_time_for_change_in_liverpool
    “Just as it did after the Militant and Hatton era it will take many years to overcome the damage done to the finances and reputation of our City.”

  • @ Nigel Jones, ” Boris is encouraging the latter very ably because his general positive personality is so attractive to so many people and not only traditional Conservatives”.

    Maybe in the home counties, Nigel, but not so in Scotland. According to a recent poll in the Aberdeen Press & Journal :

    “Brexit and the UK Government’s handling of the pandemic were among the most persuasive arguments for independence, but none more so than the argument: “Boris Johnson is not the leader I want to have for my country” , a sentiment 79% of swing voters agreed with in Scotland”.

    The perception of Johnson north of the border is of a man careless with his decisions and careless with his version of the truth. I’m afraid that self satisfied disingenuous Old Etonians don’t go down all that well in the land of ‘A man’s a man for a’ that’.

  • Peter Martin 24th Mar '21 - 4:58pm

    @ Joseph Bourke,

    “There should then be a sweeping decentralisation of regulation, tax and spending powers to local government. With very few exceptions, each layer of government must raise what it spends”

    This is just macro-economic illiteracy. In any common currency area there has to be a system of fiscal transfers between wealthy and less wealthy areas. This isn’t to be confused with socialism. The less affluent US States of Mississippi and Tennessee are net recipients of Federal funds whereas the more affluent States of California, New York and New Jersey will be net contributors. This is how any currency Union has to work. It is the same virtually everywhere. Tasmania in Australia is a net recipient. NSW is a net contributor.

    Most of the EU’s problems come back to not wanting the eurozone to be a Fiscal transfer union too. There’s nothing wrong with a Federal structure providing there is a strong Federal Govt too. As there is in the USA and Australia.

  • Joseph Bourke 24th Mar '21 - 5:40pm

    Peter Martin,
    Federal systems generally have some provisions for transfers or equalisation but the criticism is that over-centalisation and reliance on central government block grants. impedes regional investment and sustainability and makes for poorer allocation of scarce resources.
    Switzerland is relatively decentralised. The federal government in Switzerland accounts for roughly 30 percent of spending, while the remaining 70 percent is the responsibility of the cantons and local communities. There are fiscal equaisation programs, but In absolute and relative terms, fiscal equalization is relatively modest compared to public budgets. It represents 2.5% of the total federal, cantonal, and communal budgets, and 6% of cantonal budgets.
    The German tax system is system of joint taxes. The three main taxes, namely the personal and corporate income taxes and the VAT are joint taxes. This means the federal, state, and local governments have shared rights. These taxes are legislated at the federal level (rates and tax base). The revenues from these three sources are divided between the federal government and the state and local governments. The German constitution requires that personal income tax revenues are allocated to the federal, state and local levels in the following percentages: 42.5%, 42.5%, 15%, respectively. The corporate income tax is divided 50-50 between the federal and state governments. Personal and corporate income taxes are allocated to the appropriate state. Personal income tax revenues, for instance, are allocated to states based on the residence of individuals. Corporate taxes are paid to states based largely on the location of employees in the company.
    One quarter of VAT revenues are retained by the federal government. The remaining three quarters are divided into two parts: (1) 75 percent is paid out to the states on a per-capita basis, and (2) the remaining 25 percent (of the three quarters) are distributed to states deemed “poor” based on the difference between personal and corporate
    tax revenues raised per capita in the state compared to the national average.

  • John Marriott 24th Mar '21 - 6:26pm

    @Joseph Bourke
    In your quoting of the plethora of taxes in Germany you could have added voluntary church tax (Kirchenseuer)’ and a TV tax (Rundfunkbeitrag) which we used to pay when we lived in Germany, which today is around €17 per month. Also you need to factor in Health Tax in the form of subscriptions to ‘Krankenkassen’, which is dependent on income and which includes a contribution from employers.

    As a keen supporter of a Federal U.K. I am pleased that it’s now creeping on to the agenda. Under any realignment of taxes, it’s pretty obvious to an economics simpleton like me that the more affluent areas should help to bolster the less affluent areas. I remember your admonishing me regarding Kensington and Chelsea and its “oligarchs and Arab princes”. I repeat what I said in my reply to you at the time. If they live here even only for a part of the year, they ought to be paying some tax on their incomes. It may smack of fiscal illiteracy to experts like you and Peter Martin; but it makes sense to many people, believe me.

  • Peter Martin 24th Mar '21 - 6:26pm

    @ Joe Bourke,

    You’ve chosen two large net exporters, Germany and Switzerland, to support the IEA argument. A net exporter will always have, by definition, a net influx of overseas money. The UK, as I’m sure I have mentioned often enough, so you must know, is a net importer and there is a net outflow of money from the economy. Therefore there has to be a route back for that money via the Central govt by deficit spending.

    We have a very right wing think tank coming out with some very right wing ideas on how to screw the English regions, no surprise there, but you can only suggest “This does indeed need serious thinking.”

    No it doesn’t! The idea is a pig-in-a-poke! Just tell the IEA where to stuff it!

  • John Marriott 24th Mar '21 - 6:28pm

    That should have read “KirchensTeuer”.

  • Peter Martin 24th Mar '21 - 6:37pm

    @ John Marriott,

    “If they live here even only for a part of the year, they ought to be paying some tax on their incomes. It may smack of fiscal illiteracy to experts like you and Peter Martin; but it makes sense to many people, believe me.”

    Not at all. I’d go along with that. In fact I’d go further and say they are allowed to be here for one month, unconditionally, for a holiday, but after that they should pay UK income tax in the same proportion as the time spent in the UK.

  • Joseph Bourke 24th Mar '21 - 9:35pm

    John Marriott,

    the more affluent areas in Germany do help to bolster the less affluent areas. As noted above, 25 percent (of the three quarters of VAT allocated to states ) is distributed to states deemed “poor” based on the difference between personal and corporate tax revenues raised per capita in the state compared to the national average.
    The United States has no formal system of equalization to transfer resources from prosperous states to less prosperous ones. What it does have is a federal grant-in-aid system. Some of the major federal aid programs are in the areas of education, health care, housing, and transportation. These federal aid programs constitute one of the biggest areas for pork barrel politics and special interest lobbying in the states.
    Both Australia and Canada do have quite significant equalisation programs as part of their Federal budgets that allocate funds to poorer regions. These programs include support to their indigenous native populations.

  • Joseph Bourke 24th Mar '21 - 10:07pm

    Peter Martin,

    The current account consists of three elements. The first is the trade balance, exports less imports. The second is net transfers of money abroad e.g. remittances by immigrant workers or international development spending. Finally there’s net investment income. That’s the difference between the income on UK investments overseas and income of foreign investments in the UK.
    The counterpart to a current account deficit is a capital account surplus. The current account measures income but the capital account measures changes in the ownership of assets. In others words foreign money is flowing into the UK.
    A large and persistent deficit can signal an economy that is otherwise consuming domestically and not really paying its way in the world. The UK’s current account deficit isn’t really to do with exports and imports of goods and services, the UK’s trade balance has been (in general) in deficit for decades.
    What has changed in recent years is the net investment position. The pattern of the UK current account since the early 1980s has been a largish deficit in the trade balance somewhat offset by a surplus on the net investment position. British investments overseas have been yielding a better return than foreign investments in the UK.
    Since 2011 though that hasn’t been the case. The net investment position has swung from a positive number to a negative one. That means the overseas deficit isn’t driven by a poor exporting performance or a reliance on imported goods.
    A current account deficit is not a problem while it can be financed. The UK can remain a large net borrower as long as foreigners are prepared to keep stumping up the cash. For the last few years UK corporate stocks and bonds and UK property have played the role of safe haven in an often turbulent world economy. As long as things remain turbulent internationally, the UK shouldn’t have a problem financing its deficit. For advanced economies like the UK, current account deficits have a habit of not really mattering until such a time as investors decide they do matter. At which point they can matter a great deal.
    A large current deficit usually signals some imbalance in the underlying domestic economy. The task of “rebalancing” the UK economy towards a more sustainable growth path remains and decentralisation of taxation powers and investment spending to the regions is part and parcel of that of that necessary rebalancing.

  • Nonconformistradical 24th Mar '21 - 11:47pm

    @Nigel Jones
    “traditional British values”

    I’ve always been puzzled by this concept. What would you include in the list and what is particularly British about them?

  • Joseph Bourke 24th Mar '21 - 11:57pm

    The IPPR issued a report last year calling for a devolution parliament https://www.ippr.org/files/2020-02/the-devolution-parliament-feb20.pdf
    Regional economic divides do not benefit people in London. Londoners face the highest rates of income inequality in the country, as well as the highest rate of poverty in England with 28% of people in the capital trapped in relative poverty, after housing costs. The economic growth of London is disproportionately reliant on profit and rents, and house prices have risen to 13 times the average annual earnings – when they are only 5.5 times the earnings in the North East.
    “Levelling up can only be achieved by putting mayors and local leaders in the driving seat, researchers argue. And the government must open the door to devolution across England, while letting places like Greater Manchester, West Midlands and London take on more power too.”
    Sir Richard Leese, Chair of the Local Government Association’s City Regions Board, said:
    “There is clear and significant evidence that the country gets better value for money when decisions over investment and how to run local services are taken closer to communities and businesses.”
    “As this report shows, with the right powers and funding, devolution can lay the foundations for a more inclusive and prosperous economy across the whole of England.
    “Democratically-elected councils are best placed to support the Government in seizing the opportunities for growth in the years ahead. They also make a huge difference to their communities by building desperately-needed new homes, creating jobs and providing care for older and disabled people.”
    “We urge the Government to publish its promised Devolution White Paper as soon as possible, and to reignite the process of handing councils the freedom and resources they need to get on and deliver for their communities.”

  • Peter Martin 25th Mar '21 - 9:01am

    @ Joe,

    “The counterpart to a current account deficit is a capital account surplus”

    Yes the two sum to zero. A floating currency means the Govt doesn’t have to worry about any imbalance which can otherwise be created with a fixed currency.

    “A large and persistent deficit can signal an economy that is…. not really paying its way in the world.”

    OK, so why not take steps to reduce the capital account surplus if that’s your worry? It’s equally valid to say that the capital account surplus is the real problem rather than the current account deficit.

    As you say:

    “the capital account measures changes in the ownership of assets. In others words foreign money is flowing into the UK.”

    So why don’t we do something to stop the sale of some assets like land and property to absentee foreign owners. Australia does , or at least it did in the 90s, have a residency test requirement on anyone wanting to buy property there.

    This would go some way to fixing the problem but I can’t see any reason why some asset sales such as govt bonds should be disallowed. On a worldwide scale there does seem a greater desire among countries to be net exporters which almost certainly means their current account is in deficit, even though there are other components as you point out. This means they need to export their surplus capital to have a capital account deficit.

    They can’t export this to other net exporters. They don’t want it. That just leaves the net importers like the UK and USA.

  • Peter Martin 25th Mar '21 - 9:06am

    Correction: In the above it should read (penultimate paragraph):

    “…almost certainly means their current account is in surplus”.

  • Peter Martin 25th Mar '21 - 9:36am

    @ Joe,

    “As this report shows, with the right powers and funding, devolution can lay the foundations for a more inclusive and prosperous economy across the whole of England.”

    OK but the IEA don’t want “the right funding”. Presumably they would want the Barnet formula scrapped for Scotland and replaced with a requirement for a balanced budget. Or they could perhaps insist on a maximum of 3% of GDP, EU style.

    If Greece was annexed by Germany and ruled from Berlin they would be better off. Any government would need Greek votes and so we’d find that levels of unemployment would become similar in both locations. Just as they are similar, if not exactly equal, to the rest of the UK now in Scotland, Northern Ireland and the English regions.

    This is largely because, devolution notwithstanding, we have a single UK government in charge of it all in Westminster which implements a measure of fiscal equalisation. Arguably we need more not less. This doesn’t mean that Scottish and Northern Irish people are less hard working and need Govt subsidies. It is simply a recognition that central government needs to counteract the tendency of money to gravitate to other money in the more prosperous regions.

    But, it looks like the IEA wants to put an end to all that!

  • Joseph Bourke 25th Mar '21 - 2:12pm

    Peter Martin,

    A large and persistent surplus can signal a country where domestic demand is too weak and growth is overly reliant on exports. Arguably, wages have been held down too low in China, Japan, Germany and other big surplus countries impeding domestic demand.
    In the aftermath of the collapse of the Bretton Woods system in the 1970s, the United States created the petrodollar system to keep the dollar in the center of the global financial system, which contributed to the formation of structural US trade deficits in exchange for maintaining global power projection.
    Basically, the US engineered a way for the whole world to need dollars (most major oil producers would only sell oil in dollars), and as a result, the forces of supply and demand hold open the US trade deficit to provide the rest of the world with dollars.
    Export-driven countries like Germany and Japan on the other side of that equation ran big trade surpluses, exporting far more to the United States and the rest of the world than they imported.
    Japan led the way during the 1980s and 1990s, while Germany became an export powerhouse in the 2000s after the creation of the euro, and China a bit after that. Singapore, Taiwan, South Korea, Switzerland, and others have also been on the surplus side of the equation during these decades.
    The UK is not the USA. Sterling is a minor reserve currency. Foreign currency reserves are held primarily to maintain a sufficient buffer of funds to meet necessary demand for imports and sterling investments. Large dollar reserves are held by big exporters trading in dollars on International markets. In the case of the UK, srerling reserves are relatively large relative to trade as a consequence of the City of London’s position as an International financial centre. Foreign investors hold about 55% of the UK listed stocks, around 30% of gilts held by the private sector and a large portfolio of commercial and high value residential property, as well as longer-term foreign direct investment in production facilities. If that investment is impeded then sterling would have to devalue significantly to compensate for the loss of incoming investment.

  • Joseph Bourke 25th Mar '21 - 2:41pm

    Since 2018, Scotland has had a separate system of income tax rates and bands to the rest of the UK. This added two extra tax rates – one just below the basic rate, providing a break for low earners, and just one above it, to squeeze a little more from those who earn above the median wage.
    A large chunk of the Scottish budget comes from the block grant – a share of the UK-wide budget as calculated via the Barnett Formula – but tax revenues raised in Scotland have played an increasingly large role in recent years.
    Scotland is perfectly capable of meeting the needs of people in the country from the human and capital resources available within the country, without reliance on English subsidy; just as Ireland did with the Irish pound pegged to sterling until 1979 and subsequently within the ERM until joining the Euro currency ares in the 2000s. The argument that they are not is what has held back development of the country for centuries until devolution began under Blair. A devo-max settlement will be good for Scotland and the rest of the UK alike. Edinburgh can match Dublin and London as a financial Centre. Glascow as a manufacturing centre and Aberdeen as an renewable energy hub.
    I very much doubt if you would find too many Greeks, Germans or anyone else for that matter that would agree with the statement “If Greece was annexed by Germany and ruled from Berlin they would be better off.” The birthplace of Socrates, Plato, Aristotle and Hercules has much going for it as a member of a forward looking European Union.

  • @ Joe Bourke “A large and persistent surplus can signal a country where domestic demand is too weak and growth is overly reliant on exports”. Like Victorian England ?

  • David Evans 25th Mar '21 - 3:17pm

    As Jos Bourke quotes “Levelling up can only be achieved by putting mayors and local leaders in the driving seat, researchers argue.” Of course those who are members of a party which believes in diverse, democratic and participative government would not agree.

  • Peter Martin 25th Mar '21 - 3:30pm

    @ Joe Bourke,

    A “large and persistent surplus” is nearly always the result of the big net exporters holding down their currencies in one way or another. It’s currency manipulation.

  • John Marriott 25th Mar '21 - 5:22pm

    “If Greece was (sic) annexed by Germany”. Didn’t that crisis a few years ago prove that it is already?

    “The collapse of the Bretton Woods system in the 1970s”. That’s largely where the rot set in, in my opinion. How about adding the quadrupling of oil prices in 1973 after the Yom Kippur War? In 1969 West German Economics Minister, Karl Schiller, was assuring us that “the future belongs to oil”. Well, perhaps it did for a while; but no more, if the experts are to be believed.

  • Peter Martin 25th Mar '21 - 6:11pm

    @ John Marriot,

    So your “sic” means you think I should have used the subjunctive tense? Maybe, but I didn’t think it sounded right!

    Anyway in the same point I thought the cartoon on this page was amusing!


  • John Marriott 25th Mar '21 - 7:07pm

    @Peter Martin
    Yes, so why relax your linguistic standards, unless, being a socialist, you might want to sound more like ‘a man of the people’? Back in 1985 Midge Ure might have been able to get away with it with “If I was”, but at least Topol (“If I were a rich man”) and Bobby Darin and others (“If I were a carpenter”) were prepared to be grammatically correct. Personally I blame social media.

  • Joseph Bourke 25th Mar '21 - 7:24pm

    John Marriott,

    The collapse of the Bretton Woods system in 1971 is just history repeating itself. The common answer during generational peaks in debt levels, almost inevitably, is that currency itself eventually gets devalued by some extent instead of just a nominal debt collapse occurring. The ancient Greeks were no strangers to the remedy:
    “In the Athens of 594 B.C., according to Plutarch, ‘the disparity of fortune between the rich and the poor had reached its height, so that the city seemed to be in a dangerous condition, and no other means for freeing it from disturbances seemed possible but despotic power.’ The poor, finding their status worsened with each year- the government in the hands of their masters, and the corrupt courts deciding every issue against them- began to talk of violent revolt. The rich, angry at the challenge to their property, prepared to defend themselves by force. Good sense prevailed; moderate elements secured the election of Solon, a businessman of aristocratic lineage, to the supreme archonship. He devalued the currency, thereby easing the burden of all debtors (although he himself was a creditor); he reduced all personal debts, and ended imprisonment for debt; he cancelled arrears for taxes and mortgage interest, he established a graduated income tax that made the rich pay at a rate twelve times that required of the poor; he reorganized the courts on a more popular basis; he arranged that the sons of those who had died in war for Athens should be brought up and educated at the government’s expense. The rich protested that his measures were outright confiscation; the radicals complained that he had not redivided the land; but within a generation almost all agreed that his reforms had saved Athens from revolution.
    “The Lessons of History”, Will and Ariel Durant, 1968”.

  • John Marriott 25th Mar '21 - 8:30pm

    @Joseph Bourke

    Sorry, Joe, it’s all Greek to me!

    What I find amazing is that, with totalitarianism still not defeated, the nations of what we considered to constitute the ‘Free World’ could still get together at Bretton Woods to map a way forward when peace came, which managed to survive for over thirty years. It was also, as I am sure you might wish to inform us, J M Keynes’ valedictory. Already a sick man, the trip over the Atlantic to New Hampshire as the UK’s main representative probably finally finished him off.

    At the same time, as we were fighting for our democratic survival on these small islands, RAB Butler was putting the finishing touches to an Education Bill, which, although imperfectly implemented by the incoming Labour government, was still good enough to enable the likes of yours truly and many other working class boys to plot a journey from a Council estate, via Grammar School to University.

    So, given where we are today, how about a Bretton Woods Mark Two and, while we’re about it, how about an Education Bill as visionary and groundbreaking as the Butler Act so we can all make the most of a post COVID and, above all, post Brexit future?

  • Peter Martin 26th Mar '21 - 9:38am

    @ John Marriott,

    I’m not sure it’s that clear cut on the use of the subjunctive tense. You’ll find lots of Google hits for the phrase “If Greece was” including one on this BBC link! I found another on WIki so you might want to get on there an correct that!

    I must say I only go on what sounds right and I’ve never bothered to look up the precise rules. Maybe you know something the BBC and I don’t !


    Incidentally there’s little no chance of another Bretton Woods. No-one can make a fixed exchange rate system work indefinitely. The EU is in big trouble with the euro. This is essentially the same thing. There are many different euros. The French euro, the German euro etc all held at parity by the actions of the ECB. It can only last if it becomes a truly single currency under the control of a single EU government.

  • I’m just waiting for the first football club manager to say “We wos robbed” when his team gets subjunctively relegated, or, “the boys done well”, if they get promoted.

    As far as the ECB’s concerned, things ain’t going so well in India at this moment in time.

  • Joseph Bourke 26th Mar '21 - 3:10pm

    John Marriott,

    all good points. The IMF floated the idea of a new Bretton Woods last year https://www.imf.org/en/News/Articles/2020/10/15/sp101520-a-new-bretton-woods-moment
    Nixon in 1971 faced some of the same problems of ancient Athens. Kennedy had made big tax cuts; Johnson has brougt-in the great society reforms and together with Vietnam war spending inflation was ramping up year by year and the civil rights movement was in full swing.
    Keynes was right about having a supra-national currency like Bancor for International trade. The Bretton Woods system made the dollar the gold standard, but ultimately led to the undermining of the dollar itself.The floating rate system that replaced it has seen an explosion of private and sovereign debt ever since and ever growing wealth inequality. Each business cycle ramps up debt and it never returns to its prior levels, so over time the level of debt required to maintain the economic system increases exponentially until we get to that ‘Minsky Moment’.
    It appears unlikely that economies like China, Russia and India will be content with reliance on dollar payment systems for their intra-regional trade and new settlement systems will likely be introduced based on regional currencies.
    I think you are right about the education system. Countries that run trade surpluses tend to benefit from full employment, but not every country can be on the surplus side of the equation. Ultimately, it is education and skill levels coupled with and advancing technology that delivers improving living standards in a constantly changing world.

  • Peter Martin 26th Mar '21 - 3:39pm

    @ Joe,

    “The Bretton Woods system made the dollar the gold standard, but ultimately led to the undermining of the dollar itself.”

    No. I’m sure we all know that the US dollar is still in use as much as it ever was and is doing OK! If anyone thinks there dollars have been ‘undermined’ please send them to me and I’ll see if I can do anything with them! 🙂

    The Bretton Woods system retained the gold standard as a set price against the US dollar. I seem to remember a figure of $35 per oz. Then other currencies would set a fixed value against the US dollar but it wasn’t a ‘standard’ per se. That was still gold. At least theoretically. But even the US had a fair bit of inflation in the post war period so what started off as a sensible price for gold soon started to look ridiculously cheap.

    The US responded by making it very difficult for anyone to exchange their dollars for gold at that price but in the end they had to call it a day and take the dollar off the gold standard.

    The made some half hearted attempts to increase the price, but sensibly Nixon decided to end the convertibility of the dollar into gold.. So it was simple inflation that caused the shift and nothing to do with increased Federal debt or ‘Minsky Moments’.

    There was nothing to stop the BW system carrying on as it was without any link of the US dollar to gold. It spluttered along for another couple of years but in the end the general feeling was it was better to let currencies naturally float.


  • Peter Martin 26th Mar '21 - 4:04pm

    @ Joe,

    . Countries that run trade surpluses tend to benefit from full employment….

    This is only because a trade surplus tends to translate into a a govt surplus, or at least a lowish deficit! This keeps the neolibs happy and they don’t make quite so many stupid decisions! Like cutting Govt spending and raising taxes to try to reduce the govt deficit.

    …. but not every country can be on the surplus side of the equation……

    This is obviously true. But you’d be surprised how many Germans think the eurozone would work fine if everyone was just like them.

    “Ultimately, it is education and skill levels coupled with and advancing technology that delivers improving living standards in a constantly changing world…

    Again this is true but it’s not much help to those who have suffered from the effects of austerity economics and are now struggling along on Zero Hour Contracts. The next time you get chance to speak to a Deliveroo dispatch driver, or rider, tell them they must be doing just fine because of all the money that’s been spent on their education and the advanced technology that enables them to get their work instructions on a mobile phone.

  • Peter Martin,

    the end of Bretton Woods system was not the ‘Minsky Moment’. That came in 2008 and will come again, if Minsky was right. After the collapse of the Bretton Woods system, all currencies rapidly fell vs gold, and along with oil embargoes, this played a role in a big commodity boom and period of high global inflation that persisted through the 1970s.
    Paul Volcker in 1979, proceeded to sharply increase interest rates to approximately 20%. The inflation-adjusted yield on bank accounts was very high at that level, which attracted savings and strengthened the dollar from its weakened state.
    At the same time, President Reagan, faced with a stagnant economy, cut government taxes while continuing to increase government spending, leading to large fiscal deficits and a sharp rise in US federal debt as a percentage of GDP (after decades of consistently declining debt to GDP). The combination of loose fiscal policy and tight monetary policy was a potent cocktail for economic growth while it lasted, and resulted in a sharply rising dollar vs a basket of foreign currencies.
    This strengthening dollar, however, became such a problem for the global system, including the US industrial/export sector, that major countries got together and agreed on the Plaza Accord in 1985. The purpose of the accord was to sharply devalue the US dollar vs other major currencies, and the Japanese yen in particular, in order to make American exports a bit more competitive and, more broadly, to try to bring balance back to the International system.
    This naturally caused a bit of a problem for Japanese exporters in the latter half of the 1980s, as their currency rapidly strengthened against the dollar.
    Japan responded with monetary easing, fiscal stimulus, and financial reform. Japan’s stock market in the late 1980s became even more overvalued than the US stock market would later become during the 2000 dotcom bubble and what we see today, with a cyclically-adjusted price/earnings ratio that was nearly twice as high. At the same time in the late 1980s, Japan’s real estate market became even more overvalued than the US real estate market would later become during the 2007 subprime mortgage crisis.
    At the end of each short-term debt cycle, businesses will have collectively reduced some of their debt, but still have more debt than when they started the previous short-term cycle. However, monetary policymakers try to get the next business cycle going as quickly as possible, and so they reduce interest rates to lower levels, and therefore encourage more debt accumulation. Eventually this reaches a tipping point that we call the long-tern debt cycle or ‘Minsky Moment’ that only happens after several decades of debt accumulation.

  • Peter Martin 26th Mar '21 - 7:33pm


    I can’t keep up! The OP was about an “unreformed Westminster”. We had digressed onto Bretton Woods. That system was all over by the mid 70s but you’re now into Volker and Reagan who came along much later. Then you mentioned Minsky and he had his ‘moment’ even later still in 2008!

  • Peter Martin,

    William Wallace writes “The UK desperately needs political reform and constitutional restructuring. Even the Director of the right-wing Institute of Economic Affairs, in the Times of March 22nd, called for real devolution within England. If the UK is to hold together, we will have to move towards a federal structure.”
    In the IEA artice, its director general writes ““Breakaways, constitutional strife and pent-up resentment will be the likely outcomes of a failure to redesign outdated constitutional frameworks and transferring political power downwards” adding that “Not only is that becoming an electoral necessity, it is also a route to prosperity“.
    On Scotland he writes “In Scotland the travails of the Scottish National Party might temporarily dent the prospects of a second independence referendum being won — or even held.”
    Gordon Brown writing last year https://www.theguardian.com/commentisfree/2020/nov/20/boris-johnson-blames-devolution-but-in-truth-hes-long-been-hostile-to-scotland opines “to accommodate the needs of all the nations and regions, we have to revise the terms on which we all work together. Such a root-and-branch rewriting of the UK constitution should start with citizens’ assemblies across the country and lead up to a unique event that has only previously happened when countries decide on a fresh start: a constitutional convention.”
    The IPPR in their report write “For decades, Westminster government has enabled deep divisions to grow in this country: divisions between whole regions of England; divisions between cities, towns and villages; and divisions within places, between people. London and the South East – home to just one-third of the England’s population – has accounted for almost half (47 per cent) of the country’s increase in jobs in the last decade.
    …London’s people are also excluded by Westminster’s policies. The capital may appear highly productive, but its economy is also exclusive and extractive: almost two-thirds of the increase in jobs since 2010 have been managers, directors, senior officials, or professionals, while many other jobs are insecure and low paid.
    This is the reality of the so-called ‘North-South divide’. Our economy isn’t working for any part of England – not even the capital. This situation is unique in the developed world, and it is increasingly unsustainable.”
    The IMF’s call for a new Bretton Woods post-covid was a few months ago. As to the next Minsky moment that is inevitable according to this analyst https://advisoranalyst.com/2020/02/18/macroview-the-next-minsky-moment-is-inevitable.html/

  • Peter Martin 27th Mar '21 - 9:14am

    @ Joe,

    The ‘advisor analyst’ article you link to at the end of your last comment may not get it totally right but they make some good observations. Such as:

    ” From 1945 to 1985 there was no recession caused by the instability of investment prompted by financial speculation — and since 1985 there has been no recession that has not been caused by these factors.”

    So, in other words, if the economy is regulated along Keynesian lines we don’t have excessive financial speculation which can lead to excessive levels of bad private sector debt but if it is regulated along monetarist lines this is exactly what we see happen.

    The danger period is when the financial authorities start to think, as they did before the 2008 ‘Minsky Moment’ that the situation is getting out of hand and want to ‘rein in the excess’. They start to tighten up monetary policy by increasing interest rates. The snag is that those who do need ‘reining in’ are already out of control. Tighter monetary policy will simply expose their bankruptcy. We saw all that after the GFC when it just seemed incredible that money had been handed out in loans so freely without any of the normal checks. Also that packages of dodgy loans had themselves been so highly valued on the financial markets.

    At the time I was starting up my own business and needed a small loan to get started. There was no problem. My bank manager gave me what I asked for and tried to persuade me to take out even more! The banks couldn’t lend it out fast enough.

    So it’s not inevitable that the same problem will reoccur but it could. The danger period will be after the Biden stimulus which could cause some to think that interest rates will need to be raised to slow things down. That could create another bad debt problem and another crash. Of course the monetarists will blame it all on the stimulus rather than the tightening of monetary policy.

  • Joseph Bourke 27th Mar '21 - 1:24pm

    Peter Martin,
    The change that came in the post-war period was the ending of the Bretton Woods pegged currency system. Both the US and the UK had cyclical recessions and a stop-go economic cycle with high levels of inflation in the1960s and stagnation in the 1970s under Keynesian economic regimes. Inflation was only brought under control with very high interest rates in the US and UK in the late 1970s that generated the recessions of the early eighties.
    Germany was one of the early adopters of inflation targeting in the mid 1970s and now virtually all countries have adopted this method of economic control. Inflation targeting allows central banks to respond to shocks to the domestic economy and focus on domestic considerations. Stable inflation reduces investor uncertainty, allows investors to predict changes in interest rates, and anchors inflation expectations. If the target is published, inflation targeting also allows for greater transparency in monetary policy.

    However, some analysts believe that a focus on inflation targeting for price stability creates an atmosphere in which unsustainable speculative bubbles and other distortions in the economy, such as that which produced the 2008 financial crisis, can thrive unchecked (at least until the inflation trickles down from asset prices into retail consumer prices). Other critics of inflation targeting believe that it encourages inadequate responses to terms-of-trade shocks or supply shocks. Critics argue that exchange rate targeting or nominal GDP targeting would create more economic stability.
    There is certainly merit in the argument that one size does not fit all countries.
    There is already a massive speculative bubble in financial markets fuelled by zero interest rates and the flooding of markets with central bank created liquidity, in an effort to stave off the kind of asset price deflation Japan experienced after the bursting of its property and stock market bubble.
    The acquisition of the American Jewellers Tiffany by France’s LVMH was a case in point with the purchase financed by corporate bonds placed at negative yields https://www.bloomberg.com/opinion/articles/2020-02-07/louis-vuitton-gets-help-from-the-ecb-for-16-billion-tiffany-deal. When investors are paying companies to borrow their funds the world has turned upside down and it will inevitably have to tilt back upright in the not too distant future.

  • Peter Martin 27th Mar '21 - 2:14pm

    @ Joe,

    The end of the BW system, a fixed currency system as you say, occurred well before, at least 15 years before, the recessions caused by excessive financial speculation. The first UK one was in the early 90s as a hangover from Nigel Lawson boom.

    Why would a move to floating rates induce so much extra speculative activity? In any case the collapse of the Lawson boom came with the collapse of the peg to the DM on Black Wednesday. The economy did much better after that, ie with a floating pound, under both the Tories and New Labour.

  • Joseph Bourke 27th Mar '21 - 2:43pm

    Peter Martin,

    speculative recessions started immediately following the end of the Bretton Woods system. In the UK it was the Barber boom and bust exemplified by the collapse of Slater Walker during the secondary banking crisis if 1973-1975.
    Minsky defined the economic system as “money manager capitalism,” a structure composed of huge pools of highly leveraged private debt. He explained that this system originated in the US following the end of Bretton Woods.
    Keynes proposed the creation of a stable financial system in which credits and debits between countries would clear off through an international clearing union.
    Countries would hold accounts in an International Clearing Union (ICU) that works like a “bank.” These accounts are denominated in a notional unit of account to which nation’s own currencies have a previously agreed to an exchange rate. The notional unit of account – Keynes called it the bancor – then serves to clear the trade imbalances between member countries. Nations would have a yearly adjusted quota of credits and debts that could be accumulated based on previous results of their trade balance. If this quota is surpassed, an “incentive” – e.g. taxes or interest charges – is applied. If the imbalances are more than a defined amount of the quota, further adjustments might be required, such as exchange, fiscal, and monetary policies.
    Instead of having the burden being placed only on the weakest party, surplus countries would also have to adapt their economies to meet the balance requirement. That means they would have to increase the monetary and fiscal stimulus to their domestic economies in order to raise the demand for foreign goods. Unlike a pro-cyclical contractionist policy forced onto debtor countries, the ICU system would act counter-cyclically by stimulating demand.
    Because the bancor cannot be exchanged or accumulated, it would operate without a freely convertible international standard (which today is the dollar). This way, the system’s deflationary bias would be mitigated.

  • Peter Martin 27th Mar '21 - 4:40pm

    @ Joe,

    You’re simply trying to interpret history to fit your prejudices. It’s a lot of a stretch to try to link the collapse of Slater Walker with the ending of fixed exchange rates.

    The EU has carried on with a system of fixed exchange rates in the form of the eurozone. You can’t get much more fixed than that. It didn’t stop financial speculation in the run up to the 2008 GFC. Everything was going gangbusters and fuelled “by huge pools of highly leveraged private debt” prior to the music stopping very abruptly. When it did economies failed and so would the euro too if the ECB hadn’t effectively broken the Treaties in the way it ‘did what it took’ to prevent that.

    The fundamental problem is not whether exchange rates are fixed or floating. It is monetarist economics and economists. They don’t care about levels of private debt. When they wrote the rules of the eurozone they had nothing to say about it but lots to say about state debt. Keynes had some interesting ideas about the Bancor but they didn’t happen. This is largely a red herring. The concept isn’t going to be resurrected any time soon.

  • Peter Martin,

    Minsky explained that what he termed “money manager capitalism” originated in the US following the end of Bretton Woods. In 1971 Anthony Barber began the deregulation of the financial sector allowing commercial banks to enter the mortgage lending market setting off a property boom that saw house prices rise by 50% over a two year period.
    Slater Walker was a secondary shadow bank that had been lending heavily in the commercial property market that, along with a number of other banks, had to be baled out by the Bank of England.
    The IMF have floated the idea of a new Bretton Woods moment and others have floated the idea of revisiting the bancor https://oxford.universitypressscholarship.com/view/10.1093/acprof:oso/9780198092117.001.0001/acprof-9780198092117-chapter-9

    …the international monetary system established at Bretton Woods contributed decisively to broaden balance of payments disequilibria…the International Clearing Union proposed by Keynes would have been far more appropriate to avoid the build-up of such imbalances, being characterized by radically different features from those of the Bretton Woods system, namely: an international unit of account, distinct from all national currencies; a symmetric distribution of the burden of readjustment between debtor and creditor countries; a criterion to detect chronic disequilibria and to correct exchange rates accordingly…the principles of the Keynes plan could contribute to reform financial institutions today with a view to face current imbalances, globally and within the euro area.”
    In 2009, the United Nations suggested a new SDR-based ‘global reserve system’ – ‘feasible, non-inflationary, and … easily implemented, including in ways which mitigate the difficulties caused by asymmetric adjustment between surplus and deficit countries.’ That same year, Zhou Xiaochuan, governor of the People’s Bank of China, proposed that the SDR could become the pivotal international reserve currency, disconnected from individual nations, as ‘the light in the tunnel for the reform of the international monetary system’. Now, as a result of Covid-19, the world’s monetary system based on national fiat currencies may be approaching a turning point.

  • Peter Martin 27th Mar '21 - 6:35pm


    Money Market Capitalism may well have emerged after the ending of the Bretton Woods fixed exchange rate agreement. This doesn’t mean that it was caused by it. This, as you say, originated in the USA. There was nothing to stop any other country pegging its currency to the US dollar after Nixon removed the convertibility of the US dollar with gold.

    We, in the UK, could still do that. If we wanted too.

    Not that it would be a good idea! Floating exchange rates are a better option. History tells us that anyone can fix their currency for a short time but eventually as economies diverge the tensions mount and some adjustment is neccessary. It’s better not to let the tensions build up in the first place.

    We don’t need a new “Breton Woods” to get rid of monetarism and neoliberalism. Just a new set of economics textbooks for university students!

  • @ Peter Martin, “Just a new set of economics textbooks for university students !”

    … and especially in the Tory Party’s (and on occasion it has to be said in the Lib Dems) recruiting kindergartens, the sixth forms of the English public schools

  • Joseph Bourke 27th Mar '21 - 8:25pm

    Mankiw’s “Principles of Economics” is a common and popular introductory course. At 800 pages it covers a lot of ground including supply and demand;global trade;competition or its absence; wages; government regulation; spending and borrowing and much more. When there are disagreements among economists, Mankiw does tries to summarize conflicting views.
    UCL has introduced “Core” as its introductory module https://www.core-econ.org/it-works/university-college-london-2/ Instead of teaching students a prescribed set of models, its focus is on how to use economic models to solve real-world problems. Rather than starting with a perfectly competitive market, and identifying exceptions, CORE begins with the markets in real life, and real people making real decisions. Students are introduced to the economic tools, including game theory at an early stage, to analyse those decisions, and the consequences for the individuals and for society as a whole.
    The role of introductory textbooks is not to educate the next generation of economists. They will take many courses including economic history. The purpose of studying economics is more modest. It is to make the world a little more understandable and,with luck, to force us to acknowledge what’s realistic and what’s not.
    Reading widely and applying critical thinking is the key to mastery of any subject. This includes the work of lesser known economists not covered in textbooks like the the Irish-French economist Richard Cantillon https://www.adamsmith.org/blog/the-cantillion-effect Writing in the 18th century, he explained how inflation favours the wealthy who first receive new money and hold assets while hindering the livelihoods of those at the bottom of the pile who are last in line and must bear the effects of a devalued currency (much as Keynes would do in the 20th century).

  • Peter Martin 28th Mar '21 - 6:15am

    Does Greg Mankiw make the same points as the Bank of England have made? That the common perception of how banks work is all wrong?

    There’s also a general perception that if the Govt is in the market to borrow money, interest rates will rise due to increased demand. So according to this concept interest rates should now be much higher than they are.

    This is all very basic and should be properly explained in even a primer. Does GM do this?

  • Joseph Bourke 28th Mar '21 - 5:12pm

    Peter Martin,

    the loanable funds theory is an abstract model that presents a way of thinking about relationships between saving and investment that posits the interest rate is determined by the supply and demand for savings.
    What Keynes pointed out was that this picture is incomplete if you allow for the possibility that the economy is not at full employment. because saving and investment depend on the level of GDP. If GDP rises, some of this increase in income will be saved, pushing the savings schedule to the right… the interest rate falls. Supply and demand for funds doesn’t tell you what the interest rate is — not by itself. It tells you what the interest rate would be conditional on the level of GDP; or to put it another way, it defines a relationship between the interest rate and GDP… the IS curve, taught in Econ 101.
    Given the interest rate, you can determine investment demand, and then through the multiplier process this determines GDP. What you’re supposed to understand, however, is that this derivation is just a different way of arriving at the same result. It’s just different presentations of the same model. So what determines the level of GDP, and hence also ties down the interest rate? The answer is that you need to add “liquidity preference”, the supply and demand for money. In the modern world, we often take a shortcut and just assume that the central bank adjusts the money supply so as to achieve a target interest rate, in effect choosing a point on the IS curve.
    Which brings us to the current state of affairs. Right now the interest rate that the major central banks can choose is essentially zero… but the interest rate they would like to have is negative… we have an incipient excess supply of savings even at a zero interest rate. And that’s our problem. So what does government borrowing do? It gives some of those excess savings a place to go — and in the process expands overall demand, and hence GDP. Fiscal deficits won’t drive up interest rates unless they also expand the economy.
    Mankiw, in his latest edition mentions the zero lower bound, and that the Central bank influences the money supply with interest rates. There is going to be a trade-off between keeping an introductory textbook accessible to a general readership and going into the more detailed aspects of the banking and financial markets that specialists will follow in later courses.

  • Peter Martin 28th Mar '21 - 5:37pm

    @ Joe Bourke,

    “the loanable funds theory is an abstract model that presents a way of thinking about relationships between saving and investment that posits the interest rate is determined by the supply and demand for savings.”

    In other words it’s completely wrong but this is the theory as is taught to British undergraduates, with Greg Mankiw’s book as a supplied reference.

    They should be teaching that banks create money as they lend.

    This is not a “more detailed aspect of the banking and financial markets”. It’s quite fundamental. It doesn’t make any sense to teach an incorrect theory even if some might consider it to be simpler. It just makes it even harder to get on the right track in the long run.

    As the BoE say:

    “Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. ”

    But they would if the loanable funds theory were correct!


  • Peter Martin 28th Mar '21 - 5:48pm

    @ Joe,

    “we have an incipient excess supply of savings even at a zero interest rate. And that’s our problem. So what does government borrowing do? It gives some of those excess savings a place to go”

    This would be a plausible argument but for the well known fact that most Govt ‘borrowing’ recently has been funded by the QE process. However you care to spin the argument about QE, the BoE has ended up owning hundreds of billions of Govt debt.

    If there are so many excess savings why has this been considered necessary?

  • Joseph Bourke 28th Mar '21 - 7:00pm

    Peter Martin,

    QE is just large scale open-market operations where the central bank buys bonds to inflate the price of bonds therby reducing effective rates. The aim of QE is simple: by creating this ‘new’ money, the BofE aim to boost spending and investment in the economy https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
    QE by itself increases narrow money(bank reserves). It is typically denoted as M1. The central bank pays interest on these reserves, so it is an asset swap. One interest bearing instrument – bonds- is swapped for another interest bearing asset – reserves. This does not of itself change the supply of broad money circulating in the economy. It does, however, inflate the value of financial securities and through the mortgage market house prices https://news.sky.com/story/average-uk-house-price-surges-by-8-5-to-hit-record-high-in-december-12220686 as well as providing low cost lending for investment in the stock market.
    During the pandemic there has been a big increase in saving both through debt repayments (https://www.thisismoney.co.uk/money/cardsloans/article-9078837/Britain-paid-15-6bn-debt-just-7-months-amid-coronavirus-pandemic.html), accumulation of funds held in bank deposits and a decline in investment. The government spending on pandemic support programs has served to offset the deflationary impact of the increased savings to an extent athough GDP has declined 9.9% in 2020. As we come out of Lockdown and that position reverses the level of fiscal support will begin to reduce as consumer spending revives.
    The BofE will want to keep interest rates low as the economy recovers subject to keeping inflation expectations in check. While the bank can control the supply of money in aggregate it does not control the level of demand. That is set by underlying economic conditions of which interest rate is just one factor.

  • Peter Martin 29th Mar '21 - 9:41am

    @ Joe,

    You’ve said :

    “Given the interest rate, you can determine investment demand, and then through the multiplier process this determines GDP. What you’re supposed to understand, however, is that this derivation is just a different way of arriving at the same result. It’s just different presentations of the same model.”

    The BoE say:

    “….nor do they ‘multiply up’ central bank money “

    So it looks like the BoE might be saying you’ve read the wrong text books too!

    The problem is that these aren’t “different presentations of the same model”. They are different models that may, or may not, lead to the same result.

    For example, those who had their faith mainstream models generally failed to predict the 2008 GFC. If they did they were probably relying more on gut instinct rather than on a reliance of conventional theory at the time. The levels of private debt weren’t supposed to matter. Those same people then went on to mistakenly advocate that a policy of economic austerity was necessary during the Lib Dem period of government in the period 2010 – 2015.

    So this should be more than a matter of academic interest, or uninterest, to Lib Dems. This is if you want to know why your period of government turned out to be such a disaster.

  • Peter Martin,

    the multiplier effect of investment has nothing to do with the so called money multiplier. Once you have calculated the marginal propensity to save from investment demand you can derive the marginal propensity to consume (MPC) you can model the increase in GDP.
    The Keynesian Theory states that (given sufficient slack in the economy) an increase in production leads to an increase in the level of income and therefore, an increase in spending. The value of MPC allows us to calculate the size of the multiplier using the formula: 1 / (1 – MPC) = 1 / (1 – 0.5) = 2. It means that every £1 of new income will generate £2 of extra income.
    Economics to be useful has to be values free. We can use it to model expected outcomes and to allocate resources appropriately.
    Politics is not values free. It would not be much use if it was. Journalists like Elliott and Atkinson did predict the 2008 fallout in their book Fantasy Island
    Austerity was a factor in the slowdown in 2011 and 2012 but was reversed and the economy was grew at a healthy rate until the Brexit referendum. The problem during the coalition years and since was spending priorities particularly with respect to welfare and local government services. Unemployment did fall to low levels. Under employment continued but that was present throughout the Blair/Brown years as well as Elliott and Atkinson noted.
    The problems are not insurmountable but they need honest appraisal. A good place to start would be with the recommendations of two economists with their heads screwed- Skidelsky and Hutton https://braveneweurope.com/robert-skidelsky-will-hutton-sustaining-and-creating-employment-now-and-post-covid
    On Macro policy the call for:
    – Integrating Fiscal and Monetary Policy in pursuit of the single objective of a non-inflationary level of high employment.
    – Borrow for capital spending but balance current revenues and spending. Accept debt service limit (10 % of tax revenues?)
    – Increases in capital gains, corporation, inheritance taxes. Introduce environmental taxes.
    – reorganisation of tax system around the Mirrlees report (proper taxation of capital and wealth, environmental taxes, reform of council tax, try to avoid high marginal rates for low earners)
    – Build in green targets for all public capital projects (Green New deal)
    – Up to 600,000 public sector jobs could be created, with more than half in the NHS and adult social care, as part of rebuilding of public capacity and reversing hollowed out civil service.

  • Peter Martin 29th Mar '21 - 3:27pm

    @ Joe,

    You’re being pretty naive if you think Economics and Politics can be separated and that Economics can ever be ‘value free’. Yes, in theory, but in practice the status quo relies on the keeping the majority of the population in the dark about how the economy actually works. Everyone might know where babies come from, but in the main they have no idea about money and where that comes from. This could be quite important too. It’s just there in most people’s imagination and the government can only get hold of it by borrowing it from someone else or raising taxes to acquire it.

    MMT is often referred to as left wing, and by those of similar opinions to yourself, but there’s no particular reason why any theory should be classed as that. Any MMT economist could advise right wing politicians on how to achieve their objectives without damaging their economies as they do. They could even help the EU in getting the euro to work better than it does.

    But when the right do get it right it is usually for all the wrong reasons. Reagan did reasonably well because Laffer had bent his ear and convinced him that having a looser fiscal policy would create more tax revenue and so close the deficit. Well, no it wouldn’t. Not necessarily. But it did allow the economy to zip along which is what matters when it comes to winning elections. Who cares now by how much raised the US National debt at the time?

    There’s not much talk about the problems of the eurozone at the moment. Has anyone noticed? This is because the fiscal rules have been relaxed as MMT economists would have advised all along. So why does it take a Pandemic to make the ultra conservative PTB in the EU do the right thing?

  • Peter Martin,

    this is an objective and values free overview of MMT https://economics.td.com/gbl-modern-monetary-theory.
    “The central concerns with MMT are that the core principles make either very strong assumptions or are simply not correct. The first main tenet claims that there is no limit on the ability of governments that borrow in its domestic currency to fund themselves. While this might be true for closed economies, it is not strictly true for open economies, which most are to various extents. A rapid accumulation of debt or printing money to pay down debt could lead to a steep depreciation of the currency and large capital outflows. This would introduce considerable inflationary pressures and potentially destabilize the entire economy.
    The U.S. is a special case. As the global reserve currency and a relatively closed economy, it may evade some of these impacts in the short run. However, over the longer run, it too could face significant depreciation and capital outflows, as investors rethink the status of the U.S. dollar. In contrast, small open economies without a global reserve currency, like Canada, are a lot more susceptible to the negative consequences of MMT.
    The second core principle of MMT, that expansionary fiscal policies lead to lower interest rates, may also not be true. Take a scenario in which a government starts a spending program. This, as MMT would claim, expands the amount of reserves held by the banks, increasing the supply of money. But, it could also generate demand for money as fiscal stimulus moves through the economy. Therefore, the net impact on interest rates is unclear. If the generated output is far greater than the increase in money supply, interest rates can indeed move higher in response to fiscal stimulus, consistent with conventional macroeconomic theory.
    Another problematic aspect of MMT is that it eliminates central bank independence. Decades of research have told us that allowing a central bank to conduct monetary policy independent of political pressures is important to mitigate the negative impact of inflation on growth in the longer run. With central banks handing their mandate to fiscal authorities in the MMT world, it is entirely possible that spending agendas are legislated without carefully considering the inflationary impacts and investor confidence. Although proponents of MMT state that governments should enact policies to rein in inflation if the constraint is breached or about to be breached, it may be politically inconvenient to turn off the fiscal taps at any given time.”

  • Peter Martin 30th Mar '21 - 1:13pm

    @ Joe,

    Firstly, just because you say it objective and value free doesn’t make it so. I’ve already pointed out how economics is heavily influenced by political viewpoints and hardly anyone can claim to be objective and value free on that score.

    Another factor is the natural desire we all have to not maintain some level of consistency in our approach. For example the author says:

    “Another problematic aspect of MMT is that it eliminates central bank independence.”

    Why is it a problem? I remember even John Redwood recently conceding the point that central bank independence was largely a fiction anyway. If he can do that surely there’s no problem for anyone else. It’s just an acceptance of the way things are. It’s only a problem if you said just the opposite for the last 30 years or so.

    Also you need to be correct in what you say. The author claims that MMT theory means “Expansionary fiscal policy leads to lower interest rates”. No. This is expansionary monetary policy. Interest rates were deliberately lowered after the 2008 GFC to encourage everyone else to start borrowing again so the Govt needed to borrow less. This was partially successful but the effect has been to increase the extent of private debt in the economy. So there has been some talk of abolishing cash and going heavily negative.

    Most MMT economists would say keep interest rates at zero or close to it and regulate the economy by varying fiscal policy. I don’t think they have to be exactly at zero providing Govts decide what they want them to be and stop fiddling around with them.

    The author’s other objections always come back to the question of inflation. MMT economists are pretty much in line with every one else in saying that excessive inflation is to be avoided. Even 2% is too high for some.

  • Joseph Gerald Bourke 30th Mar '21 - 2:44pm

    Peter Martin,

    Economics comprises both micro-economics and macro-economics. The teaching of economics is largely values free to the extent that any discipline can be. Economics is not physics. It is a social science that studies human behaviour. One of the most basic fallacies in economics is interpreting an accounting identity as a behavioural relationship or ignoring basic monetary economics like the impact of velocity of money. For many policy interventions there are multiple equilibriums or outcomes that can obtain depending on how households, firms and markets react.
    As to the assertion in the cited article that MMT claims “Expansionary fiscal policy leads to lower interest rates.” This is Stephanie Kelton’s written answers to questions from Paul Krugman https://stephaniekelton.com/paul-krugman-asked-me-about-modern-monetary-theory-here-are-4-answers/:
    Does expansionary fiscal policy reduce interest rates? Answer: “Yes. Pumping money into the economy increases bank reserves and reduces banks’ bids for federal funds. Any banker will tell you this.”
    You don’t need to be an economist to understand that an expanding economy driven by expansionary fiscal policy (deficit financing) pushes up overall spending and longer-term bond rates rates typically increase with it.
    Currently the BofE is paying interest on reserves, so even if banks do find themselves with excess reserves there is no imminent pressure to lend them out to other banks. Overnight rates of interest as set by central banks says absolutely nothing about the “natural rate” of interest on government debt and only tells us that profit seeking banks don’t like sitting on assets that either don’t earn a profit or can be deployed to earn higher margins.

  • Peter Martin 31st Mar '21 - 9:02am


    It’s good that you’ve read enough of what Stephanie Kelton is saying to be able to quote her when it suits.

    The standard MMT line is that the natural rate of interest is zero for countries like the USA and UK which issue their own currency. This is because their deficit spending is forever creating a surplus of reserves. This was said long before interest rates were actually lowered to nearly zero.

    However govts choose to pay short term interest on those reserves. It’s decided by a committee. The BoE has its monetary committee which not too long ago decided to put them down to 0.1%.

    It didn’t do that because of loose Fiscal policy forcing it to. It can decide to put them up to whatever it likes whenever it likes.

    Similarly on the question of longer term interest rates, the govt can increase them by instructing the BoE to sell some of its bond holdings into the market. This would depress their price, forcing up yields, and longer term interest rates too.

    There is some debate on where we draw the line between fiscal and monetary policy but, generally speaking, the control of the economy through adjustment of interest rates is considered to be monetarism. Govts have full control of both fiscal and monetary policy. They aren’t constrained in one by what they might choose to do in the other.

  • Reading Stephanie Kelton ?

    Some people know how to live.

    It’s, ‘Living the Dream’.

  • Peter Martin 31st Mar '21 - 10:40am

    @ David,

    Don’t worry. I do read more light hearted stuff from time to time. Like Ed Davey’s speeches. I noticed that he called on Lib Dems “to take up the mantle” of Jo Swinson the other day! Remember her?

    He didn’t include Nick Clegg in his list of notable Liberals! But he did included Keynes. If you think Stephanie Kelton is hard going you might want to have a try with Keynes! Even Marx is more readable!

  • Joseph Gerald Bourke 31st Mar '21 - 1:05pm

    Peter Martin,

    the market interest rate is the actual interest rate that is paid on deposits and investments of various kinds. This is determined by the supply and demand for funds in the money market and is dependent on the rate the central bank sets. The natural rate is defined as the short-term interest rate that supports the economy at full employment/maximum output while keeping inflation constant.
    The bank rate is not the natural interest rate, it is the rate charged by the central bank for lending funds to commercial banks.
    There are many interest rates that impact on spending in the economy. Credit card rates at 18%, SME and personal loans at 10%, collaterilised loans on cars at 5%, mortgage loans on property at 3.5%, larger business loans at 2.5%, margin loans for investment/speculation, share buybacks etc. The market rate for lending is an amalgam of these rates of interest based on the market rate for deposits plus a profit margin and risk premium based on default risk.
    The “market” rate will vary from the natural rate for all sorts of reasons other than monetary policy.When the market interest rate on deposits is below the natural interest rate, prices increase, and when the market interest rate is above the theoretical natural rate, prices decrease – although the changes may be offset by other deflationary factors like demographics, technological advances etc.
    When bank rate is set below target inflation, money no longer functions at a store of value. Savers see the purchasing power of their bank deposits eroded. This distorts the functioning of the economy and financial markets. Observing what has happened in Japan, people actually save more to make up for the lack of interest on savings and this itself has a deflationary impact on wages and economic growth.
    Interest rates rise for two reasons – optimism about robust economic growth or fear of inflation. Neither has been present in Japan for three decades. Both are likely in the USA in the short term https://www.aier.org/article/rising-interest-rates-and-inflation/. Only inflation fears are a potential cause in the UK at present.
    This is an example of why we say economics is a social science that studies human behaviour and why it is a basic fallacy in economics to interpret an accounting identity as a behavioural relationship.

Post a Comment

Lib Dem Voice welcomes comments from everyone but we ask you to be polite, to be on topic and to be who you say you are. You can read our comments policy in full here. Please respect it and all readers of the site.

To have your photo next to your comment please signup your email address with Gravatar.

Your email is never published. Required fields are marked *

Please complete the name of this site, Liberal Democrat ...?


Recent Comments

  • David Rogers
    Re "Local Councils will only begin sending out postal ballot papers starting Wednesday 19th June" - not so! West Devon BC (Torridge & Tavistock constituenc...
  • Paul
    Janet Goldsborough-Jones is/was a long term Lib Dem activist / council candidate in Worthing awarded an MBE. Very active in the community. Congrats to her too....
  • LIZ Gamlin
    I live in target seat 28. I am being showered with Lib Dem leaflets thru the door but no one is engaging with residents to urge them to vote out the conservativ...
  • Alex Macfie
    Uncritical support for whatever the EU does isn't even possible because the different institutions often disagree on policy! And EU policy extends beyond policy...
  • Roger Lake
    May I plead crumbling venerability, and look forwards as well as sideways, please? No-one doubts that despite the natural selfish resistance to it of Conserv...