Dear listener,

On Friday 27 July 1694 William III signed the Royal Charter which created the Bank of England. Its cash book shows it was set up with £300,000 and by the end of the day its total assets were £312,426-11s-5d. The Bank was set up to raise money - £1.2m at first – to lend to the government whose finances were in dire straits partly because it was fighting a war – against France then. Nearly 315 years later the Bank may well have to do that again. Not to prop up the government but to get the cash flowing round the economy.

It is called “quantitative easing”. The best way to think of it was set out by the American economist Milton Friedman. He suggested curing deflation by printing billions of dollar bills and throwing them out of helicopters over shopping centres so that people could go out and buy stuff, boosting business and the economy. Hence the speculation in the press this week that the UK government was going to “print money”.

In fact it will work rather differently with the Bank creating a credit line in its books and then using that invented money to buy assets which really have very little value, either off the government itself or off the High Street banks. It is a bit like you going to your bank manager for a loan and offering an old used car in exchange. That won’t happen. But if you are a bank and your car is a mortgage backed security then it will.

Either way it is putting more money into the economy. And given that money is a human idea anyway, why shouldn’t the bank create a bit more to solve the current problem – which is the lack of credit?

*** ON MONEY BOX THIS SATURDAY ***

Rate cuts, savings and mortgages – not forgetting quantitative easing.

Shadow Chancellor George Osborne will explain Conservative plans to scrap basic rate tax on savings interest and raise the tax allowance for people aged 65 or more. And there will be a longer version on the web.

What do you do if you get a phone call which appears to be from your bank or credit card provider? How do you know it is really the bank on the line and not a criminal trying to steal vital information so they can rob you?

And the Financial Services Authority sets out its plans to make us all feel safer about our savings.

Best wishes,

Paul

PS Don’t forget the programme taster on BBC Breakfast between quarter to nine and nine o’clock. If you miss it, you can watch it on our website.

e-mail Paul Lewis