Monetary Policy and Financial Repression in Britain, 1951–59 Palgrave Studies in Economic History Series The Palgrave Studies in Economic History Series is designed to illuminate and enrich the understanding of economies and economic phenomena of the past. The series covers a vast range of topics including financial history, labour history, development economics, the industrial revolution and world economic history. Titles include: William A. Allen MONETARY POLICY AND FINANCIAL REPRESSION IN BRITAIN, 1951–59 Christopher Taylor and Graham Hacche INSIDE THE BANK OF ENGLAND Memoirs of Christopher Dow, Chief Economist 1973–84 Forthcoming titles: Oleh Havrylyshyn and Nora Srzentic THE ECONOMY OF RAGUSA, 1300–1800 The Tiger of Mediaeval Mediterranean Palgrave Studies in Economic History Series Standing Order ISBN 978–1–137–32436–8 Hardback You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and the ISBN quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England Monetary Policy and Financial Repression in Britain, 1951–59 William A. Allen Visiting Senior Fellow, Cass Business School, London, UK © William A. Allen 2014 Softcover reprint of the hardcover 1st edition 2014 978-1-137-38381-5 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. 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Contents List of Figures and Tables viii Preface xi 1 Introduction 1 2 1945–51: Labour’s Macro-Economic Policies 3 2.1 The state of the economy and the financial system 3 2.2 Monetary policy 6 3 1951–52: The Reactivation of Monetary Policy 19 3.1 The change of government 19 3.2 Conservative fiscal policy 21 3.3 How monetary policy was reactivated 21 3.4 Academic reaction 31 3.5 Reactivation of British monetary policy and the ‘accord’ in the U.S.A. 31 4 1952–54: Years of Growth 36 4.1 Why external pressures eased? 36 4.2 The debate on the effects of policy tightening 39 4.3 The recovery of 1953–54 42 5 Moves towards Convertibility and Their Implications for Monetary Policy 44 6 Short-term Interest Rates in Late 1952 to Mid-1954 48 6.1 Two rate cuts 48 6.2 Afterthoughts 51 7 Government Debt Management 1952–54 55 7.1 The government’s financing needs 55 7.2 Rolling over Serial Funding 55 7.3 Market conditions improve 58 7.4 Assessment 61 8 The Debacle of 1955 64 8.1 Changing market conditions, late 1954 to March 1955 64 8.2 Two budgets and a credit squeeze 73 v vi Contents 8.3 The Tuke affair 85 8.4 The immediate effects of the credit squeeze 86 9 1956: Macmillan as Chancellor 93 9.1 Late 1955 to Spring 1956 93 9.2 The review of monetary organisation 100 9.3 The Suez crisis 109 10 1957: The Year of Thorneycroft 114 10.1 Recovery from the Suez crisis 114 10.2 The Budget and phase 1 of the struggle over monetary policy 116 10.3 Reserve losses, phase 2 of the struggle over monetary policy and the 7% Bank rate 122 10.4 The working group on credit control and the a ftermath of the struggle 132 11 1958: The Sunny Uplands 141 11.1 Getting Bank rate down to 5% 141 11.2 The end of the advances ceiling and the introduction of the Special Deposits scheme 147 11.3 Getting Bank rate down to 4%, and Operation Unicorn 150 12 1959: Here We Go Again 157 12.1 Contemporary theories of inflation 157 12.2 The Prime Minister, the 1959 election and economic policy 158 12.3 The weakening of sterling and the beginning of a new cycle 165 13 Monetary Policy Techniques 172 13.1 Bank rate 172 13.2 Operations in bills 172 13.3 Operations in bonds 174 13.4 Foreign exchange and gold operations 177 14 Financial Repression 181 14.1 Definition of financial repression 181 14.2 Financial repression in Britain in the 1950s 182 14.3 Moral suasion, or ‘ear stroking’ 184 14.4 The effects and limits of financial repression 186 15 Management and Communication of Monetary Policy 194 15.1 Power and influence 194 15.2 Cobbold and his advisers 202 15.3 Communication 205 Contents vii 16 An Assessment of Monetary Policy 218 16.1 Excess demand, inflation and inflationary expectations 218 16.2 Criticisms of monetary policy 219 16.3 Fiscal dominance 224 16.4 The Radcliffe report 228 16.5 Was there a better way? 231 16.6 The expansionism of 1959 233 17 Epilogue: The Next Reactivation of Monetary Policy 236 Appendix A Macroeconomic and Financial Data 243 Appendix B ‘Above the Line’ and ‘Below the Line’ in the Exchequer Accounts 255 Appendix C Clause 4(3) of the Bank of England Act 1946 257 Appendix D The Unification of Transferable Sterling: March 1954 258 Appendix E C obbold’s ‘Random Thoughts’ 261 References 265 Index 271 List of Figures and Tables Figures 2.1 Net official sales of gilts, 1945–51 (£ millions) 8 2.2 Gilt yields 1945–47 (%) 9 4.1 Sterling/dollar exchange rate and official foreign exchange o perations, January–December 1952 37 4.2 U.K. and U.S. treasury bill rates, 1951–54 (%) 38 7.1 Net official gilt sales, ex forthcoming maturities, January 1951–June 1954 (monthly, £, nominal) 57 7.2 London clearing banks’ liquid asset ratio, 1952–54 (%) 57 8.1 Sterling/dollar exchange rate and official foreign operations, September 1954–February 1955 65 8.2 Net official gilt sales, ex forthcoming maturities, June 1954–October 1955 (weekly, £, nominal) 66 8.3 U.K. long-term interest rates, 1800–1961 (%) 66 9.1 Net official gilt sales, ex forthcoming maturities, November 1955–August 1957 (weekly, £, nominal) 98 10.1 Sterling/dollar exchange rate and official foreign exchange operations, August–December 1957 123 11.1 Short-term interest rates in the U.K., the U.S.A and Germany, 1957–58 142 11.2 Sterling/dollar exchange rate and official foreign exchange operations, January–June 1958 142 11.3 Net official gilt sales, ex forthcoming maturities, September 1957–December 1958 (weekly, £, nominal) 144 11.4 London clearing banks’ assets, 1957–61 (million) 150 12.1 Net official gilt sales, ex forthcoming maturities, January–December 1959 (weekly, £, nominal) 163 12.2 Short-term interest rates in the U.K., the U.S.A. and Germany, 1959 167 viii List of Figures and Tables ix 12.3 Sterling/dollar exchange rate and official foreign exchange operations, November–December 1959 167 13.1 Issue department net gilt sales (£, nominal) and yield changes (%), monthly, 1951–54 176 14.1 Total assets of U.K. financial institutions 1950–60 (£ million, as on 31st December) 188 14.2 Transferable sterling: discount against official rate and official intervention 191 14.3 U.K. and U.S. Treasury bill rates, 1951–59 192 16.1 U.K. and U.S. long-term government bond yields, 1953–59 220 A1 U.K. reserves, 1949–59 (£ million) 250 A2 UK public finances (modern definitions), 1950/51–1960/61 (% of GDP) 251 A3 Retail price index, 1951–61 (% change on a year earlier) 252 A4 M3 and advances growth (% change on a year earlier) 252 A5 Gilt yields, 1951–61 (%) 253 A6 Quarterly GDP growth, and its demand components, 1956Q2–1959Q4 (% change on previous quarter, seasonally adjusted) 253 A7 Bank rate and Treasury bill rates, and the exchange rate, 1951–59 (%) 254 Tables 2.1 Labour’s fiscal policy, 1945–51 (£ million, % of GDP in brackets) 4 2.2 Estimated distribution of the national debt and nationalised industries’ loans guaranteed by H.M. Government, as on 31st March 1951 (£ million, nominal) 7 3.1 Reserves and external sterling liabilities, 1951–52 22 6.1 Money market rate structures, 1951–54 49 7.1 Maturity distribution of gilts, including government-guaranteed stocks, 1951–55 (£ millions, % in italics) 56 8.1 London clearing banks advances, commercial bill holdings and deposits, 1955 (£ millions) 76