The Politics of the Money Supply

  • Michael Moran
Part of the Studies in Policy-Making book series


The important events in the life of a government are not always those which excite most attention or argument; quiet omissions can also have resounding consequences. The point is aptly illustrated by the case of the money supply when Mr Barber was Chancellor, especially after the introduction of Competition and Credit Control. The great political arguments of the early 1970s were focused away from money and banking, on to the problems of EEC entry, trade union reform and the role of the state in managing industry. Yet what was happening to the monetary system, largely unnoticed except by those with specialist interests, had profound economic and political results. Competition and Credit Control unleashed powerful competitive forces in banking; these forces were for a time so far beyond official control as to make it impossible for the authorities to fulfil their traditional duties of controlling the volume of credit in the economy and preserving the prudential soundness of banks.


Interest Rate Monetary Policy Money Supply Money Market Economic Management 
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Notes and References

  1. 1.
    The two-year average is in ‘Reflections on the conduct of monetary policy’, p. 32. Some other measures are in A. R. Prest and D. J. Coppock (eds), The UK Economy: A Manual of Applied Economics, 8th edition (London: Weidenfeld & Nicolson, 1980) pp. 302–11.Google Scholar
  2. 4.
    David Laidler, ‘United Kingdom inflation and its background: a monetarist perspective’, in Michael Parkin and Michael T. Sumner (eds), Inflation in the United Kingdom (Manchester: Manchester University Press, 1978) pp. 52–74.Google Scholar
  3. 6.
    The most influential modern argument for non-discretionary monetary management is Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1964) pp. 37–55.Google Scholar
  4. Two influential pessimistic post-Barber polemics are Peter Jay, Employment, Inflation and Politics (London: Institute of Economic Affairs, 1976);Google Scholar
  5. Samuel Brittan, The Economic Consequences of Democracy (London: Temple Smith, 1977).Google Scholar
  6. For a careful analysis of empirical evidence about elections and the money supply see Edward R. Tufte, Political Control of the Economy (Princeton University Press, 1978) pp. 48–52.Google Scholar
  7. 11.
    Problems of interpretation are put more theoretically by one of the Bank’s senior economists in C. A. E. Goodhart, Money, Information and Uncertainty (London: Macmillan, 1975) pp. 152–69.Google Scholar
  8. 12.
    Goodhart’s Law’ is described in Charles Goodhart, ‘Problems of Monetary Management: The U.K. Experience’, in Anthony S. Courakis (ed.), Inflation, Depression and Economic Policy in the West (London: Alexandrine Publishing, 1981) pp. 111–132 (116).Google Scholar
  9. 19.
    The classic argument is in Peter Winch, The Idea of a Social Science and its Relation to Philosophy (London: Routledge, 1958).Google Scholar
  10. The issue runs through Alan Ryan (ed.), The Philosophy of Social Explanation (London: Oxford University Press, 1973).Google Scholar
  11. 20.
    Maurice Peston, ‘Unemployment: Why We Need a New Measurement’, Lloyds Bank Review, 104 (1972) pp. 1–7;Google Scholar
  12. Sir Donald MacDougall, Studies In Political Economy vol. II (London: Macmillan, 1975) pp. 255–60.CrossRefGoogle Scholar
  13. 24.
    The standard reference in this discussion is Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes (London: Oxford University Press, 1968) pp. 3–48.Google Scholar
  14. 26.
    C. A. E. Goodhart and A. D. Crockett, ‘The importance of money’ BEQB, 10 (1970) pp. 159–98. For equally sceptical conclusions, A. D. Crockett, ‘Timing relationships between movements of monetary and national income variables’, ibid., pp. 459–68.Google Scholar
  15. 30.
    These assertions came from private conversations, but are partly corroborated by William Keegan and Rupert Pennant-Rea, Who Runs the Economy? (London: Temple Smith, 1979) pp. 71 and 120.Google Scholar
  16. 36.
    D. F. Lomax, ‘Competition and the Clearing Banks’, The Banker, October 1971, pp. 1160–5;Google Scholar
  17. E. V. Morgan and R. L. Harrington, ‘Reserve Assets and the Supply of Money’, The Manchester School, xli (1973) pp. 73–87;CrossRefGoogle Scholar
  18. E. W. Davis and K. A. Yeomans, ‘Competition and Credit Control: The Rubicon and Beyond’, Lloyds Bank Review, 107 (1973) pp. 44–55.Google Scholar
  19. 37.
    D. F. Lomax, ‘Reserve Assets and Competition and Credit Control’, National Westminster Bank Quarterly Review, August 1973, pp. 36–46; Gowland, Monetary Policy and Credit Control, pp. 32–5.Google Scholar
  20. 40.
    I take this to be economic orthodoxy. See, for instance, E. T. Nevin, Textbook of Economic Analysis, 3rd edition (London: Macmillan, 1967) pp. 290–4.Google Scholar
  21. 52.
    Samuel Brittan and Peter Lilley, The Delusion of Incomes Policy (London: Temple Smith, 1977) pp. 184–211.Google Scholar

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© Michael Moran 1984

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  • Michael Moran

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