The Role of the Gilt-edged Market

Abstract

The public sector borrowing requirement, which averaged 7 1/2 per cent of gross domestic product (at factor cost) over the six years from 1973 to 1978, has been the largest single threat to monetary control in recent years. It has posed what has been termed “the flooding problem”, a continuous flow of new debt which has to be absorbed by the private sector. As explained in chapter 3, the PSBR causes increases in the money supply unless it can be matched by sales of debt outside the banking system. The efficiency of the monetary system in maintaining such sales and stemming the inflationary flood has been questioned. Thorneycroft, who had had to rely on it to control the money supply when Chancellor of the Exchequer between 1956 and 1958, compared it to “an antiquated pumping machine, creaking and groaning, leaking widely at all the main valves, but still desperately attempting to keep down the level of the water in the mine”. (1) By far the most important valve, and perhaps also the least trustworthy, is the gilt-edged market. Its role in money supply control is now fundamental.