Abstract
On 17 November 1967, after a three-year battle to defend the pound, the British government finally admitted defeat and informed the International Monetary Fund (IMF) that sterling would be devalued from $2.80 to $2.40 the next day.2 The Fund’s Managing Director, PierrePaul Schweitzer, reacted ‘without surprise and with little comment’, dispatching a team to London that evening armed with a set of policy recommendations.3 This chapter shows how, in the aftermath of devaluation, the IMF provided the catalyst for the most thorough investigation into monetary policy in the UK since the Radcliffe Report. The conclusions reached by the Bank, and then the Treasury, appeared to offer an alternative to a monetary system tested almost to destruction by the post-devaluation lending controls. The result was the most radical overhaul of monetary policy since the Second World War, Competition and Credit Control (CCC), in 1971. Along the way, key Bank officials discarded some of their Keynesian principles for a system predicated on controlling the money supply. The process stalled several times. But in 1971, the Heath government’s refusal to raise interest rates in the face of rising inflation provided the final spur for the Bank to overhaul the system of monetary control.
We have increasingly shifted our emphasis towards the broader monetary aggregates — to use the inelegant but apparently unavoidable term: the money supply.
Sir Leslie O’Brien, Governor of the Bank of England, May 1971.1
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Notes
The Prime Minister and the chancellor had agreed, in principle, to devalue on 4 November, informing the full Cabinet on 16 November, L.J. Callaghan, Time and Chance (London, 1988), pp. 218–19.
F.H. Capie, The Bank of England: 1950s to 1979 (New York, 2010), p. 645.
M.G. de Vries, The International Monetary Fund, 1966–1971: The System under Stress (Washington DC, 1976), p. 343.
H. James, International Monetary Cooperation Since Bretton Woods (Oxford, 1996), p. 191; see also J.H.B. Tew, ‘Monetary policy: part I’, in F.T. Blackaby (ed.), British Economic Policy, 1960–74 (Cambridge, 1978), p. 247.
A.K. Cairncross, Managing the British Economy in the 1960s: A Treasury Perspective (Basingstoke, 1996), p. 220. Emphasis in original.
M. Friedman, ‘Interest rates and the demand for money’, Journal of Law and Economics, vol. 9 (October, 1966), pp. 71–85.
M. Friedman, ‘The demand for money: some theoretical and empirical results’, The Journal of Political Economy, vol. 67, no. 4 (August, 1959), pp. 327–51.
C.A.E. Goodhart and A.D. Crockett, ‘The importance of money’, BEQB, 10, 1970, p. 176–77.
C.A.E. Goodhart, ‘A central bank economist’, in P.D. Mizen (ed.), Central Banking, Monetary Theory and Practice (Cheltenham, 2003), p. 25.
The DCE outturn was minus £541 million as the balance of payments recovered sharply in the second half of the year. With money flowing in from abroad, M3 grew by £281 million (1.9%), well within the implied target; C.A.E. Goodhart, Monetary Theory and Practice: The UK Experience (London, 1984), p. 72.
R.K. Middlemas, Power, Competition and the State, Volume 2: Threats to the Post-War Settlement, 1961–74 (Basingstoke, 1990), p. 197.
The Monopolies Commission, Barclays Bank Ltd, Lloyds Bank Ltd, and Martins Bank Ltd: A report on the Proposed Merger (London, 1968).
N.A. Nagler, ‘Money supply in April/June quarter’, 1 December 1970, TNA, T326/1253.
C.A.E. Goodhart and A.D. Crockett, ‘The importance of money’, BEQB, 10, 1970, p. 179
A.H. Lovell, ‘Management of the gilt-edged market’, 28 September 1970, TNA, T326/1258.
A. Denham and M. Garnett, Keith Joseph (Chesham, 2001), p. 186.
J. Ramsden, The Making of Conservative Party Policy: The Conservative Research Department Since 1929 (London, 1980), p. 277.
Brittan suggests that in late 1968 the money supply ‘became fashionable overnight in the policy-making world’, S. Brittan, Steering the Economy (Harmondsworth, 1970), p. 157. Also M. Stewart, Economic Policy in the UK Since 1964; the Jekyll and Hyde Years (London, 1978), p. 149.
D.H. Gowland, Monetary Policy and Credit Control: The UK Experience (London, 1978), p. 81.
R. Harris, ‘A view from the outside: a self-confessed monetarist’, in British Economic Policy, 1970–74: Two Views (London, 1975), p. 9.
D.R. Hurd, An End to Promises: Sketch of a Government, 1970–74 (London, 1979), p. 91.
M.I. Reid, The Secondary Banking Crisis, 1973–75: Its Causes and Course (London, 1982), p. 31.
Bank of England, Development and Operation of Monetary Policy, p. 40. The multiplier was dismissed as early as 1958 by James Tobin, see J. Tobin, ‘Liquidity preference as behavior towards risk’, The Review of Economic Studies, vol. 25, no. 2 (February, 1958), pp. 65–86.
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© 2014 Duncan Needham
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Needham, D. (2014). From Devaluation to Competition and Credit Control, 1967–71. In: UK Monetary Policy from Devaluation to Thatcher, 1967–82. Palgrave Studies in the History of Finance. Palgrave Macmillan, London. https://doi.org/10.1057/9781137369543_2
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DOI: https://doi.org/10.1057/9781137369543_2
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