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The task of the Bank of England is to enable and control credit

06 September 2013


From Mr Derek G. Bevan
Sir, - Andrew Dickie (Letters, 30 August) should restrain his invective towards incorporated bodies and their employees, and get back to basics - the basics of economics and accounting.

When an item is charged to his credit card, there is indeed a supporting entry, and money does change hands. The issuer of the card (usually a bank) pays the retailer or provider of a service. In order to do so, the issuing bank takes money from its reserves, or from another customer's deposit; or it borrows, directly or indirectly, from the central bank. Thus the Bank of England enables (and controls) credit.

By quantitive easing, the Bank of England makes even more money available, beyond what is supported by its reserves. This enables the wheels of a depressed economy to turn as best they can rather than have businesses failing left, right, and centre, and a massive increase in unemployment. Consequently, there are risks that inflation will rise, that lending will again get out of control, and that the value of the currency will deteriorate, with inevitable consequences for the cost of imports and for living standards generally.

A return to "honest money", as some would describe it, would be very uncomfortable indeed, and would undoubtedly bring forth howls of protest, not least from ecclesiastical circles.

Mr Dickie may not care for developments in City markets over the past 20 years or so, and no one, I hope, condones the wrongdoings associated with LIBOR manipulations. It is, however, the responsibility of government to formulate taxes and set the rates at which they are collected, making appropriate adjustments if revenue overall exceeds the state's needs or declines. To attribute that function to those engaged in banking, and to criticise them, whether in error or not, when tax receipts fall, is incredibly naïve.

As to his credit card, there is most certainly another side to the book entry. Were quantitive easing to be reversed, credit limits would be reduced dramatically, minimum monthly payments increased, and interest rates enhanced. Then savers would be rewarded at last, but consumers and businesses would suffer. Unfortunately, the retrenchment, affecting current spending as it would, could not be expected to leave levels of investment unscathed. The economic activity of all of us is thus linked.

Stanford, 4 Petre Close,
Essex CM4 9SX

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