impact from our asset purchases is still to come through. an important issue when thinking about the likely channels of monetary transmission is the state of the banking system. in normal times, a key channel through which asset purchases might be expected to operate is by increasing banks ’ stocks of liquid assets, which may encourage them to extend new loans. but we are not in normal times. banks are pulling back on their lending as they seek to strengthen their balance sheets and reduce their leverage. for this reason, when making an assessment of the likely impact of asset purchases, the committee did not factor in a material expansion of bank lending. indeed, our asset purchases were designed to facilitate a disintermediation of corporate financing away from banks and toward capital markets. this disintermediation was supported in part by the portfolio rebalancing triggered by our gilt purchases. as investors ’ demand for alternative assets such as corporate bonds and equities increased, the ability of businesses to raise finance in capital markets improved and the cost fell. this disintermediation was reinforced by the bank ’ s operations to improve the functioning of corporate credit markets. the financial market dislocation in the immediate aftermath of the crisis hindered the functioning of the commercial paper and corporate bond markets and led to substantial increases in liquidity premia. in response, the bank established facilities to make small regular purchases of corporate bonds and commercial paper, with the aim of aiding secondary market liquidity. the significance of these purchases of private sector debt should not be judged by their scale, which was tiny in comparison to gilt purchases. the purpose of these operations was not to purchase a specific quantity of assets, but rather to improve the functioning of those markets. in that respect, the knowledge that the bank stands ready to purchase assets may be as beneficial as actual purchases. 5 the importance of expectations also played a central role in the design of our asset purchase programme. it was vitally important that the monetary policy committee was able to introduce a new policy instrument at the point at which bank rate reached its effective lower bound. this instrument had to be credible, both in terms of its economic impact and the willingness of the committee to use the instrument in force. my own view is that the speed with which the asset purchase programme was introduced and the scale of the programme played an important role in reaffirming the mpc ’ s commitment to achieving the inflation target and reinforcing the belief in our ability to do so. see

of over 20 % of gdp ( versus an average of 5 % from 1792 - 1815 ). under pressure from this scale of spending inflation averaged 16 % ( versus 2 % ). as a result, the deflation required to return to gold, in 1925, was far larger and more economically painful than it had been a century earlier23. as such, it ’ s not clear that the prior belief in such a return was as firm as it had been the first time round24. nonetheless, even a partial belief in such a policy would have limited the cost of government borrowing in the interim. long - term bond yields were higher than the 3 % average of the pre - war decade but again remained below 5 %. it may also have prevented an even worse outcome for inflation itself ( by ensuring newly printed money was willingly held ). in the 1970s, with no nominal anchor either in place or expected to remain so, the restraining force on inflation expectations was largely absent. so after the end of the bretton woods regime, and even though government indebtedness was lower than it had been for decades, inflation itself became harder to control and yields on new borrowing rose precipitously. the series for long - term yields on government debt goes back almost as far as the founding of the bank of england in 1694. in that long history the highest ever ex ante yield was in 1974, when newly issued 10 - year gilts promised a return of 14 % a year in nominal terms. in real terms, the highest ever realised ( “ ex post ” ) return was the near - 10 % annual rate on debt sold in 1981. some of these comparisons are set out in charts 13a and b. i think that, even from this very cursory look at these particular episodes, a few conclusions can be drawn. one is that, if inflation is allowed to vary, one important influence on it is likely to be the scale of government demand – and aggregate demand more generally – for the economy ’ s resources. there is, of course, a huge body of evidence on the same ( phillips curve ) point, but the fact that inflation was so much more rapid in wwi than in the napoleonic wars surely owes something to the far greater levels of government demand for economic resources. second, if the scale of government ( and more fundamentally aggregate ) demand matters for inflation, its existing debt seems less relevant, or at least is far from enough to tell you about subsequent inflation. across