As the Debt Management Office (DMO) states, ‘a gilt is a Bank of England Liability in Sterling’ (£). ‘The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security.’
The perceived wisdom of the population, through a narrative, spun, again, by economists, the media and politicians, is that the Government borrows money from the private sector by selling gilts, to allow it to spend the £s received, on provisioning society.
The gilts are offered at auction to the Primary Market or Market Makers, a select group of the world’s big banks. The winners of each auction then offer the gilts for sale to the secondary market where they are traded for sale to corporations, pension funds or anyone interested in a buying a government bond.
Examples of how the public are (mis)informed on the subject of gilts include this article from the online BBC Business News, ‘Where does the government borrow billions from?’. In the midst of the piece the author asks ‘Where does the Government borrow money? The answer: ‘The Government borrows money by selling bonds’.
The Financial Times chimes in regularly as in this article in 2020, where it explains that ‘Boris Johnsons Government turns to bond markets to fund its spending spree’, and this article, from a group of economists at the Institute for Fiscal Studies (IFS) claim that ‘Government borrowing this year will reach a level never before seen in the UK outside of the two world wars of the 20th century.’
These recent samples of our trusted state broadcaster, the prime UK financial newspaper and top economists, all linking the gilt-issuance of the government to borrowing would leave the layman in no doubt that this was the way the UK economy was run. The fact that every other major economy eg, US, Canada, EU, Japan, Australia etc, follows the same narrative, simply consolidates the frame.
It is strange then, that a quick scroll down the Government DMO website homepage, will show that the word ‘borrowing’ is not mentioned once. Perhaps, with the knowledge picked up through the first few installments of this series, you’ll be able to see the error in the narrative.
As currency-issuer, the Government has no need to borrow £s from anyone. Every £ spent by the Government is a new £.
Like taxes, sales of gilts drain the amount of highly-liquid currency in the economy, and tie it into savings, in this case, gilts. The same benefit could be gained by allowing these investors to open fully guaranteed, interest-paying, deposit accounts at the Central Bank. Instead of National Debt, the concept would become National Savings and instead of being in the red, the Government account would be back in black.
In the past, issuing gilts performed an extremely important function for Governments. At times when national currencies were on the gold standard, ie, the price of the currency pegged to a certain amount of gold or pegged to another currency that was pegged to gold, the cash in circulation was transferrable for actual gold at the bank. This meant that the bank could only lend out the supply of cash that it could cover from its supply of gold reserves.
Gilts were a way of exchanging non-interest paying cash, that could be exchanged for gold, into interest-bearing gilts that could not be exchanged for gold. The incentive of the earned interest on savings was an attractive proposition and the interest rate could be manipulated to increase and decrease uptake as required, and protect the national gold reserve.
Since 1971, when President Nixon called an end to the gold standard, gilt issuance Has been largely anachronistic. The only function served now is as a safe vehicle for parking large amounts of currency, as commercial banks have relatively low deposit guarantees. However, as I stated earlier, this could be solved by having savings accounts at the Central Bank, so they are pointless.
This raises the question: What possible purpose could there be for this deception?
Again, there are several intertwined stories being spun together here. Firstly, the ‘debt’ bogeyman is a far better tool to control a population with. An austerity policy, even on a false understanding of the money system, is hard to sell to a society when it is obvious there are plenty of funds in the national savings fund.
The idea of the nation being in debt, once again, triggers the ‘household analogy’, justifying ‘tightening the national belt’ and ‘living within our means’ to invoke a scarcity of funds, which, if you have been following the series, can never be true of a currency issuing Government. The narrative reinforces the neoliberal ideology of the Western Democracies.
The main reason seems to be, as Prof. Bill Mitchell terms it, ‘Corporate welfare’. It is a vehicle for people with wealth to increase that wealth through the public purse, for no public purpose.
Cutting this funding would be the most obvious policy that Government could follow to cut wealth inequality. It could happen overnight and have no undesirable consequences for society. There may have to be some re-allocation of jobs, but none of these jobs were serving society in any meaningful way anyway..
Prof Bill Mitchell interview
DMO website: https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts/
Bank of England website: https://www.bankofengland.co.uk/markets
Gilt Primary Market Makers: https://www.dmo.gov.uk/responsibilities/gilt-market/market-participants/
https://www.bbc.co.uk/news/business-50504151
https://www.ft.com/content/47e93fce-63ad-11ea-a6cd-df28cc3c6a68