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Monetary policy in times of crisis: Pragmatism and conflict

Duncan Needham UK Monetary Policy from Devaluation to Thatcher, 1967-1982, Palgrave Macmillan: Basingstoke, 2014; 272 pp.: 9781137369536. 70 [pounds sterling] (hbk) Duncan Needham has not written a particularly long book, but you may be forgiven for thinking it was, considering the sheer density of the information packed within. Drawing heavily from Bank of England and Treasury archives from the late 1960s to the early 1980s, the author presents an incredibly detailed history of Britain's monetary policy development during a period of severe economic duress. The microscopic attention paid to the main policymakers, academics and commentators of this period is the great achievement of this book. Yet it is also its weakness, since at points Needham is in danger of ascribing too much causal power over the broad economic dynamics of this era to the ideas and actions of these individuals. The slowdown of the post-war boom presented novel and often contradictory challenges for British policymakers, prompting them to rummage in their toolboxes in search of new strategies for alleviating these pressures. Bank official Christopher Dow wrote in 1976 that the 'night-time electrocardiogram recordings of those whose daytime duties gave them close concern with the British balance of payments over the years ... would surely show more disturbance than other peoples' (Dow 2013: 47). As inflation and the money supply began to creep upwards from the late 1960s, further eroding British capital's competitive position, monetary policy became a central site of innovation and contestation. The period from 1967 to 1984--the focus of this book--was one of particularly desperate experimentation with the ideas of a group of economists proposing a new quantity theory of money. Needham's account starts with the formulation of Competition and Credit Control (CCC)--the first major financial deregulation in postwar history--in the years leading up to 1971. To supplement the positive effects of the 1967 sterling devaluation on the current account, monetary policy was tightened; but when this proved insufficient Chancellor Callaghan went to the IMF for the first of a series of loans. These loans came with progressively stricter conditionalities, especially regarding money supply targets. This sparked vigorous debate between the Bank, Treasury and IMF regarding the merits and feasibility of monetary targeting. At the same time, the traditional clearing banks--the institutions British monetary policy was chiefly designed to regulate--were rapidly losing market share to new 'secondary banks', such as building societies, undermining the effectiveness of many of the Banks monetary tools. Most importantly, lending ceilings were becoming increasingly unworkable and painful to impose. In this respect, the evidence presented supports the thesis advanced by Moran (1984). Needham carefully examines the interplay between the Bank's practical knowledge and academic monetarism, as policymakers desperately sought to reframe policy in line with changing conditions. Another catalyst for the monetary policy transformation of CCC was the Bank's frustration with the Treasury and Ministers--a recurring theme throughout the book. After the election of the Conservative Heath government in 1970, Bank officials expected that their requests for high er interest rates to combat inflation would meet a warmer reception; yet they were mistaken. Heath and Chancellor Barber were keen that British capital should utilise its excess capacity, which would not be aided by either more expensive credit or a stronger pound, leading them to reject the Bank's pleas. Needham charts how such stinging rebukes further spurred Bank officials' desperation to circumvent the traditional avenues of monetary control, through the working groups set up in the wake of the IMF consultations. (1) The result was the basic framework of CCC, designed to shift emphasis away from clumsy quantitative lending ceilings towards more flexible use of interest rates to control the broad money supply. …