“Masterly manipulation” it was called by J.M.Keynes in secret papers in the 1920’s. Today we call it QE. 

A fascinating and only recently discovered entry in old Bank of England ledgers revealed that in 1914 the Bank was forced to purchase Gilts for itself as there was insufficient demand for its new issue. The issue of the £350m “War Loan” in 1914 was reported as being a success; press articles of 1914 talk of demand ”pouring in” for the deal. Yet, £250m of the transaction was never sold and quietly shuffled away on to the Bank of England’s ledger – or balance sheet.

So what have we learnt from this historical discovery?

1) Just because the newspapers (social media, today) say it’s a good deal it doesn’t mean it is a good deal. Having some healthy scepticism is “stock-in-trade” for the Kames Fixed Income team, and we trust for our readers.

2) QE will happen in extremis but ultimately it is about delivering confidence. In 1914 it was about financing a European war and failure to be seen to be doing so would have had huge political ramifications. Similarly, in 2009 confidence in the financial system was shot and QE helped rebuild confidence in the system. Something had to be “done” and globally central bankers responded by tripling their balance sheets over the next eight years.

3) It has taken over 100 years for the “masterly manipulation” of War Loans to come to light. Despite some disquiet, Gilt purchases in the UK or purchases by other central banks have been done in an open, transparent and formulaic fashion. With today’s QE there is no obfuscation with the purchase process but QE’s unwind is less clear and a matter for public debate. Institutional transparency is a part of the confidence we have in our system. We may not like QE but it’s a whole lot more transparent than a hundred years ago.

(Thank you to the authors of the excellent bankunderground blog: https://bankunderground.co.uk/2017/08/08/your-country-needs-funds-the-extraordinary-story-of-britains-early-efforts-to-finance-the-first-world-war/#more-3230)

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