Join the new world

Prepared by Arthur Wellesley, 25/26 June 2009

I have been working on a new, two part monetary policy for the eUnited Kingdom over the past couple of days, and I wanted to lay it out to the public now that the excitement over the elections are over. It's not ready to be put into any sort of legislation yet, there are still a lot of kinks to be worked out, but I don't think it is going to come any farther without public input.

1. The Snake in the Tunnel
The current benchmarks that the Treasury have been pursuing are becoming outdated. The marks of 1 GOLD = 38.5 GBP and 1 GBP = 0.027 GOLD, while stable, do not reflect the potential of our economy. While we have been fighting a general rise in the value of the Pound in recent months, I, along with a few others, are beginning to see some merits in actively pursuing the devaluing of the Pound.

Why will this be beneficial? In some ways, it won't be beneficial in the short term. The economy will destabilize to a certain extent if we begin pursuing a different aim. Over time, however, we should have a gradual rise in the average wage (most citizens don't bother and do the GBP to GOLD conversion in their head, they just see that they can get better wages elsewhere, and thus we lose workers). We do not need to devalue enough that prices will raise beyond the point of keeping business profitable, but I think we can do it without causing this. Devaluation would also match us up more equally with countries in similar states of raw material disbursement, as they are typically around 1 CURRENCY = 0.020, with us at 0.027. This makes it more difficult for our companies to export because we have higher relative costs at home, thus making us more relatively competitive. Thus, devaluation should encourage British workers to stay in British jobs, and it should encourage British companies to export abroad. I think we can all agree that the domestic business market is much too crowded, and getting some of that abroad couldn't hurt.

To pursue devaluation, I propose a different mechanism for maintaining our exchange rates. Currently, we buy up all offers below G=38.5 and GBP=0.027 immediately, and hold hard and fast to those numbers. This is not as expensive as it used to be, but still represents a lot of effort on the part of the Treasury without much gain. No change... stagnation... no growth... it's no good. It is time to seek greener pastures. I hereby introduce and recommend a policy that derives itself from the real world "Snake in the Tunnel" that the EEC attempted some years back.

The treasury will set new benchmarks, say 1 GOLD = 40 GBP and 1 GBP = 0.026 GBP. This represents a devaluation of about 4% if I've done my math correctly, and it will also maintain the 4% bias built into the benchmarks to aid in currency trading. We will then allow the exchange rate to fluctuate in response to the market positively or negatively with a +-5% band, meaning the Treasury will only intervene if the going rate attempts to breach 1 GOLD = 42 GBP or 38 GBP, or 1 GBP = 0.025 or 0.027 GBP. Official government business will be conducted using the target rates of 40 and 0.026. We should see, then, a rise and fall with the markets within these parameters. They are rather narrow at the moment, but the idea is that we can expand and contract the barriers, and we can also slowly shift the value of the pound up or down, to meet the demands of the economy. This should allow the Treasury and the British economy to become more more fluid and responsive to changes in the market.

2. Central Banking
It has long been a pet peeve of mine that the control I have over monetary policy in the eUK is basically relegated to 1.) issuing GBP, 2.) Selling GBP/GOLD, or 3.) Hoarding GOLD/GBP.

I have been fiddling with the idea of creating an actual central banking system in the eUK built around the Bank of England. Ministers of Finance before me have long chagrined over the constant requests for loans and funding for businesses, some are ridiculous, a few are legitimate. Regardless, there is a demand out there for money, a demand that cannot always be met efficiently by waiting around for the next hard worker medal or whatnot.

I propose that the Bank of England begin operating as both the arm of the Treasury that currently acts as, and also as a central bank within a system of banks that will be constructed within our economy. We will have private partner banks, such as Wellington Chase Bank and another bank that is supposed to be starting up soon, and with a newly created Reserve Bank that will function as a kind of halfway house in the sector.

The goal of all this is to start getting GOLD and GBP flowing more readily within the eUK, and eventually we would hope that foreign currency trading within the banks would begin to flourish, and that loans, savings accounts, and foreign currency clearances would begin to grow out of the institutions. With more fluid currency out there, we would hope that this would grow our economy and also allow more players to get involved with business, with government, and just learning how everything works. It has done wonders for many that have come in contact with Wellington Chase Bank, for example.

A. Bank of England

The role of the BoE will not particularly change, other than it being the source of the new sums of capital that will go out into the new banking sector. The Bank will offer, with contractual obligations and Parliamentary consent, large amounts of capital of banks with the intent that they will take it and do business with it. At the end of each month, these banks will be contractually bound to pay a percentage back, a dividend of their profits, to the Bank of England. Should that bank not be profitable, it will pay back a penalty dividend on the lump sum of the capital. Over time, it is hoped that this will achieve both well stocked private banks that have adequate currency reserves, as well as the Bank of England breaking even on the investments and even potential sources of profit.

B. Treasury

In exchange for government money, the banks will be required to follow certain centralized aspects of the governments monetary policy, including operating within the exchange rate mechanism, following interest rate guidelines, and agreeing to open their accounting books to a closed session of the House of Commons or Treasury if necessary, and any contracts will included clauses about total seizure of funds if necessary.

C. Private Banks

As said, the private banks involved (thus far Wellington Chase Bank and Investments, as well as another thus far non formed bank) will receive chunks of capital from the government to do business with. In return, the banks will aid the Treasury in maintaining the governments monetary policy and maintaining the money supply, and will also help keep things stable. They will also, as already mentioned, pay the government back monthly dividends on their profits.

This is as far as I've gotten so far. This is not meant to be legislation or a bill, this is me explaining the big picture plan and the goals of the policies I want to pursue. I deliberately cut them up into two big chunks as well, because I've the feeling that the exchange rate mechanism is going to be a much easier sell than the central banking scheme.

Please debate, discuss. Forum discussion can be found here: http://forums.erepublik.co.uk/viewtopic.php?f=42&t=13636