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British credit control, 1931-1950

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British credit control, 1931-1950

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Content BRITISH CREDIT CONTROL
1931-1950
A Thesis
Presented to
the Faculty of the Department of Economies
The University of Southern California
In Partial Fulfillment
of the Requirements for the Degree
Master of Arts
by
Yen Hui Ho
August, 1951
UMI Number: EP44715
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TABLE OF CONTENTS
CHAPTER PAGE
I. INTRODUCTION.............................. 1
The problem and its importance.......... 1
Definition of terms ........... 5
A review of literature ........ ..••• 8
The methods and materials used ...... 10
Preview of this study.................. 12
II. BRITISH CREDIT CONTROL DURING THE
NINETEEN-THIRTIES ...................... 15
Abandonment of the gold standard .... * l6
Exchange equalization account and
foreign exchange ........... 23
Control over foreign issue ........ 29
Cheap money policy ............ 31
Direct control over the rate of
Interest ..•••••...••».. 32
Control over the supply of loanable
funds .......................... 35
Effects on the general economic
recovery ............... 39
Some problems of credit control • » • • . i j . 3
The goal ......... I j i j .
ill
CHAPTER PAGE
Adequate information................. l j . 6
*
Cash reserves and window dressing. ... i j - 9
Investments of the banks 52
Loans and advances of the banks .... 5 1 } -
Special credit facilities ....... 57
III. BRITISH CREDIT CONTROL DURING
WORLD WAR I I .........1 ................ 6i | .
The war time controls and credit
policy . . * .........................._ 6 1 $ .
Direct controls versus financial
Control......................... .. 6 1 1 -
Survey of direct controls ....... 67
Effect of war time direct controls
on credit • 69
The financial measures ......... 71
The task of credit policy ......... 72
Restriction of non-essential
borrowing ............... 7 i | -
The restriction on new capital
i
issues .................... 7 1 1 -
Restrictions on bank loans . ........ 77
Cheap money program.................... 8l
*
iv
CHAPTER PAGE
Broadening credit base ......... 8l
Lowering interest rates .............. 85
Government borrowing .......... 87
Foreign exchange and foreign
disinvestment.............. ..... 9®
Effects of these wartime measures ... 95
IV. BRITISH CREDIT CONTROL: POST WORLD WAR
II (1946-1950). . 103
Post-war British economic planning and
the role played by credit control • • • • 103
British post-war economic planning in
general..................... IOI 4.
The a i m s ............................ 104
The technique of planning ....... 106
The machinery of British economic
planning......... 110
The measures of British economic
planning ...................... 112
The role of credit control in the
framework of planning .............. 114
From 1946-I9l|.7............. l l i j .
From 1948-1950 115
V
CHAPTER PAGE
The treasury, the Bank of England, and
the money market ............. 118
The Chancellor of the Exchequer and
the money market ........... 118
As the supervisor ............... 119
As the owner of the central bank . . . 121
As the powerful customer ....... 121
As the policy maker ........... 123
The Bank of England after
nationalization . ......... 123
Directly controlled by the
Treasury ........ ........... 125
Its power to control the money market
extended ..... ... 126
The significance of these changes . . 127
Exchange control......... 130
The enactment of the Exchange Control
Act, 1 9 ^ 7 ............................ 131
Important provisions of the Act .... 133
The significance of the A c t ............ 135?
The control over long term credit .... 136
Restrictive regulations of
investment .............. 136
Vi
CHAPTER PAGE
The important provisions ............ 137
The work of the Capital Issues
Committee. ............... 137
The scheme of Investment................ II 4.O
Government guarantees ........ l l } . 0
Financial assistance to development
areas. ............................ II 4 . 3
Sponsoring long term finance
companies.................... II 4J 4.
Public investment * .................. 152
The over-all picture of British
investment planning ......... 15I 4.
Over-all quantitative investment
plans. ............... 155
The over-all qualitative investment
plans.......................... 157
Criticisms of British investment
planning......... 159
The cheap money policy .......... 163
Arguments for cheap money.............. l 6 1 { .
Keynesian employment theory.......... l6i { .
Equalization of income distribution. . 168
vii
CHAPTER PAGE
Considerations of government
burden . . . . . ............... 170
Inappropriate economic conditions. . . 172
Irrational priority........... 1 7 i } -
Daltonian Ultra-cheap Money Policy . * • 176
Methods used............. 177
The results of the ultra-cheap money
drive................... 182
Crippsian Disinflation Policy ..... 186
Steps taken . 186
Fiscal policy as the chief weapon . • 189
Consequences of the neglect of the
monetary measure 190
V. SUMMARY AND CONCLUSIONS......... 199
Pure domestic considerations ............ 200
Centralisation of the policy making power
in the hands of the Chancellor of the
Exchequer. .................... 203
Changes in controlling devices ...... 206
Changing positions of credit control in
the government economic policies .... 213
viii
CHAPTER PAGE
Cheap money policy • . • ............ * 217
Qualitative control of credit .... * 222
BIBLIOGRAPHY................................. 228
LIST OF TABLES
TABLE PAGE
I. Bank of England Notes in Circulation and
Total Deposits of London Clearing Banks,
as at the End of February 1939-50 . • • . . 3
II. Selected Data on Year End Balance Sheets
of the Bank of England, 1930-19^5 • • • • • 6l
III. Selected Data of Joint Stock Banks in
England and Wales 1930-19^5 62
IV. Money Rates and Bond Yields, 1930-19l|5 ... 63
V. British National Income and Central
Government Expenditure, Revenue and
Borrowing 19ij.Q-19^4-5 ............ 72
VI. United Kingdom External Disinvestment .... 96
VII. Indices of Prices, Cost of Living and
Wage Rates in Two World Wars ....... 99
VIII. Changes In Deposits of London Clearing
Banks 19lj.5-1950 .................. 1 8 1 } .
IX. Selected Data on the Balance Sheets of
the Bank of England, as at the End of
February 19i}-6-1950 193
X
TABLE PAGE
X. Selected Data of London Clearing Banks,
19*1-5-1950.............................. 19^
XI. Prices and Yields of British Government
Securities, 1945-1950 .................. 19S
XII. Estimated Gross Fixed Investment
19k7-1950 ............... 196
XIII. The Finance of Capital Formation........ 197
XIV. Floating Debt of British Government,
1945-1950 .............................. 198
CHAPTER I
INTRODUCTION
The Problem and Its Importance
Money in a modern economy occupies so important a
position that no economic analysis concerning the function
ing of the whole economy is adequate without referring to
monetary phenomena. Most of the prominent economists,
despite their different viewpoints, agree that the monetary
factor Is a very important* If not a major, factor causing
the fluctuations of prices and changes in the employment
level.^ Consequently traditional corrective measures have
commonly relied upon the use of monetary policies and
controls. Recent extension of monetary management in
conjunction with fiscal policy is but an evidence of its
prestige prevailing nowadays.^
1 The works of R. G. Hawtrey, D. H. Robertson, P. A.
von Hayek and 3. M* Keynes, would justify the statement
made here. An excellent analysis of their works with
special relevance to this aspect Is made by Raymond J.
Saulriier in his Contemporary Monetary Theory (New York:
Columbia Universi ty Press• 19^8)* ’ l | - 20pp.
2 Cf. Albert G. Hart* Money, Debt and Economic
Activity (New York: Prentice-Hall, 19^8), pp. 1-3.
The true character of the relationship between
fiscal policy and monetary policy may be debatable. However,
How the core of monetary policy is credit policy* This
especially true in the United States and Great Britain
because (I) theoretically credit as compared with currency
has a far more vital role in the process of fluctuation;^
( 2) over eighty per cent of the total volume of business
transactions in Great Britain, as a matter of known fact,
is made through checks;4 and ( 3) bank deposits represent
a much higher percentage of the total money supply than
currencyTable I shows that the volume of bank deposits
has been several times greater than the currency in Great
Britain in recent years*
the statement that they are closely related and not easily
separated is perhaps acceptable to most economists* Even
Alvin H. Hansen, the well known proponent of fiscal policy,
wrote a book Hto elucidate the precise role of money in
quite different situations and circumstances*t t (p. vi),
entitled Monetary Theory and Fiscal Policy (Hew York:
Me Gr aw-Hi 11, 1949)• 2l6pp•
3 It is the contribution of R. G. Hawtrey, who
analyzed the fluctuation process in the light of borrowing
behavior of business firms (especially wholesalers) and
the costs of borrowing. His analysis in this issue is
commonly accepted* See his Currency and Credit (London:
Longman & Green, 1923), and Trade and Credit (London:
Longman & Green, 1928)*
4 Barnard Ellinger, The City*The London Financial
Markets (Westminster: P* S. King & Staple/ 194°), p* 20.
£ A quotation from Professor Roy L. Garis Is suf
ficient to support all these contentions: "Credit is the
promise to pay money, for a person who buys anything with
TABLE I
BANK OF ENGLAND NOTES IN CIRCULATION AND TOTAL DEPOSITS
OF LONDON CLEARING BANKS, AS AT THE END OF
FEBRUARY 1939-1950*
million pounds
1939 1944 1945 1946 1947 1948 1949 1950
| Bank of England
; notes in circu
lation
478 1,086
1,217 1,322 1,377 1,233
1,232 1,250
: Total deposits
: of London clear-
1 ing Banks
2,176
3,897 4,405 4,684 5,519
5,642 5,017 5,841
^Compiled from Annual Reports of Bank of England. 1947-1950.
Great Britain since the early nineteen-thirties has
undergone many great changes. The direction is from a
capitalistic economy toward a more or less socialistic one,
or from an ’ ’ unplanned*’ towards a centrally planned economy.
Prom 1930 to 1950, the British people faced many unusual
problems, such as depression, war, post-war reconstruction
and inflation, etc. To what extent do the British utilize
credit control to meet these problem? What are their
policies and how do they operate in actual practice? What
are the effects of their policies? These questions are
herein set forth for study. Yet these questions may best
be answered in terms of development, since the economic
problems, the general policies and even the structure of
the credit market were different in the different stages
of this period. In other words, the problem of this study
is the development of British credit control from 1931 to
1950 under the prevailing British economic conditions and
general policies. More specifically it is intended in this
study to discover the development of the goals, machinery
credit really buys with money the payment being deferred.
Since credit is merely money’s representative or proxy,
they are not two different things. We may state, therefore,
that credit is but the name given to a common and important
use of money.” Principles of Money, Credit and Banking
(New York: MacMillan, 1$3I j T 7 p. 311. "
5
and devices, and policies of British credit control, and
their economic impacts and their relative importance on
the general economic policies, during this period*
Special attention is given to these developments in
the post-war Great Britain. For it is this post-war stage
that the British authorities have markedly changed their
general economic policy thinking. And the developments
are most significant for somedays to come. It is hoped
that the findings of this study will throw some light on
the future policy making in a free country. >
Definition of Terms
The term, credit, is used here to denote a transfer
of purchasing power or of valuable goods and services in
exchange for the promise of a repayment of an equivalent
l
in the future. It is a broad term which embraces many
6 The tern thus defined is synonymous to f , debt,n
but from a different point of view. Under the post Second
World War condition in which the excessive purchasing *
power and the huge bulk of public debt exist, the word,
Mdebt,n signifies more than the word "credit." For example,
see A. (3. Hart, in his Money, Debt and Economic Activity;
Lester V. Chandler in his The Economics of Money and Banking
(New York: Harper & Brothers, l8! j . 8}, Ch."TT, especially
pp. 162-1 6 5. The tern, credit, however, is more useful and
adequate for this study for two simple reasons; first, the
section on public debt is going to be neglected; second,
the investment section is going to be discussed at consi
derable length.
t y p e s The common methods of credit control are for the
central authorities, i. e. the central bank or the central
government or both, either ro regulate the total quantity
of credit in the economy or to regulate some specific types
of credit, or to regulate both. Although as a rule the
power to control credit Is vested in the central autho
rities in the various countries, the working of the con
trol must be Hhrough the market” (an indirect type of
control) in the absence of complete regimentation.
In other words, the traditional quantitative credit
controls mean that the central authorities either fix the
price of credit (I. e. the rate of interest) and let the
market decide the quantity, or fix the total quantity of
credit and let the market adjust the price. On the other
hand the traditional qualitative credit controls do not
go beyond the setting up of the rules of the game for some
specific types of credit, such as the small loans laws,
stock market margin requirements, and consumer credit
regulations. In this sense, the qualitative credit controls
are also working through the market.
However, several variations of credit control have
7 Professor Roy L. Garis has a comprehensive
classification in his book, op. cit., p. 3 2 6.
been seen* One is the control over the demand for credit*
This has been done in the forms of raw material control,
output control, price control, and consumption control.
These controls no doubt may be used in order to secure the
same objectives as credit control. They are, however,
essentially the substitute of credit control. They can be
said to be a form of credit control only in a very loose
sense of the word. In this study, they are not viewed as
a kind of credit control proper. However their effects on
the credit situation can not be ignored. Their relevance
to this study is their incidental effects upon the credit
market. ' •
Another variation of credit control is so-called
investment planning. The term, investment is not the
equivalent of the term, credit. Investment credit is but
one type, although the most important type of credit.
Besides investment credit, there are consumptive credit,
commercial credit, and agricultural credit. On the other
hand, investment may not necessarily involve credit, for
the person who saves and the person who invests (not In
the sense of the buyer of securities, but In the sense of
the purchasing owner of a capital good) may be the same
person. However, with the development of modern financial
institutions and the corporate form of business organiz
ation, it is perhaps safe to ignore those investment which
involve no credit transaction. And then the term, long
term credit, is the approximate of the term, investment.
Even so, the peculiarity of investment planning should be
borne in mind. In so far as Investment planning is carried
out in such a way that public authorities allocate capital
industry, or even firm by firm according to their judg
ments it abolishes the market mechanism. Therefore, invest
ment planning is the borderline between credit control
proper and complete regimented control.
A Review of Literature
To the writer»s knowledge, there is not any work in
existing economic literature which deals systematically
with all the problems set forth in this study. There are
some famous works which deal with some particular phase
of the problem. Por Instance, there are famous books on
monetary theory written by prominent English writers such
as D. H. Robertson, R. G. Hawtrey, and J. M. Keynes.^
However, each of their analyses aimed only at economic
fluctuations, which are only one of the economic problems
8 See note 1, supra, p. 1; note 3, supra, p. 3.
which confronted the British authorities from 1931 to 1950*
Moreover, they did not attempt to analyze the actual work
ing of credit policies in Great Britain.
A somewhat comprehensive and realistic study was made
by Walter Morton of the University of Wisconsin.9 Yet his
work covers only from 1930 to 19ij-0. Furthermore, there was
♦ no analysis of the mechanism of British credit control in
his work.
®hiere are some descriptions of British credit control
in World War XI in the official history of the British
economy in World War II.*® Again it is not very adequate
!for answering the problems set forth here, for it is only
an incomplete record for that period. Benjamin H. Higgins*
Lombard Street in War and Reconstruction** has a very
excellent analysis. However, it looks at the problem from
the angle of Lombard Street (i. e. the banking circle of
London) rather than from the whole economy and the whole
9 British Finance (Madison: University of Wisconsin
Press, I9I 4. 3), 356pp.
10 W. K. Hancock and M. M. Growing; British War
Economy (History of the Second World War, United Kingdom
Civil Series; London: H. M. Stationery Office, 1 9 2 4. 9).
583pp.
11 (Occasional Paper Mo. 28; Mew York: National
Bureau of Economic Research, 19^9), 108pp.
10
system of credit control.
As to British credit control in the post-war stage,
the writer has not found any work which deals with the
British credit control systematically and throughly. At
the most, a little space is found in the hooks of most
critics of the Labor government*s economic policies dis
cussing some matters of credit control.^ Or some articles
discussing some of its phases may appear in professional
journals. However, a complete survey of all these literary
works fails by far to answer the questions which are set
forth in this study.
Indeed, it is this inadequacy of literature on British
credit control that prompts the writer to undertake this
study.
The Methods and Materials Used
There Is no other way for a person who resides In
the United States to study the British credit control than
to use the published materials. The published materials,
12 For example, see: Roy P. Harrod, Are These Hard
ships Hecessary (Second edition; London: Rupert Hart-
Davis, 19^7), 178pp» John Jev/kes, Ordeal by Planning (Hew
York: Macmillan, 194®)# 248pp; J* jEY Meade, Planning and
the Price Mechanism (London: George Allen Unwin, 1947)* '
130pp; Thomas Wilson, Modern Capitalism and Economic
Progress (London: Macmillan, 1950), 274pp*
11
however, are not limited to the books published by private
publishers, and the professional periodicals. Many official
publications in fact are much more important, simply
because they are original sources. It is fairly agreed
upon that the official publications of Great Britain are
comparatively reliable, so it Is fairly safe to use them.
Among such are the white papers on national income and
expenditure, on capital investments, the annual reports
of the Bank of England, etc.
In the process of this study, the writer had sought
and secured published information from the Doheny Library
of the University of Southern California, the Los Angeles
Publie Library, the Library of the British Consulate-
general at Los Angeles, the Library of British Information
Services at Hew York (through inter-library service), the
His Majesty’s Stationery Office at London, the Bank of
England, the Barclays Bank Limited, the Lloyds Bank Limited,
the Midland Bank Limited, the Westminster Bank Limited,
the Finance Corporation for Industry Limited, and the
Industrial and Commercial Finance Corporation Limited.
From all these materials, the original ones are used
whenever possible. Only in the case that the original
materials could not be obtained, were the secondary sources
12
used which in the best judgment of the writer are reliable*
The nature of the problem requires both qualitative
and quantitative analysis. An attempt has thus been made
in this study to integrate both of these analyses.
Since Great Britain has preserved and continued to
maintain her financial center, namely, the MeityM of
London, (hereafter referred to as the ncitytt) one of the
largest credit markets in the world, it is appropriate
in the writer*s judgment, to study British credit control
through the channel of the London money market. This
famous financial center consists of various institutions,
including the British Treasury, the Bank of England*, the
London clearing banks, merchant banks, discount and accep
tance houses, the issuing houses, and the London Stock
Exchange. In other words, this study will concern itself
with the setting and the operations of the British credit
policies from 1931 to 1950 as reflected by the London
money market.
Preview of This Study
Broadly speaking, there have been three stages in
the development of the British economy during the past
twenty years. The first was the pre-war stage in which
the British economy was recovering from the Great Depres-
13
sion; the second, the hostile stage in which the British
had a planned war economy; and the third stage, the post
war stage, in which the British have undertaken a socialist
experiment under the Labor Government. Each of these
different stages has had its particular economic problems
which have called for particular policies and mechanisms.
Therefore, this study may be logically presented in an
order that corresponds with the stages of the British
economy during this period.
Chapter II of this study thus will be devoted to a
review of the mechanisms, policies and the consequences
of the British credit controls as they operated in the
nineteen-thirties. In the appropriate sections of this
chapter, some institutional framework and some basic
problems of credit control5 will be introduced in order
to establish a background for an understanding of this
study.
Chapter III will analyze the role, policies, and the
effects of the British credit control in the war-time stage
of economic planning. The changes In institutions and de
vices will be indicated, if there were any.
Chapter IV, which will cover the post-war stage, will
be the heart of this study. The planning machinery of the
i4
Labor government will be first analyzed, with special
reference to credit control. And then attention will be
given to the institutional characteristics and the
statutory framework. In the discussion of policies and
their economic impacts, a considerable theoretical analysis
will have to be introduced. Every aspect in this chapter
will point to final conclusions.
Chapter V will be the final chapter containing the
summary and conclusions of this study, which will be
presented in terms of their development and economic
significance•
CHAPTER II
BRITISH CREDIT CONTROL
DURING THE NINETEEN-THIRTIES
Credit control in England, as exercised by the Bank
of England through the Bank rate, has a long history.
Yet it Is commonly recognized that it occupied a sig
nificant position only after 19li|. As developed in the
nineteen-thirties, it was confronted with a severe test.
At that time, the depression was severe; sterling was,
instead of on a gold standard basis, on an Inconvertible
paper basis. The experience of that decade was exciting
and Influential to the post-war economy. Hence, this study,
begins with a review of that period which was led by the
abandonment of the gold standard.
1 Sir John Glapham listed changes In the Bank rate
starting from 1797» in an appendix to his book. The Bank
of England: A History (New York: Macmillan, 194-5T* Vol. II,
pp. i [ T 29- ! j . 3 2.~*
Walter Bagehor discussed the significance of the
Bank rate to the conditions of the money market in 1873.
See his Lombard Street (lij-th ed., London: John Murry, 19lf>)
pp. 109-117; pp. 153-197.
2 Walter A, Morton, op. cit., p. i } . .
16
Abandonment of the (Sold Standard
The international financial crisis of 1931 started
with the suspension of payments of the Austrian Kredit
Anstalt in May. International confidence was lost, and
other countries soon began to seek greater liquility by
mobilizing their foreign assets. The first waving victim
was Germany which was the neighbor and closely-related
country to Austria, Germany suffered a heavy foreign
withdrawal and finally was forced to stop such payments.
At the same time when panic psychology existed and inter
national confidence was lacking, it was made known by the
publication of the Macmillan Committee Report^ that the
British short-term foreign liabilities exceeded her short
term foreign assets of which a large part was tied up in
Germany,^- Thus, the run on London occurred. The Bank of
England, instead of letting the London money market fail,
supported the market and let Its gold reserves become
3 Report to the British * Parliament of the Committee
on Finance and Ynduslry (Gmd 36'97;‘ lohdon":' 5Ts Majesty's
Stationary Office; hereafter cited as the Macmillan report)
published in June 1931•
^ It was estimated that about 20. I f to 23*9$ of
total German foreign short indebtness at that time was
owed to the British, See L. T. Conway, International
Position of London Money Market (Philadelphia: University
of PennsyIvenia, 19^6), p. 7.
17
drained. It secured a loan of 50 million pounds from Hew
York ($ 125 million) and Paris (3,100 million francs) in
July. But this fund was exhausted in about a month. When
a new foreign loan was necessary in order to maintain the
.gold payment by the end of August, the Federal Reserve
Bank of Hew York refused the request on account, of the
deficit in the budget of the British Labor government.
The Bank of England, therefore, was forced to suspend the
■ sale of gold at a fixed sterling price on September 21. On
that same day the suspension was sanctioned by Parliament
upon the recommendation of the Chancellor of the Exchequer.
Since then, the British currency has been on an inconvert
ible paper standard, or a managed currency.
There is a wide disagreement concerning the cause of
the failure to maintain the gold standard. Some theories are
apparently not convincing such as the over-valued theory,^
5 Over-valued theory is based on the purchasing
power parity theory of the exchange rate, which in tern is
the descendant of the classical theory of gold movement and
international prices. The basic weakness of this theory is
to assume certainty of relationships between gold movements
and international price levels. It is true that the prices
of internationally traded commodities are closely related
to exchange rates. But the prices of all wholesale and par
ticularly the prices of purely internal commodities are hot
thus related. For detail discussion see W. A. Morton, op.
cit., pp. 10i{.-lli}.. It should be noted however that it was
this overvalued idea which led to internationally compe
titive devaluation of the 19 3 0*s.
0
18
budgetary deficit theory,^ and the price rigidity theory.^
Clearly, no single cause was solely responsible* The
appropriate causes were (1) an unfavorable balance of pay**
ments which was the result of the world-wide depression,
the loss of the superiority of British industries, and the
loss of revenues from invisible items; (2) the panic psy
chology and the loss of confidence, arising from the con-
6 During the deterioration of the British inter
national financial position (i. e. after World War I),
the British fiscal authority was very orthodox in its
viewpoint and the budgets were balanced* It was only in
1930 and the first half of 1931 that the budget deficit
was seen or expected. On the other hand, a deficit bud
get does not necessarily weaken the international position
of a currency, as proved by the experience of the United
States New Deal.
7' This is really a theory of wage rigidity. And
it was held, by London and New York bankers. Even the Labor
Government of Great Britain in 1931 took steps, like cut
ting governmental wages. This theory is not convincing
because: (1) High wages affect on commodity prices which,
at the most, adverse the balance of payment in exports and
imports only; and are not influential to the invisible
items; ( 2) wage rigidity was common to countries actively
engaged In international trade; (3) The decline of British
exports has more fundamental causes,'namely the British
did not follow the changing pattern of world markets such
as new goods and new styles. Moreover, this theory Ignores
the relationship of wage income levels and effective demand.
The policy of reducing wages ceased after the
abandonment of the gold standard and British recovery was
on the way* See Morton, op. cit., pp. 257-70; 112-117.
tinental financial crisis, induced many countries to seek
greater liquidity for self-protection; and ( 3) that, the
British banking policy of lending long and borrowing short
and especially of extending too great a sum of foreign
funds to Germany, was made publicly known by the public
ation of the Macmillan Report,® All these causes may be
summed up under one category, namely, capital outflow
arising from the loss of foreign confidence. Yes, the run
on London was solely one of foreign withdrawals. It was
estimated that the total withdrawals from the middle of
July to. September 20 amounted to more than 200 million
pounds.^ This sudden huge withdrawal was made possible by
the existence of a large volume of floating international
balance which could be readily moved from one financial
center to another. It was criticized that foreign funds,
especially French and American, were attracted to London
in deposits and short-term bills (which were viewed as
equivalent to demand deposits) at a comparatively low rate
8 For a brief discussion see G-. P. Jones and A, G.
Pool, A Hundred Years of Economic Development (New York:
Macmillan, I9I 4.O), pp. 377ff.
9 Hie speech of the Chancellor of the Exchequer in
Parliament on September 21, 1931* as quoted in William F.
Spalding, London Money Market (Sixth edition; London: Sir
Issac Pitman & Sons, 193®)* P* 187.
20
of Interest, and London financiers, using these proceeds,
lent them to Germany on a virtually long-term basis, at a
high interest rate. This illiquid position of the London
money market, it was said, caused the heavy loss of gold
when foreign withdrawals occurred. 10 While this is a
matter of fact, it is yet the very nature of financial
business to borrow at low interest rates and to lend at
high; or in other words* the essence of all banking is
"borrowing short and lending long". No banking system
with less than 100 per cent liquidity can meet a run if
it does occur. Moreover, the accumulation of foreign funds
was Involuntary. 11 In short, the Illiquid position of
London, which was a result of circumstances at that time,
was not primarily responsible for the crisis, but the
exposition of this position had aided the destruction of
confidence and incited the run.
Up to that time, the international credit policy had
largely relied upon automaey. The lending and borrowing
were determined by the market; and the Bank of England
10 This proposition was first taken up by the Mac
millan Committee. See the Macmillan Report, op. clt.,
pp. k.2.f; 12$.
11 Morton, op. cit., pp. 3l|--37*
t
assumed tlie responsibility of ultimate assistance with
the guidance of gold movements* Ihere was an old saying
concerning the Bank rate that M7 per cent will bring gold
from the moon. It Is true that the Bank of England, by
raising the Bank rate, could attract foreign funds and
demand for sterling, and thus gold, when England was on
a gold standard with free exchange at normal times. Follow
ing this line of reasoning some economists, in particular
Dr# Benjamin M. Anderson of the United States, blamed the
cheap money policy for the unnecessary collapse of the
gold standard. Dr# Anderson said that during the run the
Bank of England kept money easy in the market by purchas
ing government securities In the open market and by a low
Bank rate. From the restoration of the gold standard in
1925 to 1930» the Bank rate was at an average of 4J- per
cent which was low and cheap as compared with interest
rates In other financial centers during the same period
and it was reduced to 2§- per cent on May 34, 1931# at the
time the Continent’s crisis occurred. It was only i j . | r per
cent when England went off gold standard. Dr. Anderson
claimed that had the Bank rate gone high enough, say to
12 Ellinger, op. cit., p. 37.
22
8 per cent in July, and to 9 P©** cent in August, England
would not have gone off the gold standard.-^ He overlooked
two fundamental limitations of this policy. First, while
a high Bank rate would attract foreign funds, yet at the
same time it would contract domestic credit and thus
entail a deflationary pressure, although the influence
on the domestic situation was denied as being as effective
as that on the Foriegn position by the Governor of the
Bank.^4 R. G. Hawtrey pointed out that,
To raise the rate when unemployment among insured
work people had risen to 22 percent was surely to
gild the lily. If, in the- language of I8I 4. 8, the price
of the convertibility of the note was to be1 a further
disemployment of labour, the position had become
untenable. And in fact it had. 1-5
Second, foreign depositors not only are concerned
with high earnings but also with the safety of the invest
ment. A high rate has little inducement to foreign de
positors when it Is generally feared that the deposits
13 B. M. Andersonfs views were first expressed in
the Chase Economic Review, November, 1931. He held the
same opinion later. See his Economics and the Public
Welfare (N. Y. : D. van No strand, 1949)* pp. 2) j4-253 . "
l i j - Montagu Norman * s testimony before Macmillan Com
mittee, quoted by R. G. Hawtrey, A Century of Bank Rate
(London: Longmans, 1 9 3 8), p. 33-
15 Ibid., p. II4 . 3.
or substantial portions of them are in danger of being
lost* Since that fear did exist, it is likely that a high
Bank r§.te would have called attention to the embarrassed
condition of the London money market which would have
augumented the run.
On the day of the suspension of gold, the Bank rate
was raised to 6 per cent. It was possibly Intended as a
o
safeguard against inflation. Since then, the Bank rate
has not been related to foreign exchange and gold reserves,
for the domestic money supply has been shielded from the
effects of international gold and capital flows. $hus, the
suspension of gold has enabled England to have a credit
policy primarily for the needs of the home market. Un
doubtedly, since the automatic mechanism was gone, a
greater responsibility of control and management, or
policies, was expected.
Exchange Equalisation Account and Foreign Exchange
It was expected that sterling, after the departure
from gold, would be depreciated heavily. Several measures
of safeguard were taken. In the Gold Standard (Amendment)
l6 Morton, op. cit., pp. i j - 4 f .
Act of 1931* which authorized the suspension of selling
gold at a fixed price, there was a clause allowing the
Treasury to regulate foreign exchange dealings. The Bank
rate was raised to 6 per cent. The budget was balanced.
The Board of Trade was authorized by Parliament in Novem
ber 1931 to impose duties up to a maximum of 100 per cent
on manufactured imports. The Board immediately applied
a 50 per cent raise to a long list of imported products.
All these measures made some contributions to the
restoration of confidence in sterling, although it fell
during the first four months after the abandonment of
gold, from an average of $ lj-.51j-2 3n September to $ 3*372
in December.^ After that, sterling began to recover. At
the end of February, 1932, the exchange restrictions on
the purchase of foreign exchange were renounced by order
of the Treasury.
The first few months off-gold, British authorities
did not attempt to directly influence the exchange rate.
And the Gold Standard Act of 1931 removed only the tie
between sterling and gold, but it preserved a free gold
17 Ibid., p. 1 2 l j .
25
market in London, The speculations in the gold market and
in foriegn exchange made the exchange rates fluctuate.
When the pound was pushed up again in the spring of 1932,
the Chancellor of the Exchequer, in his April budget
statement, suggested the establishment of a fund, with
assets consisting of 150 million pounds in Treasury bills
plus some 25 million pounds remaining from the old Dollar
Exchange Account.-*-® The fund was to be used to avoid
’ Violent and perilous fluctuations” in the currency from
speculative operations.^9
The fund, termed the Exchange Equalization Account
(hereafter sometimes referred to as E.E.A.) was authorized
by the Financial Act of 1932, and came into official
existence on July 1, 1932. In May, 1933, its borrowing
power was increased by 200 million and in April, 1938,
by a further 200 million, making a total of about 575
18 The amount transferred from the old Dollar Ex
change Account was not quite agreed upon by different
estimators. The figure given here was that of the Economist,
as quoted by Conway, op. cit., p. 13. Also Spalding, op.
cit., p. 1 9 8. The total assets authorized were a maximum
limit; the actual amount utilized varied from time to time
and was unknown to outsiders.
19 The words are those of the Chancellor of the
Exchequer in his statement to Parliament in which the
Account was proposed. The statement was subsequently
quoted in Spalding, 0£. cit., pp. I9I 4.- 9 8.
26
million pounds. The fund was put under direct control of
the Treasury, but its operations were carried out by the
Bank of England. In other words, the Treasury decided the
policies which were to be carried out by the Bank. This
was the first official expression, making the Bank the
executive subdivision of the Treasury.
The Account was not supposed to maintain a fixed
exchange rate, but was intended to offset speculative
fluctuations. This task was easily done by means of selling
and buying gold as well as foreign currencies. The rate of
foreign exchange, from the inception of the Account to the
outbreak of war in 1939* were substantially influenced
by its operations. It was commonly agreed that the British
E.E.A. was the most successful one of its kind. Besides
the elimination of violent fluctuations in the exchange
rate, the Account accomplished a more Important task,
namely, protection of the domestic credit position against
disturbing international movements of gold and capital.
During the period from its Inauguration to April, 1938,
the E.E.A., facing an Inflow of gold in capital account
from the Continent, followed the procedure of sterilizing
the gold and arresting the rise of sterling In terms of
other currencies; with the result the E.E.A. accumulated a
substantial portion of the inflowing gold and prevented
it from having full effect on the eredit base in spite of
the cheap money policy concurrently maintained, This policy
proved to be wise when the reverse flow of capital occurred
in 1938-1939 and the event was met by the use of gold which
it had accumulated and kept in reserve. Undoubtedly, its
effectiveness came fundamentally from its asset components.
While the American Exchange Stabilization Fund, consisting
of gold, had nothing with which to buy gold except gold
itself, the British E.E.A, was created primarily out of
Treasury bills, and thus was able to operate on the prin
ciples of open market. The detail daily operations of
E.E.A. were well kept secret in order to assure its success.
Yet the processes and the mechanism mpy be summarized as
follows:
When foreign funds and gold flowed in, they became
deposits of banks. The bank*s deposits and cash increased
by the same amount. The E.E.A. sold its Treasury bills in
the money market to obtain sterling with which it bought
the inflowed gold or foreign currencies at the rate de
termined by the E.E.A. itself. Thus, the extra cash of
banks and the gold or foreign currency were absorbed by
the E.E.A.. Reversely, the E.E.A. sold its gold or foreign
28
currency to the London money market for payment to foreign
centers. With the proceeds the E.E.A. might buy back or
< *
repay the outstanding Treasury bills. Thus, the banks*s
cash was unchanged and the payments were foade to foreign
centers.
These are normal procedures. Yet, these operations
had net effects on the money market. The net result of
offsetting gold inflows was an increase of deposits, un
changed reserves, a decline of the cash ratio, and hence
deflationary pressures. In the case of an outflow of gold,
there was often a tendency towards an inflationary rise
in cash ratios when the purchase of bills from the money
market restored the banks*s reserves, but failed to create
a deposit equivalent to the decrease created by foreign
withdrawals. These net effects were to be offset by open
market operations of the Bank of England.
Judging from the money market positions in the thir
ties, the operations were guided by appropriate policies.
In the event of great capital outflows from the summer of
I938 to the outbreak of the war in 1939» bhe dollar rate
fell about 20 per cent2® and the E.E.A. lost 275 million
20 Morton, op. cit., p. 1 2 i | . .
29
pounds of gold,^-*- jet it protected the British internal
economy from this disturbance*
Control Over Foreign Issues
By June of 1932, the British government carried out
a large conversion of War loans* To facilitate this oper
ation, the Bank rate was kept down to 2 per cent at the
end of February and the Bank of England continued to make
open market purchases long beforehand. Furthermore, the
Chancellor of the Exchequer appealed to the public not to
make new capital offers, and while this did not take the
form of an official prohibition, it Mled virtually to an
embargo on the new issue market. ”22
i
By September relaxations were made in favor of domes
tic Issues. In the following October the Treasury announced
that until further notice,
(1) There are to be no new foreign issues, i. e.,
borrowers outside the Etapire, (2) no issues, involving
either underwriting or an invitation to subscribe new
cash for Optional replacement of existing issues, and
(3) ho trustee security issues without consultation
with the Bank of England.23
21 Kahn, oj>. cit., p. 203*
22 The Economist, July l6, 1932; quoted by Conway,
op. cit., p. 8.
23 The Economist. ,0ctober 8, 1932; quoted by Conway,
loc• cit..
30
The restriction was applied essentially to capital
issues outside of the sterling areas. In April, 193&, the
Foreign Transactions Advisory Coiamittee, representing the
chief banking and investment firms, was appointed to
cooperate with the Treasury and the Bank of England in
controlling new issues along these lines* Since then, the
control over new foreign issues has become a consistent
part of the newly evolving pattern of British economic
poliey. The aims of such control were three folds. The
first was to support sterling; hence, to relax the embargo,
thereby tying other currencies to the pound. The second
was to foster British exports and to reward countries
which offered special concessions to British goods. The
third and the most Important was to give domestic producers
a prior claim on available capital, with empire producers „
next.
The adoption of this control indicated a change in
the British economy and its policy. Before World War I
and even late In the 1920*s, the foreign investment and
invisible items, which consist of incomes from services and
from investment, were considered indispensable to the
domestic prosperity and consequently the encouragement of
free capital export was practiced. The average annual
31
oversea new capital issues from 1921 .to 1931 were about
I 4 .9 per cent of the total annual new capital Issues. The
figure was dropped to about 21 per cent for the years
extending from 1932 to 19 38.^ Domestic producers were
given a prior claim; economic nationalism was growing. And
from the point of view of providing domestic employment,
the priority given to domestic investment was proper.
Cheap Money Policy
The control over the money market was supposed to be
vested in the Bank of England. Before abandonment of the
gold standard, the Bank was left to form its own policy,
» 1.
bearing in mind that the government was sovereign. Yet
the Inauguration of the cheap money policy in 1932 was
primarily in response to the requirements of the Treasury
for the conversion of war loans. Since then it has become
difficult to distinguish between the government and the
Bank for purposes of explaining credit policy*
TJp to 1932, the chief means by which the Bank of
2 l j . Compiled from figures given by Midland Bank
Monthly Review, as quoted in Morton, op. cit., p. 3W.
The decline" of international investment In that decade may
have more important reasons than the restriction, such as
depression and uncertainly. Yet the stress On the domestic
economy and the increasing state intervention in economic
and financial policy were clearly indicated.
32
England controlled the money market were; (a) lending or
discounting according to the Bank rate on eligible paper;
,(b) open market operations; (c) personal influence and
advice to those elements directly dependent upon the Bank.
After 1932, the Bank continued to exercise these means,
but the power of determining the policy was virtually
exercised by the Treasury and to a certain extent the duty
of carrying out the poliey was shared by the Treasury too.
Direct control over the rate of Interest. — The im
mediate direct control over the rate of interest was
facilitated by the old device, namely, the Bank rate. The
Bank of England traditionally did not go to the market to
lend or to discount bills. The Bank only stood by to lend
or to discount the eligible bills presented to them at
the Bank rate or at a higher rate. The eligible bills
were Treasury bills or commercial bills with two approved
British signatures, one of which must be that of the
acceptor. The bills were not presented to the Bank in the
ordinary course, for the cost of financing the bills from
other lenders was cheaper. Banks and other lending houses
customarily lent at 1 per cent below the Bank rate. In
the period of the low Bank rate, say 2 per cent which was
the case in most years during the thirties, per cent
below the Bank rate was charged by banks. Therefore, the
discount houses which customarily did a big quantity of
discount with little capital went to the commercial banks
to borrow money. The willingness and the amount a bank
lent depended upon the particular bank’s cash position
of the day. If a bank was temporarily short of money, it
did not renew its loans or lend to the discount houses,
and the discount houses would then seek, and usually find,
the accomodations which they required In some other bank or
finance house. Ihen the discount houses could not find the
money they required In the market such as at the end of
the year or In a tightened market position, the discount
houses had to borrow from the Bank of England either by
giving bills as security or by discounting the bills with
the Bank. This condition was called "the market is' in the
Bank.n If the market borrowed money from the Bank by means
of advances, the Bank charged ^ per cent over the Bank
rate and for a minimum period of a week; the Bank also
insisted on a margin of £ per cent of the security. If
the market took money by discounting bills, it would charge
the Bank rate for the bills with a minimum maturity of 2
to 3 weeks.
The process described above is also true nowadays.
3 1 ) .
The Bank rate, as has been shown, is the minimum rate
t t
at which the Bank of England will discount bills for the
Blanket* It is a penalty rate* The significance of the
Bank rate lies in its ability of leadership of interest
rates in all money markets* As has been shown, the market
rate of discount is directly and Immediately affected by
the Bank rate. Then the rate on day-to-day money and other
short-term rates is influenced too. And eventually the
long-term rates may follow suit if the conditions are
favorable.
A high Bank rate, which influences the raising of
other money rates, means a dearth or contraction of credit.
A low Bank rate means cheap money or an expansion of
credit. It was commonly thought that the Bank rate was an
effective instrument Kto Increase or decrease transactions,
to raise or depress the price level, to enlarge or compress
the consumers* Income, to stimulate, or restrain the em
ployment of labour.”2^ Yet the effectiveness has been
doubted since the experiences of the Great Depression, In
the face of extremely low demand and low expectation,
business would not be encouraged by lowering interest rates,
2j? R. G. Hawtrey, A Century of Bank Rate, op. cit.,
p. 2l j - 6.
even to a aero level* A high Bank rate, on the other hand,
may not always result in an ideal contraction of business
activity. For one thing, a high Bank rate would attract
foreign funds which would make money plentiful in the
market and thus encourage lending activity. For another,
a high Bank rate makes it more costly to withhold stocks
of commodities from the market and tends to cheapen them
and to stimulate their flow into channels which require
them for manufacturing.^
The Bank rate was per cent on the eve of the
abandonment of gold. On that day (September 21, 1931), the
Bank rate was raised to 6 per cent where it remained until
February 18, 1932, for reasons of safety. And then steps
were taken to reduce it. On June 30, 1932, it was 2 per
cent where it stayed until August 2 1 $ . , 1939* The purpose
of keeping the Bank rate at a low level was to keep all
money rates down in order to reduce government burdens on
government securities as well as to help recovery.
Control over the supply of loanable funds. — Money
to be dear or cheap, is not only influenced by the Bank
rate, but also by the reserve conditions of banks. Thus
26 Ellinger, op. cit., p. 39.
36
the open market operations of the Bank of England are
another pillar of credit in the hands of the Bank of
England. Through open market operations, the Bank is able
to inerease or diminish bank reserves and reserve ratios,
and also sometimes change the composition of a bank’s
assets thereby influencing its credit policy. In Britain,
there is no legal requirement for bank reserves. The
effectiveness of open market operations relies entirely
upon certain ratios which each bank customarily keeps.
One Is cash ratio, which Is supposed to be about 10 per
cent, that is cash reserves — - till money plus balances
at the Bank of England — * is supposed to be 10 per cent
of the bank’s total deposit liabilities* Another is
liquidity ratio which is supposed to be 30 per cent, that
is, the liquid assets — - cash money at call and short
notice, balances on other banks, and bills discounted and
bought -— are about 30 per cent of the bank’s total de
posits. A 50 per cent of loans to deposits ratio i£ also
considered by the banks as important. These ratios are
not only viewed by banks as minima for the sake of safety,
but also maxima from the point of view of profitability.
Thus, there is a tendency for banks to keep these ratios
constant. The open market operations by the Bank of England
37
through these channels, affect the credit policy of the
whole money market.
Suppose the cash ratio of the banks temporarily drops
below normal; the banks replenish it ordinarily by*with
drawing funds from the discount market and forcing dis
count houses and brokers into the Bank, It is primarily
by the tendency in this direction that the Bank of England
gauges the credit needs of the market and of industry. Yet
1
in so far as open market operations are concerned, the
i -
Bank of England may take its own initiative.
The Bank operates through a broker who acts like any
other broker, but on behalf of the Bank, The operations
through a broker were once extended to the discount policy
in the late thirties. In the beginning of 1937, large sum®
of French balances were repatriated in a short time to
Paris from London. The Bank allowed it to be known that
any broker needing money from the Bank might sell his bills
at - g - per cent discount to the broker who acted on behalf
of the Bank. By this means the supply of money by the
Bank was automatically adjusted to the needs of the dis
count market without the market to pay the Bank rate for
this accommodation at a time when there was no need for
the market to be penalized.
38
Under review the Bank since 1932 to the end of this
period was on the whole operating on open market purchases.
As a result of the Bank’s open market purchases, the
bankers’ cash increased 15 per cent from 1932 to 19 3 3?
. from then until the beginning of the war only minor fluc
tuations took p l a c e . ^ 7 But increases in bankers’ cash was
not the whole amount of cash provided by the Bank because
a large portion of cash provided by the Bank was absorbed
pQ
;by hoarding and withdrawal from active circulation.
Although the cash ratio was important, the liquidity
ratio was even more important from the point of view of
an expansionary money policy. The latter was the ratio
the banks most faithfully watched. The liquidity ratio
was kept by adjusting their bill portfolios* The banks
.would not buy securities unless their total liquid assets
! ^
:were 30 per cent of the deposits. At times of a shortage
of short-term bills, the banks might even sell Investments
' ■ r i ' — r r ii - n- - - - - - - r .. - . . 1 . .
27 Morton, o£. cit., p. 259*
28 It was estimated that notes and coins in circul
ation increased 7if million pounds from October 1932 to
October 193i^. Of the Increased amount, only 17 million
pounds went to increase the till money of the deposit banks.
The balance, 5>7 million pounds, was withdrawn from the
banks by the public and was either hoarded or remained in
active circulation. An amount over 30 million was said to
be hoarded by the French public. See Ellinger, op. cit.,
pp. l69f. ___
39
so as to reduce the percentage of fixed assets --- invest
ment plus advances — - to the 70 per cent norm. They might
do so even if their cash ratio stood well above 10 per
cent. In case of a bill shortage the actions of the banks
were determined not by the cash ratio but the liquidity
ratio. Therefore, an expansion of bank cash would not lead
to credit expansion unless the supply of bills was great
enough to maintain the liquidity ratio .^9
Yet in the decade of the thirties, the volume of
commercial bills, foreign and domestic, declined, and
there was no hope for their revival because of the world
economic situation and the changed methods of business
financing. Consequently, the liquidity ratio of the banks
largely depended upon the sufficient supply of Treasury
bills. The Treasury assumed the responsibility to keep the
banking system liquid at its own expense and thereby was
to have the responsibility for the execution of monetary
policy.
*
Effects on the general economic recovery. — The cheap
money policy was the policy for the whole decade. Yet it
was after February, 1932, that the policy was most marked.
29 Morton, oj>. cit., pp. 2 i f . 0 - I j . 3 *
The Bank rate was persistently at 2 per cent; bankers cash
was made plentiful; Treasury bills were supplied suffi
ciently to fulfill the market need for expansion. Moreover,
the Budget was balanced so as to keep the people’s con
fidence; the authorities, as well, convinced investors
that interest rates were bound to fall to a,lower general
level by the simple device of persistence of the policy to
a reasonable degree. Because of consistence and the good
coordination of the policy, it was successful in so far
as keeping lower rates of interest in all markets.
Table II shows the activities of the Bank of England
in carrying out this policy; notes in circulation, together
with bankers deposits indicate the gross credit base. 30
Discounting and open market operations are also reflected.
Table III shows the banking conditions of England.31 The
cash ratio and the liquidity ratio are the key to under
standing the credit situation under the cheap money policy*
Table IV shows the effects of cheap money policy on
interest rates,32 ®he lowering of interest rates, no doubt,
30 Infra., p. 6l,
31 Infra., p. 62,
32 Infra., p, 6 3.
benefits the borrowers of which the government was the
largest single one* Indeed, it was the desire to reduce
the burden of interest on government bonds (war loans)
that was primarily responsible for the adoption of the
cheap money policy in 1932* Yet, an added consideration,
namely, to ease the depressed economy, was probably in
the authorities* minds* As a matter of fact, British
recovery from the Great Depression came along with the
cheap money policy without further governmental action,
as contrasted to the pump-priming with deficit financing
in the United States.
The question was raised, namely, "was the British
cheap money policy effective in promoting the recovery?"
Since the British cheap money policy was able to lower
interest rates, doubtlessly, it benefited industrial and
commercial borrowers too* Cheapening business costs, how
ever, does not necessarily bring about recovery. If demand
is lacking and the anticipation of business men is gloomy,
then the cheap money does little to encourage borrowing
and business activities. Even R. G. Hawtrey did not
attribute the recovery to the cheap money policy. He said;
Theoretically depression may get business Into a
state of deadlock, trades being so unwilling to borrow
that even very cheap money would fail to start revival.
••••• It is only in recent years that the theoretical
k . 2
possibility of a depression too deep and persistent
to be cured by cheap money has beeome a painful
reality. The return to cheap money starting February,
1932, failed to overcome the deadlock.33
An empirical study, undertaken by a group of econ
omists at the Osford University after the cheap money
policy had been in effect for five years, indicated that
the varying interest rates had a negligible effect upon
businessmen's decision to invest.3^1- other factors, such
as confidence and demand for their products were more
'influential. Furthermore, fluctuations in long-term invest
ment were (and are) thought by many to bring about a
business cycle. It was thought consequently that a cheap
money policy if it achieved its objective in lowering long
term rates of interest would promote recovery. Statistical
data showed that a large volume of new domestic investment
was carried on under this cheap money policy. The question
wi|s whether the low rates were the single outstanding
factor for this large volume of investment.
Walter Morton after making a careful study of British
33 Hawtrey, A Century of Bank Rate, op, cit., p. 251.
3b H. D. Henderson, ’ ’ The Significance of the Rate of
Interest;” J. E. Meade and P. W. S. Andrews, ’ ’Summary of
Replies to Questions on Effects of Interest Rates,” Oxford
Economic Papers, 1: 1-13; llf-31, October 1938.
43
recovery and cheap money policy reached a very fair con
clusion, saying ’ 'cheap money may have done a little good,
and that it certainly did no ham, but it still was not a
powerful force in the British recovery,"35 As a matter of
fact, the expansion of investment of Britain in the nine
teen-thirties started from the housing and construction
boom which was effected by the relative scarcity of houses,
the obsolescence of existing houses, the change in the
location of industry from the north to the London area,
and the development of new and the decadence of the old
industry.^ 6
Some Problems of Credit Control
The main problems of credit control may be readily
summed up in several categories, namely, the choice of
goal, the choice of means, the practical operations, and
the results. All these have been discussed previously.
Some of these problems seem to need a little more extensive
treatment in order to accomplish the task of this study.
This section is assigned to analyze some points in more
detail which were not touched previously.
35 Morton, ©£. cit., p. 317•
36 Ibid., pp. 318-31*4*
The goal. -- The goal of the credit policy in this
period was, as has been said, to reduce the interest burden
of the government as well as to promote recovery. The sig
nificance of the reduction of the government burden has
been neglected by most reviewers and critics. The reduction
of the interest burden, on the one hand, made a budget
balance possible without cutting government services. On
the other hand, it did not lead the way for more public
debt and thus showed the conservative policy of the govern
ment. The fact that the government restricted its expendi
tures and did not undertake a large scale public investment
program brought confidence from the "City of London" and
private investors. The Labor Party, in viewing the finan
ciers* favorable attitude toward the conservatives, urged
stricter controls over the whole financial system. Laborites
even claimed that the financial crisis of 1931 was created
by the "City" and Wall Street. It was believed that the
next time the Labor Party would be in power, it would
impose more and formal controls over the credit system,
merely for political expediency, if not for reasons of
their philosophy or their planning program.
The goal here set for British monetary policy was not
officially declared by any authorities anywhere. Indeed,
k$
the official statement of the monetary policy in the world
monetary conference in London, July 1933* was that hence
forth the currency should be managed with a view to
stabilizing the price level. It was believed that the
fluctuations in price levels were the eause of the business
cycle. The device used was to stabilize the quantity of
money, of which the volume of bank credit was of most
importance.37- Yet in practice, the British monetary policy
in that period did not undertake to stabilize the volume
of bank credit; but, on the contrary, made it as plentiful
as possible to domestic borrowers*
Before abandonment of the gold standard, the credit
policy, especially carried through manipulation of the
Bank rate, was always directly influenced by International
gold movements. Indeed, international considerations over
shadowed the domestic requirements on the belief that the
Bank rate was more effective on international gold move
ments than the domestic credit situation. Since sterling
was unredeemable in gold and the operations of the Exchange
Equalization Account came into effect, the credit policy
37 J* E. Goodbar, Managing the Feople*s Honey (Hew
York University Press, 1935)» PP« 2^3-2$2.
I i 6
was released from external considerations, and a purely
domestic policy was established. With the result a finan
cial nationalism was formed. The position of London in
world finance was at the same time changed. Britain went
into a new era.
Adequate information. — Information about economic
conditions is vital to any economic control. An appropriate
credit policy also needs sufficient Information about
economic and monetary conditions. Data for showing changes
in business activities and giving signals for eoming con
ditions Is, of course, fundamental. Even assuming this
data is available, which evidently was not the ease In
Great Britain, data on the current credit situation is
also needed.
The Treasury probably got most of its information
from the Bank of England, for the Governor and Deputy-
Governor of the Bank called upon and reported to the
Chancellor about twice a week; and communications between
the Bank and the Treasury were made even several times a
d a y . The Bank of England in turn got information’ from
four sources': (a) Its own balance sheet; (b) direct con-
38 Ellinger, op. cit., p. 30.
kl
tacts with the market — - chiefly through bill brokers or
discount houses, as has been noted; (c) Personal inform-
i ation contributed by its members of the Court Directors,
who were prominent persons in industry, commerce and
finance; and (d) data provided by the market, chiefly the
banks. That the Bank got valuable information from these
sources was well-recognized. The question was whether
their Information was sufficient. At any rate, criticism
; over the data provided by banks was frequently raised.
The statistical data legally demanded was extremely
scanty. However banks voluntarily furnished several types
of data: One was weekly returns which were based on a
specific date whieh the banks might choose; a monthly
statement based on a day of the week had been published
by all London clearing banks since 1921; a half-yearly
balance sheet and a yearly statement were also provided.
Yet all this data was neither uniform nor comprehensive.
The Macmillan Committee recommended a form of statement,
to whieh some items the banks did agree. Sir E. Harvey,
then the Deputy Governor of the Bank, demanded that a
fuller information be given to the Bank and the public,
in his testimony given to the Macmillan Committee. The
banks agreed to publish aggregate figures concerning
certain items, like distribution of the “Cash1 1 item between
till money and balances at the Bank of England, and the
division of deposits between current and deposit account.
Meanwhile they objected to providing information about
i
certain items, like the amount of the unused overdraft
,facilities and the distribution of holdings of bills be
tween commercial paper and Treasury bills*
According to the Bank of England*s Statistical
!summary, the banks supplied certain figures, such as (a)
i the average amount of till money, (b) the volume of de
posits and current accounts respectively, (c) the value
of cheques drawn, and (d) classification of loans and over
drafts* The Midland Bank gave the distribution of bills
and of investment in a monthly statement while Lloyds gave
it in a half yearly balance sheet. Certain items, like
total acceptance and foreign balances and assets, were
known to be available to the Bank of England although
they were not published.39 To read all the data, two things
must be borne in mind. First, the method of book keeping
was different in almost every case. Certain of the banks,
for instance, showed their balanee sheets after eliminating
39 Balogh, op. cit., p. 28-33*
certain "impersonal accounts, ’1 such as internal reserves
against bad or doubtful debt, and, on the other side of
balance sheet, profits, unclaimed profits, etc; Others did
not "deflate” the balance sheet in this way.^ Second,
data shown was not the average over the period, but as of
a certain day and this ”making-up day” was different with
different banks; consequently considerable "window dress
ing" took place.
Gash reserves and window dressing. -- As has been
shown, the figures of cash published by banks were as of
the selected day of a week. The day selected was called
"making-up day;" it was not identical for all banks A
bank might build up its cash just for publication purposes
on a specific day by calling short-term loans from brokers
who would apply for loans from other banks. The figures
published were never the actual figures on the basis of
which the policy of the banks was determined by the manage
ments.
I 4.O Idem.
Ipl There were four different days among the Big Five
Berclays Monday; Lloyds, Tuesday; Midland and National
Provincial, Wednesday; Westminster, Thursday. See Balogh,
op* cit., p. 4 5.
$0
Careful statistical studies showed that the amount of
window dressing was considerable and unstable; thus, the
)
actual cash positions of the banks were hard to know from
the publications.
The Bank of England knew no more than the others
about the cash positions of the banking system before 1931*
for the Bank new only the "Bankers deposits" ("balances at
the Bank of England"); the banks did not report their till
money except at the end of a half year; and the ratio of
the till money to total cash reserves was fluctuating.
In such a case, credit control presented considerable
difficulty. However, several steps for improvement had been
suggested. One was the elimination of window dressing;
figures published were to represent the dally average.^
This was not adopted until after World War II. Another was
;the establishment of an agreement between the Bank of
England and the banks on the cash ratio which should be
rigidly adhered to by the banks; and the ratio should be
varied only through the agreement. It is not known whether
there was ever a conference or agreement on this matter.
I 4 . 2 Sir Ernest Harvey suggested before Macmillan
Committee; Balogh 0£* cit., p. IJ 7.
51
Yet, according to published figures, the banks for a long
time customarily kept the cash ratio constant and thus
left the Bank of England free to manage credit. Other
improvements were made by the banks. The ratio of till
money to total cash reserves was kept down between i * . 6*2
and 1^9*3 P©** cent for the years 1932 to 1938.^-3 This
fairly stable low ratio 6f till money to total cash reserve
> •
rendered valuable help in establishing confidence in the
Bank of England and in exercising the power of credit con
trol by the Bank. Par more important was the fact that the
banks did currently notify the Bank of England concerning
their till money after 1931*
The constant ratio of cash to deposits was true only
when it was referred to over a period, a month or so, or
. referred to the banking system as a whole* There were
variations in the ratios of individual banks. These
variations came from the policy of the banks to use their
cash as a residual item. Temporary changes in cash ratio
could occur whenever they experienced a shortage of the
liquid assets necessary to build up the desired combina-
tionof assets* Another cause of the variations was the
k-3 Ihld. • P. i|-l
£2
time lag which was (and is) necessary for a general per
meation throughout the banking system of the effects of
a change in the monetary policy of the central Bank,
Investments of the banks. — The item, Investments,
in the balance sheets of banks is the money invested in
gilt-edged securities, most of which are government bonds.
As shown in Table III the investments of London Clearing
Banks doubled in amount from 1931 to 1939* “ Ek© chief rise
came In 1932 when the banks were appealed to by the
government to cooperate in the War Loan conversion program.
The banks, besides lending money to their customers to buy
the conversion bonds, bought a large sum of them. By 1933
investments had increased to 2? per cent of the total
deposits and they increased slightly thereafter.
While the holdings of government securities increased,
the advances and overdrafts declined during the same period.
An illusion thus often occurred which concluded that the
cheap money policy benefited the government only. It should
be noted, however, that there were no new government issues
at that time. All increased holdings were from existing
Issues which had already floated into the hands of the
public or the banks. The purchase of existing government
issues by the banks helped the- cheap money policy to
53
benefit industries and trade, through three channels.
First, the yield of the bonds was forced down as their
price was forced up by the increased demand from the banks
and the lower yield enabled industry to make issues of
long-term capital at a lower rate of interest than would
otherwise have been the case. Second, the purchase of
government securities by the banks from the public freed
the capital tied up in these securities and thus made the
capital so freed available to the owner-industialists to
repay bank loans or to invest. Third, the government
security-owners who sold their holdings, if not actively
angaged in business themselves, would buy, with the pro
ceeds, new or existing industrial issues
Moreover, the Increase of government security holdings
were involuntary in the sense that they were the result of
the situation. When the demand for advances declined and
the loanable funds increased, the banks, seeking to employ
their funds in a more profitable way than short-term loans,
naturally tended to Increase their investments. The history
of this period probably is typical of any cheap money
policy designed to remedy the depression.
1*4 Ellinger, op., cit., p. 164.
Sk
Loans and advances of the banks* — That the banks»
advances declined in absolute amount as well as in per
centage of deposits, was a fact as shown in Table III*
Banks sometimes were criticixed by some persons for pro
longing the depression by retarding the speed of recovery.
The Laborites even advocated the nationalization of banks*
,A careful examination reveals this criticism to be ground-
'less*
' It was true that the banks, having learned their
lessons from past experiences, had formulated certain
principles, such as, flexibility, liquidity, adequate
distribution of risks, Inadvisability of lending long and
borrowing short, and the maintenance of adequate reserves
for all doubtful debts. The bank managers, however, denied
in the Macmillan Committee Evidence that the application
of their principles had ever resulted in a refusal of
legitimate and desirable assistance to trade and industry.
They claimed that even in times of stringency of credit,
caused by the bank's percentage of advances to deposits
being high (say, over $0 per cent), preference had always
been given over other demands for credit to sound industrial
and commercial applications. Moreover, it had been said
that the banks applied their principles less rightly In
times when there was a__sma.ll demand for loans and _when
55
their ratio of advances to deposits was below the normal
(about 50 per cent)*^ Many banks, notably the Midland
Bank, had even followed a procedure whereby the turning
down of an application for an advance was made so difficult
that.only the genral managers of the head office had the
right to do so*
It is true that the interest rate on advances was
normally | to 1 per cent above the Bank rate, but when the
Bank rate was 2 per cent, the advances rate was If to 5 P®**
cent* Many thus said that the banks reduced the demand by
high interest rates in a cheap money period. It is perhaps
profitable to recall that the rate on advances prior to
the depression was not only agreed on by banks to maintain
^ to 1 per cent above the Bank rate, but also to maintain
a minimum of 5 P©i* cent which was the highest during the
cheap money period* There were many reasons that prevented
a lowering of the rate, such as the risk involved, the
reserves needed, the heavy over-head costs of the banks,
etc* And it was doubtful that the advances would be in
creased much if the rate was lowered. At that time, the
demand for advances was decreased by lowered prices, and
k$ Ellinger, op. clt*, pp. llfJjf**
56
increased liquidity of business. Meanwhile the supply of
funds was increased by other institutions such as insurance
companies, building societies, ete.^
Another criticism on the inadequacy of credit rendered
by the banks was the distribution of their credit among
various borrowers. It was discovered that the banks* loans
for financial purposes, the stock exchange, etc. were in^
creased. ^7 That the banks in granting credit were tied, to
a considerable extent, to their past histories and her
itages, was commonly known. The inadequacy of long-term
capital facilities for industries and commerce was known
long before the Macmillan Committee pronounced it. All
| i Q
these situations prompted a qualitative control of credit5 .
The proposal of qualitative rationing of credit
brought about two things only; the publication of the
clearing banks* classified advances,^9 and the establish
ment of special Institutions for long-term finance which
I 4.6 Ibid., pp. l£6-l60; Morton, ©|>. cit., pp. 26lf.
i j . 7 Balogh, op. cit., p. 62.
1 4 -8 Ellinger, op. cit., pp. 233f.
1 ] _ 9 The Macmillan Committee Report published for
19301 s. The Bank of England, Statistical Summary, Published
for 1936. Ibid., p. 151. ----------
will be discussed in the next5 paragraph. Credit control in
that decade was still on the quantitative side.
Special credit facilities. — Althoug the qualitative
rationing of credit was still left to the discretion of
the banks, some special needs for credit had been noticed*
Consequently some of them were provided for directly by
'the government; some by the government and the Bank of
England, assisted by the banks; and some were met by the
Bank of England alone.
Under the Agricultural Credits Act of 1928, the Mor-
gage Corporation was formed for the purpose of making loans
on mortgages of agricultural land and making loans under
the Improvement of Land Acts for agricultural purposes. The
Corporation commenced with a guarantee Fund of 6^0,000
pounds, subscribed by the banks; and 5#00°>000 pounds
debentures* The shareholding banks acted as agents for the
Mortgage Corporation and received applications for long-
©
term credit loans. The advances under these credits, if
approved, were made by the Corporation, through the banks.
The Act also provided short-term credit for farmers. A
farmer might get loans from a bank by making a charge in
’..... ’ ©V" ‘
favor of the lending bank on 'all or any of his faming
stock and other agricultural assets belonging to him, as
58
security for any advances to be made. The Act and the
Corporation so far seemed very useful in providing agric
ultural credit* The total of mortgage loans completed up
to March 31st, 19^-2, was 13 million pounds secured on
properties, agricultural and heritable valued at 21 million
pounds
The Bank of England had taken a leading part in
providing the special needs of industries. The Bank or
ganized a subsidiary company, the Securities Management
Trust, Ltd., of which the entire capital shares were held
by the Bank. The principal objective of the Trust was to
aid basic industries to reorganize if necessary. It provid
ed experts to assist industries on technical, legal* ac
counting, and labour matters. Under the Trust, many in
dustrial companies were nursed back to prosperity, such as
Armstrong, Whitworths and Beardmores.^*
Through the Securities Management Trust, Ltd., the
Bank of England organized the Bankers Industrial Develop
ment Company, Ltd., of which the share capital was sub-
50 Kenneth MacKenzie, The Banking Systems of Great
Britain, Prance, Germany, & The'"Unit‘ ed State of America
(London: Macmi 11 an, I9I 4 . 7 ), pp. 1jJ5-52.
51 Ellinger, op. cit., p. 18*
59
scribed by the joint- stock banks, the merchant bankers and
the Securities Management Trust. The last named had a
majority of the voting rights. The Company’s principal
objective was to help carry out approved rationalization
schemes of basic Industries. It assisted an industry, if
the plan was approved, in obtaining the necessary capital
through existing channels, that is, through banks and other
financial houses. Many industrial rationalization plans
have been helped by the Company, such as those of the
National Shipbuilders Security, the Lancashire Cotton
Corporation, Stewarts and Lloyds, and John Summers and
Sons, Ltd.^
The Bank of England also acquired, in 1930, a large
shareholding in the United Dominions Trust, a hire pur
chase financing company. In 193^» Credit for Industry, a
subsidiary of the United Dominions Trust was promoted to
provide long-term loans for small and medium-sized concerns.
In order to promote exports under uncertain Inter
national relations and fluctuating exchange, the government
established an agency, under the Board of Trade called the
Export Credits Department.'The business of the Department
52 Jones, op. cit., p. 38I 4. . MacKenzie, op. cit.,
pp. l£f.
6o
was to guarantee the credits extended to foreign buyers
by British exporters. During the four years, 1933-1937» the
; operations of the Department increased in volume from 7w
million pounds in 1933-3^ to over 35 million pounds in
1936-37Under government guarantee, the banks were
prepared to make advances to their customers who applied.
; Such advances were usually made to the extent of 75 per
cent of the face value of the Bill of Exchange drawn
, against an export of home manufactured goods.5k-
53 Morton, op. cit., p. 269.
MacKenzie, op. cit., p. 3!^.
TABLE II
SELECTED DATA ON YEAR END BALANCE SHEETS OF
THE BANK OF ENGLAND, 1930-1945
Last
Wednesday of
the Year
million pounds
Notes in
Circulation
Discount
and
Advances
■ Government
Security
(Banking
Dept.7
Other
Securities
(Banking
Dept.7
Bankers
Deposits
1930 358.6
8.7
mm
65.5
1931
354.8 10.8
- -
64.7
1932 359.5
12.8
- -
8I.3
1933
371.2 11.8
- -
99.9
1934 378.7
1.8 -
-
100.3
1935 414.7 9.6
- -
96.7
1936 463.9
9.8
- -
96.2
1937 505.3 9.2 114.6 20.9 120.6
1938 504.7 28.5 69.2
21.5
101.0
1939
554.6
4.3 151.5
24.6
117.3
1940 616.9
4*0
178.5
20.6
135.7
1941 751.7 6 .4
240.6 27.2 219.8
1942 923.4 3.5
242.2 25.7 223.4
1943 1,088.7 2.5
292.0
15.9 234.3
1944
1,250.2
5.1 305.1 12.3 260.7
1945 1,325.9 7.1
272.1 23.2 238.1
Sources: League of Nations, Money and Banking. 1939/40. p. 82.
League of Nations, Money and Banking. 1942/44, p. 193*
The Economist. Banking Supplement. October 27, 1945, p. 5*
^Unavailable.
TABLE III
SELECTED DATA OF JOINT STOCK
BANKS IN ENGLAND AND WALES
1930-1945
Years
end
million pounds
Cash 3111
Discount
Loans and
Advances
Investment
Government bthers Total Deposits
1930 192 264 963 329.3
1,976.3
1931
132 256
919 353.2 1,397.0
1932 137
303
344 464.3 1,923.4
1933
212
354 759 577.3
2,013.6
1934
212 230
753
636.3
2,061.9
1935 215
266
769 653.7 2,172.7
1936 244 365
691.6 2,329.1
1937 361.9 232.5
930.6
533.1 56.9
2,343.2
193^ 352.5 234.4 977.7 571.7 31.2 2,263.3
1939
334.2
334.4
994.0 547.3 34.3
2,419.3
1940 445.3
530.0
903.3
712.1 31.3 2,777.6
1941 516.3
931.6 302.7
943.6
71.4 3,306.5
1942 559.7
1,094.3 773.0 1,071.3
69.3
3,601.4
1943 617.7 1,441.3 741.7 1,101.3 71.5
4,512.2
1944
1945
Source: League of Nations, Money and Banking 1942/44
The Economist Banking Supplement, October 27, 1945, p. 3.
o
TABLE IV
MONEY RATES AND BOND YIELDS, 1930-1945
(Years Average)
| Year
i
i
Bank Rate Treasury Day to
Day Money
Commercial
Bills or
Acceptance
Consols
(2 1/2
per cent)
Industria
Bonds
' 1929 5.50 5.264
5.26 4.60
5.73
' 1930 3.42 2.4$4 2.57 4. 4$ 5.39
; 1931 3*93 3-593
3.61
4.39 5.73
. 1932 3.01 1.436 1.37 3.76
4.$7
1933
2.00
.591 .69 3.3$
4.61
1934
2.00
.727 .62 3.OS 4.12
, 1935
2.00 .546 .5$ 2.91
3.33
1936 2.00
• 5$3
.60
2.95 3.92
' 1937
2.00
.563 .53
3.31
4.03
193$
2.00 .611 0.$1
.63 3.41 3.95
1939 2.27 1.32 0.96 1.22 3.72 4.23
1940 2.00 1.03 1.00
1.04 3.41 4.45
1941
2.00 1.01 1.00
1.03 3.13
4.26
1942 2.00 1.00 1.02 1.03 3.03 4.04
1943
2.00 ’ 1.00
1.04 1.03 3.10
3.91
1944
2.00 1.00
3.14 3.35
! 1945
2.00
0.9 2.92
Sources: League of Nations, Monetary Review 193$-39. p. 145J
Money and banking 1942744. P* 74*
o
w
CHAPTER III
BRITISH CREDIT CONTROL
DURING WORLD WAR II
The modern wars between countries are so highly
developed and organized, they have been frequently termed
“total wars". The term indicates the comprehensiveness of
mobilization of all natural resources, labor forces, or
ganizations, methods, and instruments, which are available
to a country for winning the war, under the direction of
central authority. So, the modern war economy is a planned
economy. This is one of the reasons why the experiences of
World War II are vital to the post-war British economy In
whieh the Labor Party has experimented with peacetime
planning. Another reason is that many situations In the
post-war economy, and accordingly many measures have their
origins In the war economy.
The War Time Controls and Credit Policy
Direct controls versus financial control. — Tradi
tionally, wartime economic problems in Great Britain have
been thought of In terms of financial problems. In past
conflicts the primary concern has been how to raise money
to finance the war. At the best, the repercussive effects
65
:of financing a war were taken into consideration. There
were, thus, many admirers of the British tradition, which
goes back to Gladstone and even Pitt, who advocated their
policy: "Fay for your wars as you fight them and pay in
the frankest way; put up the taxes, keep down the deficits,
keep down the nation,*s debt."-*- This policy was firmly
, attempted at the out break of World War I. As the War went
on it was realized that financial measures alone could not
successfully curb inflation; nor could they effect a
desirable allocation of resources. Before the close of
. World War I, a comprehensive policy to control inflation
was definitely shaped.^ Direct controls, such as rationing,
took place, not only for the blocking of redundant pur
chasing power, but also to ensure "fair shares" of scarce
essential commodities. Yet the financial measures were still
presumed to shoulder the most responsibility.
The growing significance of direct controls in war
planning, may be seen in a memorandum issued by the British
Treasury in 1937 entitled The Course of Prices in a Great
1 W. K. Hancock and M. M. Gowing, British War
Economy: History of the Second World War, tinlted Kingdom
Civil Series (London: H. M. Stationery Office, I9E9T,
p.
2 Ibid., p. 12.
66
, War, of which the conclusion reads:
The real conclusion is that the problem of banking
and general financial policy in tome of war and the
problem of controlling profits and the price of Labour
(including remuneration for personal services of all
kinds) must be dealt with together. The limitation of
wages is probably more important than the limitation
of profits, since all other methods failing taxation
can be applied more easily to correct inflated profit
than to correct inflated wage payments* The problem is
to reduce the volume of money in circulation so as to
correspond to a decreased supply of commodities at the
same time as we Increase the amount of employment and
services called for from the Nation. The programme
must include fixation of wages and prices so as to
reduce to the smallest possible dimensions the demand
for additional credit; it must include a strict control
of imports and rationing of consumable goods so as to
reduce possible objects of expenditure, and lastly, it
must seek to bridge the gap that yet remains between
the national revenue plus national savings and the war
expenditure by increasing taxation and borrowing
additional funds without the artificial creation of
credit.3
This program was the guiding principle of British
economic control in World War II. Yet, the British govern
ment at the outbreak of the war thought of “financial and
economic plans'* and still put the accent on the first word.
It was not until the new United Government,in which both
the Conservatives and the Laborites took part, was formed
in May, 19^ 4-0 that the order of words was shifted and
"economic" was put in front of "financial" by the new
3 Quoted from W. K. Hancock, op. cit., p. l j . 8 .
government. In 1939 the Chancellor of the Exchequer, alone
among the ministers concerned with economic affairs, had
a seat in the War Cabinet. He was also chairman of the
; Ministerial Economic Policy Committee. Prom May, 19^0* to
the end of the War, the Chancellor of the Exchequer did
not occupy the chairmanship of the Economic Policy Com
mittee nor did he have a seat in the War Cabinet; but
there was a strong representation in the War Cabinet of
Ministers who were charged with the main burden of mobiliz
ing and allocating the nation’s physical resources, such
: as the Minister of labor, the Minister of Supply, the
President of the Board of Trade, etc.^- It should be repeat-
ly noted that the British government did not abandon the
anti-inflation policy. Indeed it carried out that policy
: more effectively than any other government had done before
It. The emphasis, however, was shifted from financial to
direct controls.
Survey of direct controls. — The direct controls
were rather comprehensive. The government asked that prices
not be permitted to exceed the current prices of August
1939 in keeping with the Prices of Goods Act of 1939.
Prices were more effectively controlled, however, under the
i | - Ibid., pp. 9®"95*
68
Goods and Services (Price Control) Act of July, 19^1« The
prices of essentials could not be raised except when just
ified by cost increases and then only with the permission
of the respective authorities. Labor was first controlled
under the Control of Employment Act of September 1939•
Later more effective controls were instituted under the
Emergency Powers (Defense) Act of May, 19^-0, which en
trusted to the Government unrestricted power "for requiring
persons to place themselves, their services and their
property at the disposal of His Majesty.”^ Thus, the Minis
ter of Labor and Hational Service had the power to direct
any person in the country to perform any service which that
person was In the opinion of the Minister, capable of per
forming. He might also prescribe the remuneration and con
ditions of such services and hours of work. According to
this Act, a series of special Industrial Registration
Orders were issued. Under the Essential Work (General
Provisions) Order of April, 19^1» permission of the Ministry
was required before a worker could quit or be removed from
a job listed in the Minister's Schedule of Reserve Occup-
5 Quoted from Hancoek, op. cit., p. 150.
69
of Reserve Occupations. Wages were kept in bounds, not by
authoritative action, but by convincing labor and the
union leaders of the need for cooperation and by keeping
the cost of living index constant through subsidies. Raw
materials were allocated by ministers and committees,
according to priority through various methods and by the
import program. In many cases, the government purchased
the raw materials abroad and then distributed them. Many
products were prohibited; and many others were permitted
only under license from the Board of Trade. Concentration
on plants and products were directed under a concentration
of production plan. Many essential industries which were
encouraged to increase production were operated by the
government; others, were financed by the government.
Rationing of consumers goods was extensively and stringent
ly operated.
Effects of wartime direct controls on credit. — All
these direct controls have important effects upon the money
market, reducing the commercial and consumers* demands for
credit. Controls over materials, labor and outputs reduced
the credit requirements of business, and these credit
requirements were further reduced by funds financed by
70
the government.& Price ceilings and the rationing directly
diminished the demand for consumer credit and indirectly
contracted the demand for commercial credit by reducing
the volume of business transactions. Direct procurement
and distribution by the government tended in itself to
reduce the credit needs for distribution.
These direct controls, therefore, practically con
trolled the credit market in so far as the demand for
credit was effectively curbed. It followed that they, on
the one hand, supplemented the orthodox eredit controls;
but, on the other hand, supplanted them, or at least made
them credit controls a secondary and easy measure simply
because direct controls are more effective in controlling
inflation and the whole economic activity*
For example, in the case of the inflation threat
alone, the British government, as other belligerent govern
ments, was forced to use every means available to meet the
6 Besides the government plants and firms which
were directly financed by the government, the private firms
carrying war contracts could ask for monthly progressive
payment whereby the government extended funds, monthly,
on work in progress under war contracts. Such payments
ran as high as 90 P©** cent of total expenditures incurred
by a contractor during a month. See Higgins, op. cit.,
p. i f . 6.
71
problem throughout the war. It was estimated, for instance,
that the British government was faced with an “inflationary
gap” of about £00 million pounds during 19^ 1 - 1.^
The financial measures* — For purposes of financing
the war and curtailing inflation, the British government
followed its traditional preference to tax rather than to
borrow, imposing taxes up to excessive limits. As Table
V. shows the total tax revenue receipts increased from
39 Pe : r * cent of the total expenditures In 19^0 to E>9 per
i
cent in 19i}-5» And the taxes were as much as i j _ 0 per cent
of the national net income in 19^* Moreover, the tax
figures shown were only those of the central government.
The local rates and other municipal taxes were not Included.
In addition to taxes which took a large portion of
, purchasing power from the citizens, the British government
also undertook a saving compaign to absorb the excessive
purchasing power. The National Savings committee went In
action again In 1939 with twenty-three years of continuous
history behind it. The National Savings Movement con
tinuously spread into homes, offices, factories and schools
all over Great Britain. Saving banks and the Post Office
7 Hancock, op. cit., p. 325.
TABLE V
BRITISH NATIONAL INCOME, AND CENTRAL GOVERNMENT
EXPENDITURE, REVENUE.AND BORROWING
1940-1945
'
Calendar
Year
National
Net
Income
million pounds
Expenditure Revenue Borrowing
Tax Revenue
as percentage
of National
Income
Tax Revenue
as per
centage of
Government
Expenditure
193S 4,707
1,040
893 147 19
86
1940 6,066
3,584 1,397 2,187 23 39
1941
6,978 5,052 2,172 2,880
31 43
1942 7,652
5,457 2,635
2,822
34
48
1943 8,115
6,047
3,139
2,908 38 52
1944
8,310 6,078 3,328 2,750 40
55
1945 8,355
5,583
3,293
2,290
39 59
Source: W. K. Hancock, British War Economy, pp. 75, 119, 200, 347, 34$*
-FO
72
Saving Bank were instructed to attract small savings in
order to draw the genuine savings of the citizens. The
Treasury issued two types of savings bonds in small de~
' nominations and in an unlimited amount, namely, National
Savings certificates and Defense Bonds. The Treasury's
borrowing policy was to borrow as much as possible from
the public outside of the banks.
Credit control was but a part of the financial
measures that were instituted for winning the war said to
minimize its undesirable effects. All the economic and
financial measures, coordinating and interacting, were
integrated in a whole program in which the credit policy
played only a small part.
The Task of Credit Policy
The importance of credit in an economy lies in the
fact that it represents the nation's loanable funds, which
are in part the people's savings and foreign funds, and
,in part the creation of the banking system. It may be used
to purchased capital goods or consumption goods. To control
credit means to control the loanable funds and/or more
exactly to control the purchasing power. It is obvious that
the credit needs in war are quite different from those of
a peacetime depression. As shown previously, there was
73
insufficiency of demand to borrow on the part of private
enterprise and citizens in times of depression and the
}
i
- ■ British government did maintain the tradition of a balanced
budget in most of the thirties. In time of war, there is
: a rapid and great increase in demand for borrowing. The
government needs to borrow huge sums, not to mention the
increased demand for business borrowing, which if uneon-
. trolled, results from increased business activities, arising
from government spending. So In the depression, the credit
policy must be so designed as to stimulate borrowing. To
make the loanable funds plentful at low interest rates is
proper and necessary. Yet In order to meet the increased
needs of government in war, the same policy is also neces
sary. A cheap money policy, therefore, is basic in both
periods, although the aims are different.
; There is still a distinction between the cheap money
policy in depression and that in wartime. During the
. depression the cheap money policy aimed to encourage
business borrowing whereby the economy would be revived.
So there was no qualitative allocation. During the war, the
government needed to borrow; meanwhile the aggregate demand
for good3 exceeded the supply; therefore, the money had to
be made cheap on the one .hand, and private borrowing had
7k-
to b© curbed in order to make the funds available to the
|government on the other hand. In short, the cheap money
policy in the depression dealt with deflation only, whereas
in the war it had to deal with the inflation.
There are two component parts of credit policy to
deal with inflation, namely, curbing the demand for borrow-
■ ing and directing the supply of loanable funds. The task
of controlling the demand for borrowing was largely and
effectively done by various direct controls, as has been
said previously. It remained for the credit policy to
‘direct the supply into a desirable channel.
To sum up, the task of eredit policy in Worl War II
was to make the money cheap and plentiful to the government
and not to the civilians. This was done by means of re
strictions on borrowing and cheap money in the money market.
; Restriction of Non-essential Borrowing
The restriction on new capital issues. — An embargo
on new capital issues was imposed at the very beginning of
the war. One of the provisions in N. 6 of Defense (Finance)
Regulations under the Emergency Power Act read as follows:
Subject to such exemptions as may be granted by
order of the Treasury, it shall not be lawful, except
with the consent of the Treasury and In accordance
with such conditions as the Treasury may impose to make
7S
an Issue of capital in the United Kingdom, to make in
the United Kingdom, any public offer of securities for
sale or postpone the date of maturity of any securities
maturing for repayment in the United Kingdom.
Subject to such exemptions as may be granted by
order of the Treasury, it shall not be lawful to issue
any prospectus or other document offering for subscrip
tion, or publicly offering for sale, any securities
which does not include a statement that the Gonsent of
the Treasury has been obtained to the issue or offer
of the securities.®
According to this Regulation, the issues in excess of
5,000 pounds in any one year had to be approved by the
Treasury. And "issues'1 were defined broadly, to include
any one who
(a) issues any securities whether for cash or other
wise, or (b) receives any money on loan on the terms,
or in the expectation, that the loan will or may be
repaid wholly or partly by the issue of any securities,
or by the transfer of any securities issued after the
making of the loan.°
Blanket exemptions were provided for issues involving
no new cash subscriptions or no postponement of the existing
securities (such as those made only to amalgamate two or
more companies or to rearrange a firm*s capital), and
issues to any government department.
A Capital Issues Control Committee, composed of re-
8 Quoted from A. Philip Woolf son, M Day; Banking
and Finance (Cambridge, Pradv Publishing Co., lQli.0).
p. 7b:
9 Idem
presentatives or the business organizations most concerned
with the capital market, was set up under the Treasury to
review applications for permission to float an issue. The
Committee made recommendations to the Treasury, which
approved or refused the issue based on the Committee *s
recommendations. The attitude of the Treasury was made
known that they would generally approve issues only for
defense purposes or for the maintenance of food supplies
Therefore, only those concerns in these prospective fields
could apply for issues and the majority of actual applic
ations (as distinct from inquiries) were approved.^
Meanwhile, central government departments drastically
cut their programs of civilian capital expenditure and
local authorities were instructed by the Treasury to do
likewise. The effectiveness of the restriction on new
issues may be seen from the figures released by the Midland
Bank. The total home new issues in the London market from
1940 to 1944 were only 23.1 million pounds in contrast to
92 .7 million pounds in 1938* and 111.7 million pounds in
1946; the total overseas issue were 3*4 million pounds from
194-0 to 1944 while in 1938 it was 25*4 million pounds, and
10 Hancock, op. clt., p. 173*
11 Higgins, op. eft., p. 47_.-
77
in I9I 5 . 6, 19*1 million pounds.^
Restrictions on Bank loans. — After the outbreak of
war, the Treasury, besides the Statutory Rule and Orders,
issued many circulars to the banks which contained "sug
gestions for guidance." The banks were requested:
... to view their loans and advances as an in
strument in the vigorous and successful prosecution
pf the war, to be chary of extending accommodation,
however well secured, which would support unnecessary
production and consumption, and, on the other hand, to
turn a lenient eye to demands for credit required for
essential purposes. ... Wherever a given programme is
checked or halted by lack of credit, the machinery is
there for making the banks aware of the need, and, if
necessary, pointing the finger of duty to them.
The negative aspect (of Orders and the specific
guidance) has been to arrest almost completely the
grant of fresh personal and investment advance. ... The
positive aspect ... has been to give rise to a very
considerable increase in bank advances to Government
contractors and subcontractors. In many cases the help
given by the banks In such directions has involved the
grant of loans that would have been deemed thoroughly
unsound by customary banking standards. Small firms
engaged on Government contracts have been granted loans
rising to quite fantastic ratios to the firms’ own
resources.-^
These requests were not "Orders" but "suggestions."
Yet because of traditional loyalty, sovereign power and
patriotism, the "suggestions" were as effective as "Orders."
12 Ibid., p. 59.
13 The Economist Banking Supplement, November 16,
19l | - 0, p. i j . .
?8
t
' The banks expressed publicly their willingness to follow
these suggestions*-^- Under these requests to restrict
advances to the non-essential borrowers, the non-essential
i trades or industries, the personal advances and the hire-
purchase finances (i. e., consumers credit) were almost
completely arrested. Financial loans, such as stock ex
change loans to underwriters of securities issues, were
drastically reduced* Even borrowing for the purpose of
I buying war bonds was considered to be for a "non-essential
purpose" after February, 19^-2.^
As a result of these restrictions on loans for non-
essential purposes, together with many direct controls
l l | - The late Hon. Reginald Mckenna of the Midland
Bank said in an annual report: "It is in this diversion of
purchasing power from the people to the government that
the banks can give practical assistance. They can restrict
loans for non-essential purposes, and thereby affect the
double object of curtailing purchasing power for purely
civilian purposes and increasing their own capacity to lend
to the state and to government contractors." To the same
effect was the statement of Mr. Edwin Fisher, chairman, of
Barclays Bank Ltd.: "In times like the present a special
duty is imposed upon us to see what, consistent with pru
dent banking practice and having regard at all times to the
legitimate interests of our customers, the credit resources
of the country are primarily directed toward financing
those activities which would most assist the national end
eavor." See Woolfson, op. cit., p. 7 6.
15 Higgins, op. cit., p. I 4 J4 . .
79
: and government direct financing to essential industries,
i
i the demand for bank credit was arrested. The bank advances
decreased sharply. The aggregate advances of London Clear-
; ing Banks were 38 P©** cent of their total assests in 19 38,
, dropping to 16 per cent in 19Mf*'1 ’ ^
i
Not only the bank advances had decreased sharply, but
t
, the same was true also for the commercial bills, another
form of short-term loans to commercial and manufacturing
1 concerns* The volume of international bills of exchange
declined during the thirties. The war almost completely
swept them out. The Defense Regulations forbade making
loans to non-residents. Par more important, the Germans
occupied most of the European continent; the government
i departments undertook bulk purchases; and the Lend-Lease
Agreement in effect took care of a large portion of Great
Britain’s trade with the United States.
At the outbreak of war, there were still a consider
able number of bills of exchange outstanding, mainly con
nected with the German stand-still credits, which were
estimated to amount to about 37 million pounds at the end
16 League of Nations, op. cit., pp. 62-63.
80
of August, 1939 In order to avoid the panic which was
experienced In 193ij., a government War Risks Insurance
Office was opened, and the Treasury instructed the Bank of
England to extend aid to approved acceptance houses which
;were unable to meet their habitities because the war de
prived them of the remittances due from their obligators
abroad. If bills were normally discountable in the London
: market and were accepted before September 3» 1939» bhe
1
acceptance houses could obtain from the Bank of England
special advances of funds necessary to meet the bills at
maturity. Such advances were offered at a “punitive rate”
of 2 per cent above the Bank rate, with a minimum of 6 per
cent annum. While this special accommodation was designed
to avoid temporary panic only, It should not be thought of
as an encouragement of acceptance lending.
The domestic commercial bills business, which was
developed in the thirties with some degree of success, was
greatly diminished by various controls and the coneentra-
■tion of trade in the ministries of Supply, Pood and Ship
ping and in government controlled agencies.
17 Mayor B. Poster and Raymond Rodgers, Money and
Banking (3rd edition, New York: Prentice-Hall, l$i|.7),
p. £45.
81
With the disappearance of commercial bills, the em
bargo of new capital issues and restrictions on advances,
funds, long-term and short-term alike, creditors in the
money market had no considerable outlet other than lending
to the government* All the banks, acceptance houses, bill
brokers and even merchant bankers were dealing mainly with
the givernraent. The government became almost the sole
customer of the market* In this case, the government could
borrow on its terms from the market with ease*
Cheap Money Program
Broadening credit base. — The credit base in England
consists of currency, mainly Bank of England notes, and
bankers balance at the Bank of England. It Is the right
and duty of the Bank of England to provide and manage the
credit basis.
Formerly the Bank of England could issue notes amount
ing to its gold reserves in the Issue Department plus
authorized fiduciary issues. The gold holdings of the Bank
were valued at a statutory price (85s. per fine ounce or
77s.9d per ounce eleven-twelfths fine) before the Currency
and Bank Notes Act of 1939 was passed. The Act removed the
obligation, placed upon the Bank by the Bank Charter Act
82
of to buy with its notes any gold offered to it at
the statutory price. The Bank has been unable to buy gold
at the statutory price since 1931• The Act required that
the gold holdings of the Bank thereafter should be re
valued at the market price every week. By such revaluation,
the Bank’s gold was increased in terms of the sterling
pound. But apparently it was not the purpose of the Act to
regulate the note issue according to the Bank’s gold hold
ing* On the contrary, its purpose was to end the gold
standard completely. And so provisions had been made in
the Act that the difference between the value of the gold
and the amount of notes outstanding was to be transferred
from the Issue Department. On September 6, 1939$ the Issue
Department transferred all but 100,000 pounds of its gold
to the Exchange Equalization Account. The next year the
gold of the Department was raised to 200,000 pounds, at
which figure it remained until 19^9 in September of that
year, it was raised to 1} . 00,000 pounds (by revaluation of
the gold stock in the Department). The issuance of notes,
hence, was made independent of gold.
The fiduciary issue of the Bank was authorized at Its
very inception in 169I 1 -. The Currency and Bank ITotes Act of
1928 fixed the fiduciary issue at 260 million pounds, with
83
the important provision that the Treasury, on the applic-
• ation of the Bank, could assent to an increase or reduction
of the standard amount* Such a change could be authorized
■ for a period of six months and could be renewed, but it
• was not to remain in force more than two years without the
: sanction of Parliament* By exercising this power, the
Treasury authorized the Bank to increase the fiduciary
issue up to 5>80 million pounds on September 6, 1939*
; although the amount set by the Currency and Bank Notes Act
; of 1939 was 300 million pounds. As the war went on, the
' fiduciary issue was fairly steadily increased year by year*
After an increase of 150 million pounds in each of the four
preeeeding years, the fiduciary issue remained at 1»Il00
, million pounds, to which level it had been raised on the
10th of December, I9k£* The total notes in circulation
correspondingly increased throughout the war. At the end
of February, 19^3, it was 93-9 million pounds; the next
year it reached 1,086 million pounds; and at the end of
February, 19k^» it amounted to 1,217 million pounds.1®
Besides the increase of notes that were Issued, the
Bank of England conducted open market purchases throughout
18 Bank of England, Report for the Year Ended 28th
February 19k7 (London: Bank of England, 19I 4. 7) ' , pp. 2f.
8 1 j -
the war, as reflected in the increased holdings of govern
ment securities in the Banking Department, and a cor
respondingly increase in the bankers1 deposits in the
Bank# On August 30, 1939* the government securities in
the Banking Department were 113 million pounds, while on
August 29, 191^5, they reached ZJ2 million pounds. Mean
while the bankers* deposits increased from 9® million
pounds over the same period.^9 Moreover, the proportion
in the Banking Department, that is, the ratio of notes,
gold and silver which could be held in the Department to
its total deposits, was unpreeedently low, from 21.3 per
cent on August 30, 1939* to 8 Pez* cent on August 2 9,
19*1-5. 20
Because of this drastic expansion of the credit basis
on the part of the Bank’s actions, the bankers always had
enough cash reserves to meet the credit requirements. And
as the banks extended their credit largely to the govern
ment in the form of Treasury Deposit Receipts, which were
viewed as secondary reserves, as shall be shown later, the
liquidity ratio was far above the 30 per cent norm.
19 Higgins, 0£. cit., p. 101.
20 Idem
85
Daring the war, the Bank of England had adopted a
policy to avoid the imposition of the punitive Bank rate
on the market. The method was to use more open market oper
ations than discount facilities. The open market operations
were exercised to such an extent that the official agents
of the Bank of England, breaking the traditional barrier,
frequently dealt with the clearing banks. In times of a
shortage of funds, the official agents of the Bank in the
market would buy for the Bank of England and probably for
the account of Public Departments, shortly maturing
Treasury bills directly from the clearing banks. When the
clearing banks had a surplus of funds which could not
profitably be employed in the discount market by buying
bills or making loans, the agent of the Bank would sell
directly to them the Treasury bills held by the Public
Departments or the Banking Department. By this practice,
the discount market and the whole money market was adjusted
without being forced in the Bank and penalized.21
Lowering interest rates. — Rates of interest had been
substantially lowered during the thirties. It was essential
for the government during the war to prevent the interest
21 Poster and Rodgers, op. cit., pp. 532f.
86
from rising and, furthermore, to reduce it as far as
possible. This was not a hard task for the government
|because of the effectiveness of various controls. As has
' been said, the government was to make itself virtually the
sole customer in the money market. It, therefore, had the
power to force the market to accept its terms. So the in-
■terest rates were almost unilaterally determined by the
Treasury without any difficulty.
Nevertheless, several steps were taken to effect the
, lowering of interest rates. The Bank rate was raised from
; 2 per cent to I j . per cent on August 2ij.th, 1939* ^or reasons
of safeguard against the emergency. But a month later It
was reduced to 3 per cent; and on October 26, 1939* it
resumed the level of 2 per cent at which it stayed through
out the war. It was doubted whether the Bank rate had any
i significance, since it remained at 2 per cent so long and
. open market operations had by passed the Bank rate. It is
true that the Bank rate was not as important as it used to
be; but it is imcompatlble too if the Bank rate was much
higher (say 3 per cent) than the bill yield for a consider
able period. Therefore, the low Bank rate was a necessary
condition for a cheap money policy.
In July, 19^0> i*10 British Bankers* Association,
87
partly requested by the government and partly due to the
: decline in the earnings of the banks, announced that the
maximum rate paid by banks on deposits y/ould be 1 per cent.
i
This made an investment in government securities more
■attractive to the holders of free funds.
The successfulness of the policy was apparent. Except
for an initial flurry when the war broke out, and for a
brief period in the spring and summer of 192+3 when the
I allies’ military successes led to some shifting from
government to other securities, the yields on long-term
securities followed a downward course throughout the war.
!Short-term rates rose sharply at the very beginning of the
war, but promptly fell again and remained quite stable
throughout the war. The government was able to tender
Treasury Bills at just a little over 1 per cent, leaving
a slight margin for the brokers to borrow from the bankers
at 1 per cent in order to buy the bills. Interests on
Treasury Deposits was 1^/g per cent. War bonds and savings
bonds were 3 per cent to 2k per cent respectively.^2
Government borrowing. The British government recog
nized that to borrow from the public is better than from
22 See Table IV, supra., p. 63*
88
the banking system, at least as far as anti-inflation is
concerned* So the government conducted a policy of borrow
ing as much as possible from the public. Shis effort was
evidenced by the fact that approximately 75 P©** cent of
the government debt incurred from 1938 to 19^5 was sold
outside the Bank of England and the 3©ink stock banks.
Besides making the money market no other profitable outlet
than investment in government security, the government
took positive steps to attract savings.
Immediately prior to the outbreak of the war, the
London stock Exchange Committee prescribed the minimum
prices of government securities, giving a yield on the
government long term securities of about 4 per cent. Below
the established minimum prices, transactions were forbid
den. The minima were set only after consultation with the
Treasury. The minimum prices were subsequently raised in
response to the decline of long-term money rates.
Many methods had been used to attract private savings.
A National loans compaign was conducted everywhere In the
country from time to time. The Post Office Savings Bank,
the savings banks and the commercial banks were instructed
to act as the agents of the government to promote the sale
of publie securities. Various types of securities were
89
issued, to attract different classes of investors* For big
investors there were large denomination war loan bonds;
for the small investors, there were National Savings Cer
tificates with a purchase price of l£0 shillings (about
$ 3*00) and Defense Bonds in units of £ pounds* The Chan
cellor of the Exchequer even made an appeal to the British
citizens to make interest free loans to the Treasury*
Persons or companies advancing such funds to the Treasury
received a certificate, entitling them to repayment three
months after the conclusion of a peace treaty*
On the side of floating debt, there was an important
technical development besides the traditional Treasury
bills and the ways and means advances. In July, 19ij.0, the
• " /
Treasury Deposits Receipts were introduced; thereby the
Treasury’s weekly cash requirements were advanced by the
banks. The Treasury Deposit Receipts (hereafter referred
to as TDR) were in units of £00,000 pounds for a period
of six months, non-negotiable but discountable at the Bank
of England at the Bank rate and usable in payment for the
banks* own or their customers* subscriptions to new Govern
ment issues* The interest rate on TDR was 1^/g P©** o©nt
throughout the war. This technique enabled the Treasury to
obtain funds for six months at an interest rate only about
-V 32 per cent higher than the current rate on the three-
months Treasury bills. On the other hand, it provided a
limited liquidity and higher earnings than the Treasury
bills for the banks. The Treasury Deposit Receipts soon
replaced the Treasury bills in importance as floating debt
held by banks. In 19^5* the bills discounted by the London
Clearing Banks were on a monthly average of 188,000,000
pounds, only amounting to I 4. per cent of the banks1 total
deposits; yet the Treasury Deposit Receipts held by them
amounted to 1,811,000,000 pounds, representing 3 8 .6 per
cent of their deposits.23
Foreign exchange and foreign disinve stment. -- The
United Kingdom is (and was) a country which has to live
on International trade and has to obtain foreign raw
materials and other resources. But her foreign investments
and exports have been declining since World War I and this
decline was accelerated In the nineteen-thirties. In 1939»
her foreign investments and gold holdings were less than
in 1 9 2 4* There was only one consolation. That is; although
the resource which she could command were smaller than in
I91I 4- , she could aommand them more effectively. The exchange
23 See Table IX, infra., p. 193«
91
,control which contributed to the effectiveness had not
been invented in the 19ll|-~l 8 war*
! Long before the war, Germany had a comprehensive
r
exchange control system which covered every transaction in
foreign exchange In 1932 the British had only instituted
the Exchange Equalization Account which did not even Intend
to set an exchange rate and did not intend to restrict any
'transaction. Would Great Britain be compelled in time of
:war to construct the formidable German type of exchange
control? The question was raised by the Bank of England in
the summer of 1937 and was discussed between the Bank and
the Treasury during the next eighteen months.^5 The Treasury
recognized its necessity! six months before the war it had
prepared the draft regulations which were enacted into law
between August 21 4. and September 3* 1939* Under these re
gulations, which were applied to all residents in the United
Kingdom, (a) dealings in gold and foreign exchange were
made a monopoly of the Treasury and Its authorized agents,
and the Treasury was given power to limit sales to current
2 i j . See H. S. Ellis, Exchange Control in Central
Europe (Cambridge: Harvard University Press, l^T)',
pp. 158-2 8 9.
2$ Hancock, op. cit., p. 108,
92
requirements, (b) all gold and all holdings of designated
foreign currencies were required to be offered for sale
to the Treasury; (c) except with Treasury permission, pay
ments to foreign residents were prohibited; (d) the Trea
sury was empowered to exercise control over all securities
marketable abroad and to cali for their registration with
a view to their ultimate acquisition. The administration
was Mdelegated to the banks as authorized dealers, acting
under detailed Treasury instructions, issued through the
Bank of England.”2^
In an order, the Treasury permitted payments to re
sidents In the sterling area. The sterling area was given
its wartime definition as roughly consisting of the
British Commonwealth and Empire with the omission of Canada
said Hongkong, and other countries, like Egypt, which held
their principal monetary reserves in sterling in London
and imposed exchange control similar to that of the United
Kingdom.
There were two serious weaknesses in this exchange
control at the beginning. First, it applied only to re
sidents of the United Kingdom; foreign holders of sterling
26 Ibid., p. 109*
93
fund were exempted. A "free rate" came to exist, and con-
i
siderable spread developed between the "official" and the
"free" rate.27 And if the free sterling fund were used to
buy British exports, resources would be diverted from war
production while relatively few dollars would be provided.
So remedies had to be taken. On March 2 6, 19^ 4- 0, foreign
holders of sterling balances were forbidden to use them
in payment for six major Bnpire exports: whisky, furs, tin,
rubber, jute, and jute products. On May 2, foreign-owned
sterling securities were blocked. In June, restrictions on
the use of free sterling were extended to all exports to
the United States and Switzerland. In this way, the
foreign-owned sterling balances were still left free, but
they would not do any harm. After September, 19^0 the free
rate remained very close to the official rate.
The other weakness of the British exchange control
system was that its operation had been decentralized among
banks* They could not pretend to have any exact knowledge
of the government's import policy and could not, therefore,
take responsibility for granting or refusing exchange to
27 By March 27* 19^l-°» the free rate was $ 3*^8 In
comparison with the official rate of $^.03. Hancock, op.
cit., p. 1 0 9* footnote.
9k
to their individual clients. The remedy was to adopt
measures based on the scrutinizing of different classes of
imports. The demands of importing government departments
for foreign exchange were met by the Treasury after they
had been scrutinized by the Exchange Requirements Committee,
‘ a body set up on August 29» 1939* with representatives
from all the importing departments, the Treasury, and the
Bank of England. The demands of private importers were
controlled by the Import Licensing Department of the Board
of Trade.
So, with the aid of import licensing and the govern
mental import program, and also the export licensing,
British exchange control was as effective as that of
Germany.
The need of foreign funds was so great that not only
the foreign balances were subject to control, but also the
mobilization of foreign investments was necessary* Resid
ents* holding foreign marketable assets were required to
register them with and later surrender them to the Treasury.
The British policy was to sell them outright. Yet in order
to prevent prices from dropping by this big sale, an
arrangement was made with the United States, whereby
instead of selling outright immediately, the securities
95
might he used as collateral for loans at the interest rate
equivalent to the yield of the securities* and the securi
ties would he sold over a period to repay the loan.
The total foreign disinvestment was very great. Tahle
VI shows that the sales of securities, the loss of gold,
and Increased liabilities amounted to ij.,198 million pounds
In the war. This great foreign disinvestment together with
the loss of earning power created major problem in the
postwar economy and its administration.
Besides the utilization of their own foreign resources,
the British were able to obtain loans from the whole ster
ling area In the form of accumulated sterling balances
(Canadian sterling balances were converted Into a $700
million interest-free loan, iylj.2), gifts (Canada donated a
billion dollars in 19^2), and the Lend-Lease agreement. In
this way, the British got sufficient supplies from foreign
countries, especially the United States.
Effects of These Wartime Measures
It was the first time for the British to Impose so
many economic controls that they were not much freer than
the totalitarian Germans whom they were fighting.
The British justified these controls In terms of
necessity in order to win the war. They also justified them
TABLE VI
UNITED KINGDOM EXTERNAL DISINVESTMENT
(As far as recorded: probably an underestimate)
1939
Sept.
1940
1941 1942
1943 1944 1945
Jan.-
June
Total
Sept. 1939-
June 1945
Realization of
external capital
assets
5# 164 274 227 Id 9 143 63
l,lld
Increased in
external
liabilities
go
179 564 519 647
60d 2d2 2,379
Decreased or
increased (-)
in gold and U.S.
dollar reserves
57 474 -23 -75
-150
-99
-32 152
Unallocated
17 -6
5 3 3
11 16 49
Total 212 dn g20
674 6S9 663 329 4,198
Source: Hancock, British War Economy, pp. 79 and 352.
in terms of necessity in order to assure everyone’s getting
his fair share. As the official history of the wartime
economy stated,
The real sanction behind the emerging war economy
lay not in legal form, but in national consent, a con
sent that flowed from the deep popular consciousness
of peril and need. Throughout the time of danger,
British industries were ready to accept regulations
that were necessary and fair, even if their legal basis
were disputable: conversely, they disputed and usually
in the end defeated unnecessary or unworkable regula
tions* no matters how sound they might be in strict
law.^o
The economic controls which had so far been put into
practice in the war were commonly viewed as necessary and
fair; thus, they paved the way for postwar controls. Indeed,
most of the controls remained effective in the postwar
period. Moreover, people had become accustomed to the
various controls and planning, so they did not oppose the
continuation of these controls and even inclined to approve
of more controls and planning. This was one of the reasons
why the Labor Party received a great victory in the
general election of 19lj-£.
The philosophy of economic control was changed and
the wartime measures gave the new philosophy a real test.
28 Hancock, op. clt., pp. l6f.
The financial measures were losing their predominant role*
In their place, direct controls over resources were the
basis of the war time economy. The change had been so great
that the so-called “financial measures" included wage and
price controls.29 The monetary and fiscal policy, in the
well co-ordinated program of control, definitely was
secondary. And in view of the efficiency of war time con
trols the position of monetary auad fiscal policy could
hardly resume its traditional importance. Hence, the new
tradition developed. A new philosophy of economic controls
had been adopted. The new effective techniques of control
had been invented and improved*
The wartime economic controls were so well co-ordinat
ed and comprehensive that the aim of a "level economy" was
fairly achieved. 30 The wholesale price index was only 17I 4.
(August 1939 = 100) In July I9I 4J?; the index of wage rates
li|-9* These figures were significant when compared with
29 The sections of financial policy In the official
history were occupied largely by the discussion of price
policy and wage policy.
30 The Chancellor of the Exchequer, introducing his
first war budget, said, "We are aiming at maintaining a
level economy in which price's and profits and remunerations
are kept as steady as war conditions will allow and in
which the flow of such goods are available for civilian
consumption is kept in regulated supply." See Hancock,
2E- cit«» P* 1^1.
TABLE VII
INDICES OF PRICES, COST OF LIVING AND
. WAGE RATES IN TWO WORLD WARS
Whole
sale
Price
Cost of
Living
Index
Wage
Rates
Whole
sale
Price
Cost of
Living
Index
Wage
Rates
Av. Jan. July
July
August 8ept. 1 Beginning
July
1914 »
1914 « 1939 a 1939 « September
1914 ■ 100
100 100
100
1939 a 100
100
Jan. 1915 117 110-115 Jan. 1940 123 112 103-104
July 1915 129 125
105-110 July 1940 142 121 112-113
July 1916
15* 145
115-120 July 1941 156 128 122
July 1917 214
ISO 135-140 July 1942 163 129 131
July 191S
233
205 175-130
July 1943 167 129
136
July 1919 250 210
210-215 July 1944 170 130
143
July 1920 30S 252 260 July 1945 174 134 149
July 1946 130 132 161
Source: Reproduced from Hancock, British War Economy*
!
I
VO
vO
100
those of World War I.
The Inflationary tendency was at least temporarily
arrested. The question whether this temporary relief from
inflation has been a more painful experience to the post
war economy will be discussed later.
It should be noted, however, that the monetary and
fiscal policy of the Government followed the British tradi
tion of extracting as much as possible of the purchasing
power from the people. Taxes were raised to the limit, and
savings were attracted into government securities. These
measures had contributed much to bridge the gap of infla
tion, and were beneficial to the post-war economy too.
In so far as monetary policy is concerned the British
Government, by and large, followed a sound policy which
was evidenced by the fact that the notes in active cir
culation increased only l6f ? per cent and cheap money was
available to the Treasury and war production only. In
spite of the tremendous Increase in deposits (See Table
III), the commercial and financial loans declined even in
absolute amount. Although the Treasury followed a sound
policy in borrowing as much as possible from the public
and the banks absorbed only a small portion of the increas
ed public debt, the government obligations accounted for
101
66 per cent of the total assets of the London clearing
banks at the end of the war. Most of the banks-held-public-
debt were floating debts; about I 4.O per cent of the clearing
banks' asset were in Treasury Deposit Receipts and per
cent in Treasury bills.31
With the result, the entire market depended much upon
the mercy of the Treasury's policy. Every policy of the
Treasury affected the market very much. Due to the embargo
on new issues and the prohibition against dealings in
foreign exchange, the merchant banks were almost losing
their entire business. The changed business of discount
houses led to their consolidation. In other words, the
Treasury not only controlled the market legally but also
economically. By this complete control, the Treasury was
easily able to obtain a huge sum of the fund as the war
required at a very low interest rate and to relieve a
little of the inflationary pressure in the meantime.
Yet the war was a costly one. The current national
products were used up for war; ahd internal disinvestments
were heavy. The export industries, although they were
- 31 Poster and Rodgers, op. cit., ip. 3 3 6; also,
Higgins, ~ op. cit., p. See Table III, supra, p. 62;
Cf., Table X, infra, p. 19^. --
University of Southern California Libraqp?
102
encouraged by government policy, were deteriorating* Exter
nal disinvestments were so great that they almost swept out
British foreign assets* The dollar shortage problem, there
fore, developed as a serious consequence* During the war,
the gift and Lend-Lease agreements relieved matters some
what, but the problem was not solved and it beeame a hard
one in the post war period, as will be seen*
To the extent that inflation was arrested, financing
the war was made easier and the resources were better
mobilized and the products were more equitably distributed*
The British economic policy in the war was a successful
one. However the impact of the war was so great that it
was only possible to mitigate the results of the impact*
It was impossible to eliminate them*
CHAPTER IV
BRITISH CREDIT CONTROL:
POST WORLD WAR II (1914-6-1950)
The British Labor government, which took the office
after the British general election of February 19I 4- 6, has
undertaken the experiment of a socialist planning. It Is
the chief objective of this chapter to discover how well
did the British Laborites use credit control in their plan
ning, The overall view of their planning with special re
levance to credit control is to be discussed first. The
problem of the relationships among the Treasury, the Bank
of England, and the money market is second in line, which
will be followed by a brief analysis of the exchange con
trol, The rest of the chapter will be devoted to a discus
sion of the investment planning (the control over long
term credits), and an analysis of the cheap money policy,
POST-WAR BRITISH ECONOMIC PLANNING
AND THE ROLE PLAYED BY CREDIT CONTROL
Sir Oliver Franks drew a conclusion from his experience
in the British government during the World War II that no
government in the United Kingdom in the post-war period or
xok
in the foreseeable future would dare to abolish the exist
ing forms of central planning and control *3- One may doubt
the validity of such a generalized conclusion. But one
cannot doubt that the post-war Labor Government has decided
upon and established a program of peace time central econo
mic planning, because it is a fact known to the world*
In order to understand British credit policy in the
post-war stage, a brief analysis of British economic plan
ning in general perhaps is useful.
British Post-war Economic Planning in General
The aims. — In 19^4* British coalition Government,
in which the Labor party took part, issued a white paper on
the post-war employment policy. The white paper was the
first official announcement of the governments post-war
economic planning* It announced: "The government accepts as
one of their primary aims and responsibilities the mainten
ance of a high and stable level of employment after war."2
The aim as set forth in the white paper was accepted
• * - Central planning and Control In War and Peace
(Cambridge: Harvard University Press, 1947), p. 60, and
also p. 1 8.
2 Employment Policy (Gmd. 6527; May 19I 4J 4.) 5 directed
quoted from Employment Policy (New York: Macmillan, 19ljij.),
p. 3*
10$
by the Labor Government elected after World War II. But
to this primary aim of "a high and stable level of employ
ment,” the Laborites added some other aims. In an official
pamphlet the broad aims of British post-war economic policy
were listed as:
( 1) The highest possible level of production and
productivity;
(2) Pull employment;
(3) The control of economic fluctuations;
Hi) An equitable distribution of the community^
output;
{$) The co-ordination of an economical distribution
of resources with what is physically, socially
and strategically desirable.3
These are, of course, long term aims. On the basis of
these basic long term aims, some immediate objectives were
formulated to deal with the current situation. In the white
paper on employment, the British Government recognized
that, Mthere will be no problem of general unemployment in
the years immediately after the end of the war in Europe.
... it will be a period of shortage.nk -
Gonsequently one of the immediate objectives of the
post-war economic planning was the prevention of inflation.
3 Central Office of Information (London), Post-war
Britain, I9I 4- 8-I 4 .9 (Hew York: British Information Services,
distributor, 194-9)» P* 5>3*
Employment Policy, pp. cit., p. 3.
or to us© the British terminology, disinflation without
deflation. Another immediate objective was to improve the
balance of payments. The third objective was the socializ
ation of basic industries. The fourth objective was the
redistribution of wealth, so that the "fair shares" was
maintained and the standards of living of "the less well
paid section of the population" were raised. The fifth
objective was to re-equip industrial capital in general
and particularly to re-equip basic industries with huge
investment. 5
It should be noted that not all these short term
objectives are compatible with one another. The prevention
of inflation, for example, conflicts with the huge capital
development. In the event of such a conflict, it was always
judged on the merits of socialism. Thus, the government
sponsored huge capital Investment, for example, at the
expense of inflationary threat.
The technique of planning. — Sir Oliver Pranks stated
5 These objectives were frequently expressed by
responsible government officials. The most precise state
ment was made by Sir Stafford Cripps, then the Chancellor
of the Exchequer, to a Press Conference in London on Jan
uary 9* 19^0. See British Information Paper: ID 96ii (New
York: British Information Service,' January l95tT)* P* 9* Its
condensed form was given in Labor and Industry in Britain,
8:20, March 19^0. ;
10?
that the essential elements of economic planning
... are plans consisting of decisions of policy quan
titatively expressed in the form of programmes and such
measures as in particular circumstances may be neces
sary to ensure the performance of these programmes.
These elements ... are discoverable in Government
action at the present time.®
The statement inferred a distinction between the
technique of planning, whieh is an expert estimation of
actual and possible economic outcomes, and the measures
which are used to promote the desired results.
The technique used by the British government was, no
doubta to formulate some quantitative programs based on
statistical facts. Hence, adequate information on every
aspect of the economy was vital. Baring World War II the
British Government’s fact-finding organization was greatly
extended. In 19^0* ■&&© Central Statistical Office was
formed to collate and expand the entire field of government
statistics. But the responsibility of collecting important
< *
statistical data such as the wage-rate index and the
production index and others has been shared by the Board of
Trade since the enactment of the Statistics of Trade Act in
19lf7. The Monthly Statistical Summary, containing a large
volume of statistics of current economic affairs, has been
— -.......
6 Fran&s, op. cit., p. 17*
108
published continuously*
Prom the mass of facts, a comprehensive picture of
the whole economy has been derived and published since
1941» in the forms of the series of white papers dealing
with national income, capital investment, and the balance
of payments*
A final step in planning is to forecast the future.
An annual Economy Survey has been published since 1947* in
which the estimation of the situations and requirements of
the coming year is being made. In October 194®» a memoran
dum concerning the British economic program from July 1948
to June 1949* In relation to European economic cooperation,
was submitted to the Organization for European Economic
Cooperation and the Economic Co-operation Administration.7
About two months later, the British four-year plan (1949*
1953) was made known in the form of a memorandium submitted
to the Organization for European Co-operation.®
As a whole, the British economic planning has been
largely based on the estimation of and the balancing of
7 European Cooperation (Cmd. 75455 London: H. M.
Stationery Office, 194°).
® European Cooperation (Cmd. 7572; London: H. M*
Stationery Office, 194o; hereafter referred to as Cmd*
7572).
109
tlxe domestic demand and the domestic products on the one
hand and the estimation and the balancing of imports and
exports on the other hand. Under these basic patterns, the
attention has been given to particular industries, par
ticular areas, and particular classes of people.
Such a technique has been explored extensively* Every
year since 19^8# three white papers — -the Economic Survey,
the United Kingdom Balance of Payments, and the National
Income and Expenditure -- and the Financial Statement are
published about the time of the April budget debate* When
the debate is over, the plan for the year is set.
In passing, it should be noted, howevever, that the
British government sometimes stresses the technique of
joint consultation between the government and management
and labor in the preparation and execution of plans.9 Al
though it is only a minor technique in shaping plans, it
has great significance in putting the plans into action.-^
9 Ibid., pp. 6f.
10 Sir Oliver Franks stated: "The chances of central
planning and control meeting with reasonable success in
peace depend on diffusion of initiative throughout the or
ganization.” Furthermore, he said: "The adoption of the
principle of diffusion of initiative means that government
refrains from treating Industry and commerce as instruments
of its policy and treats them instead as equal partners in
the national enterprise with different but complementary
functions." Franks, op* cit., pp. 3 9, I 4.I,
110
Voluntary methods of agreement are used in Great Britain
whenever possible in carrying out the program, in order to
preserve private initiative and freedom in so far as pos
sible*
The machinery of British economic planning» — In as
much as the British government uses methods of agreement
and depends on private initiative in carrying out its plans,
advisory bodies are a necessary part of the planning
machinery. Two of the most important bodies of this kind
are the National Product ion Advisory Council for Industry,
under the chairmanship of the Chancellor of the Exchequer,
and the National Joint Advisory Council, with the Minister
of Labour as Its chairman. There are regional organizations
of both of these bodies.However, these bodies have nei
ther responsibility nor authority in setting up plans. They
are merely bodies of communication between the planning
authority and the parties concerned In the execution of
particular policies.
The only body which is "to advise His Majesty*s Govern
ment on the best use of our economic resources, both for
11 Cmd. 7572, p* 7; Post-war Britain, 19l|.8-lj.9> op»
cit., p. 5 7. ~ ~
Ill
the realization of a long-term plan and for remedial
measures against our immediate difficulties,” is the
Economic Planning Board.^ The Board, meeting under the
chairmanship of the Chief Planning Officer, consists of
labor leaders, representatives of management and senior
officials of the Treasury and of the Planning Staff and
the main Economic Departments of the Cabinet. Yet, this
body is still advisory.
The final authority and responsibility for economic
planning are vested in the Cabinet collectively. Below the
Cabinet level, the planning organizations have been changed
several times. Broadly speaking, there were two isolated
groups of the machinery before 19I 4- 8. One was the Treasury,
headed by the Chancellor of the Exchequer, who approached
the planning purely from a narrow financial point of view.
The other, led at first by the Lord President in his Lord
Present's Council and later by the Minister for Economic
Affairs, consists of all economic ministers in the Cabinet
except the Chancellor of the Exchequer* Under these that
circumstances, there was no coordination of the different
plans. The financial plan or policy was at variance with
12 Post-war Britain, 19if8-lj-9, op. cit., p. 5 > l j .
112
the physical plans*
It was not until the middle of October 19^-7 * when Sir
Stafford Cripps, the Minister of Economic Affairs, was
also appointed Chancellor of the Exchequer, that the
British economic planning machinery became an integral
whole. The working of the machinery has been well summa
rized by a writer who said:
Under the present system political responsibility
for economic policy lies with the Cabinet, which in
turn delegates some of its policy-making power -- but
not its responsibility* General power over economic
policy Is exercised by the Chancellor of the Exchequer,
who Is aided chiefly by the Central Planning Staff. The
functions of this agency are (1) coordination of depart
mental planning, (2) helping to staff the Cabinet
Planning Committee, (3) helping to enforce Government
economic policy. ••• With this type of planning there
is an emphasis on project planning; there is an attempt
to coordinate diverse projects; but there is no single
purpose super-planning organization such as is envi
sioned in orthordox socialist theory.3-3
The measures of British economic planning. — The
measures were first broadly outlined In the white paper on
Employment Policy, in which rationing, price control and
cost control, and the encouragement of habits of saving
were set forth as the necessary measures to prevent an
13 Richard W* Taylor, “Central Planning in the Unit
ed Kingdom, ” Current Economic Comment, Vol. 12, Ho. 2,
p* 15* May 19^0". ’
113
inflationary boom after the war,^ Besides, a monetary
policy was also set forth:
The use of capital will have to be controlled to
the extent necessary to regulate the flow and direction
of investment. Heavy arrear of capital expenditure on
buildings, plant and equipment have to be overtaken,
and construction on new development must begin. Without
control, therefore, there would be a scramble to bor
row, leading to a steep rise in rates of interest. The
government are sic determined to avoid dear money
for these urgent reconstruction needs. In this period,
therefore, access to the capital market will have to
be controlled in order to ensure the proper priori-
ties,1- *
Such measure have been faithfully used in the immediate
post-war years. The essence of these measures may be summed
up as consisting of the use of direct controls as the
primary weapon, supplemented with direct priority control
of capital, but leaving money cheap. These were essentially
the measures used by the British during World War II,
The preference of direct control was well expressed in
Prime Minister Atlee * s speech in the manpower debate in the
House of Commons of February 27, 19^4-6, in which he said:
We set about reviewing the whole situation and the
first job we had to do was to try to see what our total
resources of manpower were; we embarked on this project
I I 4. Employment Policy, op. cit., pp. 8-9.
l£ Ibid., p. 9.
0
124
in what Is really a new way of attacking the problem.
We attacked it from the point of view of manpower
rather than of finance — our .human resources rather
than our financial resources.
Besides direct control over manpower, the British
government has devised a system of import licensing, a
system of raw materials allocation and industrial equipment
licensing, a system of rationing, and a system of prices
and wages control. All these controls, of course, were
directly taken over from war time measures.
The Role of Credit Control in the Framework of Planning
From 19I 4. 6— 19lt-7 1 — The measure of credit control in
the traditional sense, i. ei tightening credit to cope with
inflation was apparently abandoned. The cheap money policy,
in spite of inflationary pressure, was advocated by the
employment white paper and was put into effect by the then
Chancellor of the Exchequer, Hugh Dalton. A later section
of this paper will be devoted to the problems connected
with cheap money policy. For the moment, it should be noted,
however, that while the financial measures retained a
secondary position in that scheme of measures, the quanti
tative approach gave way to the qualitative one. This shift
l6 Quoted in Mi cheal Young, Labour * s Plan for Plenty
(London: Victor Gollancz, I9I 4J)* pp. 3lf.
115
was but the continuation of the patterns already establish
ed during World War II.
The war time financial regulations were enacted into
two laws, the Exchange Control Act of 19^4-7* and the Borrow
ing (Control and Guarantees) Act of 19ij-6* The Bank of
England Act of I9I 46 gives authority to the central govern
ment to issue directives to the banks. The Treasury con
tinued to issue circular letters and requests to the banks
concerning advances. The Capital Issues Committee was charg
ed with even heavier duties than during the war*
To sum up the early phase of the post-war British
policy, credit control has been used to supplement the other
physical priority controls in order to ensure the achieve
ment of the general priority arrangement. But, on the other
hand, the British government not only negatively discarded
quantitative credit controls as a weapon to fight inflation,
but also positively endeavored to create an ultra cheap
money condition; a condition whieh would certainly increase
the inflationary pressure for curbing which many physical
controls were being enforced.
From 19il8-195>0: — It was not until Sir Stafford Cripps
took over the position of the Chancellor of Exchequer In
the middle of November 19^7» that the monetary policy of
116
the British Government ceased to promote Inflation. After
his appointment to the Chancellorship, the Ministry of
Economic Affairs was merged into the Treasury Department.
Thus, the financial plans and measures, and other plans and
measures were brought under a single head. A closer coor
dination than before was thus expected and realized. Fur
thermore, many direct controls, such as manpower allocation
and some rationings, were gradually removed due to the
pressure of the British people and their desire for freedom.
With the result the financial measures started to assume an
important role in British economic planning.
However, the prestige of traditional quantitative
credit controls was not restored. Although "disinflation”
v
was the motto of Crlpps* regime, he approached the problem
through fiscal policy, centering on the Budget, rather than
the traditional monetary policy. Sir Stafford Cripps has
repeatedly said that the budget is ”the most important
control — the most powerful instrument for Influencing
economic policy which is available to the Government.”^
But no where has he ever assigned a positive role to the
17 Quoted from Labor and Industry in Britain, 8:58>
June 1950* See also: Midland Bank Review,~May l91l9, p. l)\;
British Information Paper: ID. 917, March IQaQ, p. 1: Cmd.
7372, p.t:
!
117
monetary policy. At most, one may say with The Economist,
that Sir Stafford Cripps has kept monetary forces neutra
lized while he produced budget surpluses to bring forth
disinflation.Even this role of neutrality was establish
ed only after a year from the beginning of Sir Stafford
Cripps* disinflation policy.
It is interesting to note that, in the earlier memor
anda submitted to Organization for European Economic Coop
eration, there was a section on fiscal policy in the
chapter of "general policies," with no mention of monetary
policy whatsoever*^ But a year later an OEEC report
suggested that "quantitative and qualitative restrictions
on credit" provide an instrument at once delicate and
powerful to disinflation.While the qualitative aspect
of the suggestion has been a policy of the British authori
ties its quantitative aspect was ignored up to the time of
this writing. The fiscal policy, however, is still the
dominating Instrument in the fight for disinflation and the
18 "Conversion and Monetary Policy," The Economist,
157: 1308, December 10, 19^9*
19 Gmd. 7572, pp. 7-8.
20 "Tighter Credit, Lower Taxes," The Economist,
15>7: 987-8, November 5, l%-9*
118
British government has not availed itself of the monetary
weapon In a more useful and constructive way. This problem,
of course, will be further discussed later.
In spite of the fact that monetary measures had little
to play in the overall economic policy, it is worthwhile to
have an analysis of the British monetary policy in these
post-war stages, for reasons of Its tradition and its
experiments in planning.
THE TREASURY (THE CHANCELLOR OF THE EXCHEQUER),
THE BANK OF ENGLAND, AND THE MONEY MARKET
The famous weekly, The Economist, surely had sufficient
facts in England as well as elsewhere to justify its obser
vation, when it stated:
In most highly-developed modern communities the
administration of finance has come to rest.on three
tiers. First, comes the Ministry of Finance, which de
termines general policy, next comes the central bank,
which administers the policy; finally there are the
commercial banks and specialized Institutions speeding
the flow of commerce within the limits of general policy
determined by the Minister of Finance and administered
by the central bank.21
The Chancellor of the Exchequer and the Money Market
In an era when the laissez-faire philosophy prevailed,
21 The Economist, l l j . 8: 3f?0, March 17*
119
and when it was customary for the Chancellor of the Exche
quer to decline his responsibility in the money market, W*
Bagehot wrote with much insight:
On the whole, ... the position of the Chancellor
of the Exchequer in our money market is that of one
who deposits largely in it, who created it and who
demoralized it. He cannot, therefore, banish it from
his thoughts, or decline responsibility for it. He
must arrange his finance so as not to intensify panics,
but to mitigate them. He must aid the Bank of England
in the discharge of its duties, he must not impede or
prevent it. 22
There has been a slow evolution in the relations of
the Chancellor of the Exchequer to the money market since
Bagehot1s time. The Chancellors of the Exchequer have
increasingly recognized their authority and responsibility
to the money market. Some of the past events have been
indicated in previous chapters. As things developed into
the post-war stage, the relationship of the Chancellor of
the Exchequer to the money market became four-fold.
As the supervisor. — The first aspect of the relation
ship is that, as the coordinator of all economic policies
of the government under the present system of planning, he
is responsible for seeing that the money market behaves as
desired. In the Borrowing (Control and Guarantees) Act, he
22 Bagehot, oj>. cit., p. 108.
Is authorized to review and pass upon all capital issues
and secured borrowings above 10,000 pounds* And by the
antecedences innovated furing the war, he may issue circu
lar letters or requests or directives (usually through the
Bank of England) to ask the private financial institutions
to follow certain desirable practices. For instance, the
Treasury issued a memorandum in 194-5 on bank advances
wherein the banks were exhorted to decline to advance money
for the speculative buying or holding of securities, real
property or stocks of comnxondities and to call a halt in
the financing of hire purchase business* In December 1947*
the Chancellor of the Exchequer issued a further request
stressing the need for a sustained and strict enforcement
of this policy, notwithstanding the statutory exemption
from Treasury sanction of borrowings taken by customers in
the ordinary course of business under the Borrowing (Con
trol and Guarantees) Act.23 Similar requests have been
subsequently issued, 24- Such supervision, assumed by the
Treasury over the money market, extends even to the or-
23 R. W. Jones, "Banking in Britain: How Far Is It
Controlled?" British Information Paper: ID. 996, p. 4-*
24. Infra, p. 130.
121
ganizations of the financial institutions. It is known, for
instance, that the reorganization of several discount
houses was the wish of the Treasury.25
As the owner of the central bank. — Second, as the
sole share holder in the Bank of England after its nation
alization, the Treasury i3 now formally and directly res
ponsible for the conduct of the Bank of England. In other
■words, the Treasury assumes the direct responsibility of
I making policies which guide the money market.
As the powerful customer. -- Third, as the largest
single customer of the money market, the Treasury furnishes
the money market with a large portion of securities and
bills floating in the market so that the market may func
tion well. Even in the 1930*s» as has been pointed out,
the liquidity of the money market solely relied upon the
Treasury bills. With the expansion of the public debt, the
'Treasury*s debt operations now have far greater influence
on the market than ever before. Actually this is the most
powerful and the most frequently used technique directly
available to the Treasury, (in contrast to the technique
through the Bank of England). In a later section, the full
25 Foster and Rodgers, op. cit., pp.
us© of this technique will be shown. However a recent
change in the maturing dates of floating debts, for the
moment, may serve as an illustration as to how a little
element in the debt operation would affect the functioning
of the money market. Treasury bills were traditionally
issued with a three-months life (i. e., from 88 days to
92 days) and Treasury Deposit Receipts in recent years
have been issued at the option of the Treasury with lives
of five, six or seven months. The practice of working in
calender months has long been noticed as disturbing the
functioning of the money market, because it put the banks
out of balance in their liquidity position on some days of
the week. The Treasury, after long discussions among the
observers and the financial circle, finally announced that
on and after May the first of 1950$ the mature date of the
two kinds of floating debt will be standardized* Treasury
bills are now with 9 3 . days or thirteen weeks of maturity.
TDR*s are now standardized at lf&i- days (twenty-two weeks),
182 days (twenty-six weeks) and 210 days (thirty weeks)
respectively. 26 This action was welcomed by the city as
assuring the smooth functioning of the money market.
26 The Economist. 15>8: 9 6 0. April 29» 1950.
As the policy maker. — Fourth, the Treasury, by
licensing or appointment, has made some of the private
financial institutions its administrative agents, for
example, the exchange control system, which was and is
administered through the clearing banks and acceptance
houses, is a case in point.
From the foregoing analysis, it seems fully justifi
able to conclude that the Chancellor of the Exchequer has
the full authority and full responsibility and full means
of financial management, of which credit control in the
usual sense of the word is a part.
The Bank of England After Nationalization
As has been shown in chapter II, the Bank of England
has never, at least since the 1 9 3 0’s, failed to follow
the Treasury’s wish. Every observer practically agreed
that thenationalization of the Bank of England was not so
much a necessity of economic reality as a necessity of
political ideology.2? An evolutionary socialist party, such
as the Labor Party of Great Britain, cannot help but social
ize the credit instrumentarities as one of its first
27 R. F. Harrod, “Consequences of Nationalizing
the Bank of England," Political Quarterly, 17: 2lli-27,
July 19^6.
measures*28 Since the Bank of England is the key instru
mentality of the British Credit Market, the Labor Party
actually put the nationalization of it, among other basic
industries, into the election campaign platform of 19l } - 5*
And when the Labor government took office, it got the Bank
of England Act passed in the first session of Parliament.
nationalization shifted the ownership from the private
share-holders to a person acting on behalf of the Treasury
but otherwise it changed the Bank*s internal structure
little if any. The issue department is still segregated
from the banking department. The Court, which manages the
bank, formerly consisted of a governor, a deputy-governor,
and twenty-four directors, almost all of whom came from
merchant bankers; now it consists of a governor, a deputy
governor, and sixteen directors, from any walk of life.
All members of the Court are appointed by His Majesty
(presumably upon the recommendation of the Chancellor of
the Exchequer) with a term of five years for the governor
and the deputy governor, and four years for the director.^9
28 William N. Loucks and J. Weldon Hoot, Compar
ative Economic Systems (third edition: Hew York: Harper &
Brothers, I9I 4. 8), p. 2 8 6.
^9 Bank of England Charter of I9I 16 (Cmd. 6752;
London: H. MI Stationery Office, T9lp>), Clause II (2), p. 6.
Not more than four out of the sixteen directors can be full
time directors at any o n e t i m e .30
The daily operations of the Bank are still on the same
routine: every Thursday the Court meets to decide what to
do, and other customary practices of the Bank still con*
tinue. Only two subtle changes have been brought about by
its nationalization.
Directly controlled by the Treasury. — First, is the
Bank’s relations with the Treasury. Although the Bank has
been voluntarily following the lead of the Treasury in
monetary policy, - the fact remained that there was nothing
to prevent the Bank from disagreement with the Treasury.
Now in the Bank of England Act, 19lj6, a provision has been
made that, f , the Treasury may from time to time give such
directions to the Bank as, after consultation with the
Governor of the Bank they think necessary in the public
interest."3^ The Chancellor of the Exchequer is supposed
to answer for the Bank in the House of Common. In such a
way the Bank was formally and completely subordinated to
the Treasury. No matter what causes are attributed by
30 Bank of England Charter of 19li-6 (Cmd. 675>2;
London: H. M. Stationery Of tice," " 191+6')', Clause II (2), p. 6
31 Bank of England Act, 19ii-6, Clause i j . (1), p. 2.
scholars to the world-wide tendency of subservience of
central banks to central governments,32 the act of making
the Bank of England a legal subdivision of the Treasury
was the outcome of the socialist ideology and political
expediency* In view of the fact that the Bank of England
has long given up its independence from the Treasury, the
formality does not mean much, although a conservative
writer may say that the government has lost the opportunity
of getting the Bank*s skilled advice.33
Its power to control the money market extended. -- The
seeond change brought about by the Act was contained in
the clause:
The Bank, if they think it necessary in the public
interest, may request information from and make re
commendations to bankers, and may, if so authorised
by the Treasury, issue directions to any banker for
the purpose of securing that effect is given to any
such request or recommendation:
Provided that :- (a) no such request or recommen
dations shall be made with
respect to the affairs of any,
particular customer of a
32 M. A. Kriz, "Central Banks and the State Today,"
American Economic Review, 3 8: $65-80, September I9I 4. 8;
Roland I. Robinson, ^Central Banks and the State Today: A
Comment," American Economic Review, 39 * ' ^- 9^ 4-~ 6, March 19^-9 •
33 W. J. Thorne, Banking (The Home University
Library of Modern Knowledge; Gilbert Murry and others,
editors; London: Oxford University Press, 19^8), p. 8 7.
banker; and
(b) before authorising the issue of
any such directions the Trea
sury shall give the banker
concerned, or such person as
appears to them to represent
him, an opportunity of making
representation with respect
thereto.3k
The clause was the only controversial point when the
bill was in debate in Parliament. The city feared that it
opened the gateway for abusive exercise of authority and
the destruction of confidential relationship between a
banker and his customers. As a compromise, the two condi
tions quoted above were attached to the original clause.
Now, the Bank of England has the authority to request
Information from and to issue directions to bankers, but the
requested information must not be of a particular customer
of the bankers and the banker has the right to be heard.
The significance of these changes. — The significance
of these changes lies in the fact that in the £ast the
relationship among the Treasury, the Bank of England and
the bankers was on a voluntary cooperative basis achieved
3k Bank of England Act, I9k6, Clause k (3)> P* 3*
35 ’ ’ Banking Under Control,” The Economist, 150:
259-60, February l6, 19k6.
128
through persuasion, and now it is a pyramid structure
cemented by directives. Although the government at that
time declared that the power would not be exercised unless
it was necessary in the public interest, there is nothing
to safeguard from abuse in the Act. Fortunately, as yet
there has been no friction.
From the point of view of credit control, these changes
mean a strenghtening of control by the central authorities,
and a development of new techniques. The central authori
ties, in addition to the traditional power and techniques
to manipulate the price of credit and the quantity of
credit, have a legal power to direct the distribution of
credit. In fact, it is the main purpose of clause (3)
in the Act to regulate the distribution of credit. The
desire for this control was well expressed in the speech
of the Chancellor of the Exchequer during the debate. He
said:
It may be desirable, in certain circumstances, to
urge the banks to devote their resources to one or other
form of investment: which it was felt by the Government
and by the Bank of England was necessary in the in
terests of a planned priority, with a view to securing
full employment in the country and building up our
export trade and other necessary elements in our
economy.3o
36 Idem
129
The Chancellor of the Exchequer further disclosed the
whole scheme of the government to control the distribution
of credit when he said:
It is essential that we should be able, in the last
resort to establish priority in the disposal of short
term funds in the same manner as we shall in a later
measure assure priorities of national interest in
regard to long-term credit.37
It is clear that clause 1 } . (3) of the Act was designed
to authorize the central authorities to regul&te the dis
tribution of short term credit.
So far as is known, neither the Treasury nor the Bank
of England has used these final powers. But, the habit
of issuing memoranda and circular letters has been growing.
And in so far as the execution of the post-war policy of
disinflation is concerned, the authorities seem to have
;paid more attention to the control of the distribution of
credit than the quantity and the price of credit. For
almost the whole post-war stage, the rate of interest was
persistently kept low, and the quantity of credit was left
to the public to decide. But the authorities have frequent
ly issued circular letters and memoranda to the banks
requesting their compliance with the disinflation policy.
37 Idem
For example, the Treasury issued a memorandum in 1 9 and
a directive in December 19^4-7 to the banks, requesting
restriction of credit on certain lines.38 in October, 19^4-9>
the Governor of the Bank of England, at the request of the
Chancellor of the Exchequer, circularized banks and
accepting houses asking them to endeavour, in their general
credit policy, to ensure that inflationary pressure be held
in check.^9 up to now, the memoranda, and the circular
letters have been in very general terms. But there is no
guarantee in the future that they will be the same.
Up to now, the most important controls over the dis
tribution of credit are not these memoranda, but the system
of exchange control and the system of controlling capital
issue* Each of these systems deserves some study.
EXCHANGE CONTROL
As has been shown, the outbreak of war in 1939 brought
into existence an exchange control system in Britain under
the Emergency Powers Act. After then the old Exchange
38 supra, p. 120.
39 Barclays Bank Review, vol. 25, No. 1, p. 11,
February 195b.
Equalization Account was not heard of until July 1950,
when the Treasury issued to it an additional fund of 300
million pounds, making a total in the fund of 875 million
pounds.
l f - 0
The increase of funds resulted from the substan
tial recovery in Britainfs gold holding and the steep
increase in the cost of buying gold*with devalued sterling.
However, the buying and selling of gold is of little sig
nificance since the exchange rate is fixed and sterling is
no longer freely convertible into gold and other currencies.
The Enactment of the Exchange Control Act, 1914-7
The British exchange control system, continuously
shaped during the war, was a smooth functioning system
before the enactment of the Exchange Control Act of 1914-7
But it might seem difficult to justify an assumption of
long-continued exchange control on the basis of powers
granted for a specific, purpose in 1939* On the other hand,
the prolongation of the control seemed necessary. For, the
large sterling balance accumulated overseas during the war
*J-° Economist, l£9: lli-1* July l5> 1950.
I 4 .I A. H. Smith, "Evolution of Exchange Control,"
Economica, USl6: 2lj.3-8, August 1949 » "The Evolution of
Exchange Control in the United Kingdom --- 1939~^l-9* * *
Midland Bank Review, February 1949* PP* 6-13*
132
was still an immense threat, and the deteriorated position
of British export trade made the British balance of pay
ments extremely unfavorable, A further force pressing the
enactment was the conditions laid down in the Anglo-
American Financial Agreement of 1914-5 and the provisions in
the International Monetary F u n d .^-2 Under those arrangements,
!the British Government agreed to work toward early realiz
ation of convertibility of sterling* Several steps were
.taken during 19l|-6-7« But the convertibility crisis of 1914-7
made the British realize that it was necessary to continue
controls. Fortunately, the Bretton Woods Conference, which
set out the principles for the foundation and operation of
the International Monetary Fund, adopted a provision that
members may retain exchange controls during the post-war
period of readjustment of balances of payments, and may
’ ’exercise such controls as are necessary to regulate inter
national capital movement. ”14-3
The control over international capital movements is
necessary, not only from the standpoint of national economic
planning, especially in a country having a large volume of
1 | . 2 A. H. Smith, op* cit*, p. P . h ^ .
l}3 Quoted in Midland Bank Review, February, I9I 4 - 9,
p. 11.
133
world trade like Britain, but also from the insulation of
business cycles from one country to another. Since the
primary goal of the British economic policy in the post-war
period has been and is the maintenance of full employment,
it was essential for the British government to precautious-
ly adopt some measure for guarding against the transmission
l
of forces of business depression from foreign lands. For
all these reasons, the Exchange Control Act os 19^7 was
passed.
Important Provisions of the Act
The Aet, which came into operation on October 1, 19^7*
in fact merely embodied in permanent statutory form the
principles of the Defense (Finance) Regulations and later
of the Supplies and Services (Transitional Powers) Act of
19i | - 5, and continued, with some minor modifications, the
control arrangements developed in the course of experience
down to that time. The term, "sterling area," in the war
time control statute was replaced by the title "scheduled
territories" in the Act. An important new provision in
troduced by the Act was the requirement that all holdings
of foreign securities in the United Kingdom were to be
deposited with or to the order of "authorized depositories,"
13k
:subject to facilities for temporary removal for approved
purposes.^- These depostitories were the Bank of England,
| the Share and Loan Department of the Stock Exchange and
the offices of the commercial hanks in the United Kingdom*
Regulations under the Act enabled residents in the United
Kingdom to "switch” from one foreign security to another --
an exception was made in the case of Canadian security to
another — so long as no change in currency was involved.k£
The switching by non-residents of their holdings of sterl
ing securities was restricted in July 19k$, and later in
February 19k9 greater lattitude was allowed in such switch
ing. k& Investment of blocked sterling funds was limited,
about the same time, to purchases of British Government or
British Government-guaranteed securities not redeemable
earlier than ten year from the date of purchase.k7 Changes
in these arrangements can be made under the general powers
kk Exchange Control Act, 19k? (London: H. M. Sta
tionery Off ice,r I9I 4 .7 ) " , Sections 15 and l6, pp* 9-11.
Ibid.» Section 9> P»
I 4.6 "The Evolution of Exchange Control in the United
Kingdom — 1939-k9»" Midland Bank Review, February 19^9,
P. 11. ~
k? Ibid., pp. 11, 13.
135
granted by the Act.
The Act also prohibited, except with the permission
of the Treasury, loans to corporate bodies resident in the
scheduled territories but controlled, whether directly or
indirectly, by persons resident outside the scheduled
territories*
48
Thus, for example, bank advances to such
companies have first to be officially approved.
The Significance of the Act
The Act thus established a permanent feature of the
British credit system. Although the authorities frequently
expressed the desire to restore non-discrimination and
convertibility, circumstances forced them to admit that
non-convertibility and discrimination must be regarded as
permanent features of the British economic policy. 4 9
Prom the point of view of credit control, the exchange
control constitutes a solid insulation of the British
domestic (imperial) credit market with the outside world.
The speculative movements of short-term capital which so
disturbed the pre-war international money markets are now
48 Exchange Control Act, 194-7» Section 30, pp. 21-
22.
4 -9 The Economist, 1591 562, September 30, 1950.
136
i
being prevented. Par more important frotai the socialist
point of view, it prevents capital exportation resulting
from the threat of socialization and it also prevents the
objective of full employment being jeopardized by foreign
depression.
THE CONTROL OVER LONG-TERM CREDIT
The post-war Labor Government, as has been said, put
greater emphasis on the distribution of credit. In the
field of long-term credit, the Labor Government perpetuated
the war time censor system of capital issues on the one
hand; and on the other hand, it endeavored to develop
desirable investments. And since 19^-8* the government has
attempted to estimate the overall picture of capital invest
ment annually.
Restrictive Regulations of Investment
This part of the measures is the principal means of
planning the flow of long-term credit into private industry
which the Labor Government has so far executed with great
force. This part of the measures was provided by the
Defense (Finance) Regulations, 1939* and later by the
Borrowing (Control and Guarantees) Act, 19lj.6.
137
The Important provisions. -- The Act, perpetuating
the Defense (Finance) Regulations provided for the Treasury
the power of making orders for regulating borrowings (other
than from a bank in the normal course of business) in
excess of 10 ,000 pounds in any twelve months, the issue of
any security for raising money or for other purposes, such
, as capitalization of accumulated corporate surpluses or
reserves, and the circulation of offers of overseas securi
ties for subscription, sale or exchange.
The work of the Capital Issues Committee. — Under
this Act, the Treasury ordered that any of the above
actions was subject to the approval of the Treasury. For
the purpose of executing this Act and the Orders, the
Treasury perpetuated the Capital Issues Committee, which
was first established In 1939> to sort the applications
of the above mentioned actions. Persons attempting to make
an issue must file an application with the Committee. Upon
(receiving the application, the Committee examines the
proposed issue and may reject it or recommend It to the
_ Treasury for final sanction.
50 The Borrowing (Control and Guarantees) Act, I9I 16
(London: H. M. Stationery Office), Section 1, pp. If*
138
The criteria with which the committee passes or re
jects an application are not based on the commercial prin
ciple. The commercial worthness is left for the underwriter
or the investor or the Stock Exchange to watch. Indeed,
Britain has one of the finest issue markets in the world.
For large issues there are old merchant banks; for small
issues there are the new issuing houses (established after
193J|-) * a writer said,
The great majority of new public issued, and of the
large Stock Exchange placings, are now sponsored and
organized by permanent and responsible concerns which
are interested, not so much in maximizing the profit
. they make on any particular operation as in establish
ing and enchancing their own good name and reputa
tion.51
Indeed, the Act provides a control which Is, instead
of supplanting, superimposed upon the market sanctions.
The Capital Issues Committee Is concerned primarily with
the priority under the overall investment program. Hugh
Dalton, then the Chancellor of the Exchequer, made this
plain in a speech on February 5> 19^ 1- 6, in the House of
Commons, by saying;
51 F. W. Paish, ”The London New Issue Market,”
Economica, NSl8: 8, February 1951. See also R. F, Henderson,
"The Significance of the New Issue Market for the Finance
of Industry,” Economic Journal, 58: 63-731 March 19I 4 . 8.
139
Hie purpose of this control is simple. It is to
ensure that the order of priority of schemes for
raising new capital shall be determined by one cri- ,
terion only, namely by their relative importance in
the general national interest; where as in the absence
of such control they would be determined by other
criteria, namely their relative appeal to profit-seekers
and the relative applausibility of their presentation ^
to a credulous public by company promoters and o t h e r s , ”
The Treasury has been from time to time giving Instruc-
i
■ tions to the Committee listing priority orders and other
matters. The standard of permissible issues depends upon
| the industry, the availability of physical resources, and
' the general economic conditions. The general pattern in
this stage was that the building societies and industrial
I and provident societies could borrow without limit; basic
V
Industries, export industries, public utilities and dom
estic consumption Industries substituted for imports, were
permitted to float issues. Hire purchase, domestic dis
tributive and retail trades were not permitted to do so.
In the early years when most physical controls remain-
1 i
ed in force, it was the practice of the Capital Issues
Committee to submit all applications to the appropriate
: government departments for their advice. The department
would advice as to whether the physical resource was
52 Young, op. cit., p. 35.
available o p might be made available within a reasonable
period to the applicant. Since 1947* when the white papers
on capital investment started to appear annually, the
Capital Issues Committee has been ordered by the Chancellor
of* the Exchequer to sanction capital issue projects in full
accord with the planned capital expenditure program.53
The Scheme of Investment
The Labor government does not contend with restrictive
regulations of capital expenditure. It seeks to direct the
national long-term credits into socially desirable areas,
industries or concerns. Several positive measures have been
taken to assure an adequate credit supply for those in
dustries with high priority, such as government guarantees,
government loans and assistances, sponsoring lending in
stitutions, and direct public investments.
Government guarantees. -- ‘ ^he measure of government
guarantees was practiced in the field of export trades. In
the late nineteen thirties, as previously noted, an export
guarantees department was set up under the Board of Trade.
This department, however, virtuely ceased functioning
53 Barclays Bank Review, vol. XXIII, No. 1, p. 11.
February l^Ij-B.
during World War II* As the export trades revived after
the conclusion of the war, export credit guarantees were
also activity resumed under the Export Guarantees Act, 19lj-5
And the powers and the funds for this purpose were substan
tially increased by the Export Guarantees Act, 19i}-9-
Act provides:
^or the purpose of encouraging trade with places
outside the United Kingdom, the Board of Trade after
consulation with the Advisory Council may . with the
| consent of the Treasury make arrangements for giving
i guarantees to, or for the benefit of, persons carrying
1 on business In the United Kingdom, being guarantees in
' connection with the export, manufacture, or distribu
tion of goods, the rendering of services, or any other
! matter which appears^pf the Board of Trade conducive
to the said purpose*^
The maximum liability for this purpose at any one time
Is 500 million pounds.££ In addition to the above guarantee
,liabilities, the Board of Trade may give guarantee to any
■ one carrying on business in the United Kingdom as appears
to the Board to be expedient In the national interest, with
an aggregate maximum sum of 100 million pounds,The
Export Credits Guarantee Department, In the Board of Trade
Export Guarantees Act, 19ij-9 (London: H. M.
St at i one r yOffi e e, 19I 4.9), Section I (1), p . 1.
S > S > Ibid** Section 1 (if), p* 2.
5>6 Ibid., Section 2, p. 2.
l l | - 2
under the Secretary for Overseas Trade, has been engaged
in extensive guarantee activities* The Department, for
example, has offered guarantees to actual or prospective
exporters to Canada and the United States to cover loss
arising from market researches that do not pay for them
selves over a period of time, or from extraordinary
advertising and promotion expenses* The carrying of stocks
in Canada and the United States, too, may be guaranteed
by the Department*£7
Another government guarantee measure is contained in
Section 2 of the Borrowing (Control and Guarantees) Act,
19) 4. 6, which provides:
The Treasury may, if satisfied that it is expedient
in the public interest so to do for the purpose of
facilitating the reconstruction or development of an
industry or part of an industry in Great Britain,
guarantee any loan: provided that the aggregate capital
amount of the loans in respect of which guarantees are
issued in any one financial year ... shall not exceed
fifty million pounds.
This government guarantee of private loans to private
domestic industry is entirely new in British financial
history. This measure is primarily designed as a remedy
Midland Bank Review, November 19^-9> P*
£8 Borrowing (Control and Guarantees) Act, 19lj-6,
op* cit., p. 2.
}
, 143
■ for the occasion of a deficiency of private investment In
conjunction with full employment. The maximum limit of 5 > 0
| million pounds may be too small for this purpose, but then
! the Chancellor of the Exchequer made it clear that In the
event of need he would not hesitate to ask for an increase
in the maximum ceiling.59 To what extent this guarantee
has been rendered is unknown to the writer. Since it was
, a period of shortage of physical resources rather than the
t
, dificiency of capital funds throughout the post-war period,
perhaps It Is safe to presume that this measure has been
rarely used If at all.
Financial assistance to development areas. — The
British government has concerned itself with the location
of Industry. The Distribution of Industry Act, 1945*
’ provides the government with controls and inducements to
Influence industrial location. It is aimed to locate new
industries In areas where surplus labor exists. In so far
; as inducements are concerned, the Act provides: (1) The
Board of Trade may make loans to trading or Industrial
estate companies In development areas; (2) a Minister of
59 William H. Loueks quoted from ; New York Times,
January 24* 1946* in his Comparative Economic Systems,
op. cit., p. 3 5 6.
l!A
■ the Crown may make grants or loans towards the cost of
! t
i Improving basic services (i. e*, transport, power, lighting
j !
: or heating, housing, and health) in the development areas;
. (3) the Treasury may make annual grants or loans for
industrial under takings in development area.
The Act prescribes no maximum ceiling for financial
assistance. It is unknown to the writer to what extent
' grants or subsidies have been given to private concerns
i
f
; in Development areas. The British government, however,
announced, at the end of 19lf 8, that it, ’ ’ using special
: powers and machinery, had already erected 290 factories
in such areas and 250 more are at present being built.
Sponsoring long-term finance companies. — As a result
of the long endeavor to bridge the ’ ’ Macmillan gap,” i. eU
, the gap between short term bank credits and the long-term
credits from security Issues,&2 two financial corporations
were promoted by the British government shortly before the
60 Distribution of Industry Act, 19lj-5 (London: H. M.
Stationery Office, Sections 2, 3, and’ Tj., respectively,.
P- 2.s
61 Cmd. 7572, p. 33.
62 It assumed the name because It was first offi
cially discovered,by the Macmillan Committee and was made
public in the Committee’s Report, op. cit., pp. i|8-52.
145
! Labor government took office in 1945*^3
The Finance Corporation for Industry, Ltd, is designed
| to satisfy the long-term capital needs of firms or indus-
i tries, which should, in the national interest, be in a
! position to borrow, but for some reason* financial or
' otherwise, are not in a position to raise capital through
; the ordinary channels. Its purpose is to provide finance,
i
I in the words of the Chancellor,
f
( for industrial business of the country with a view
to their quick rehabilitation and development in the
> national interest, thereby assisting in the maintenance
and increase of employment *®4
The capital of the Finance Corporation for Industry
Is 25 million pounds, subscribed roughly as to i^-O per cent
by Insurance Companies, 30 per cent by Trust Companies and
f
30 per cent by the Bank of England. The Board of Birectors
; of the Company is vested with an additional borrowing
power of 100 millions pounds from the clearing banks. The
total resources of the FIG thus Is 125 million pounds.
i
63 The Intention o|f creating these two corporations
was announced by then the Chancellor of the Exchequer in
the House of Commons In January 23, 1945. The Economist,
lk8: 120-121, January 27, 1945. “ ‘
64 Ibid., p. 120.
The company Is expected to render financial assistance
t
i to big concerns, presumably in basic industries, and thus
: the normal loan or commitment of the company Is 200 thou-
, sand pounds or more. The operating policies of the Corpor
ation are as follows; (1) It will make accommodations under
those particular circumstances where the normal banking
! accommodations are unavailable and the normal capital Issue
' channels are inappropriate* (2) It will render purely
; financial assistance, and will not undertake the reorgan
ization or the management of industry. (3) It will conduct
■ its business on the broadest possible basis consistent
t
with proper commercial prudence. Its loans are expected
to be repaid as the Investment position of borrowing firms
improves and the normal sourees of funds can be tapped.
; (I4.) As the company secures favorable terms from the banks
f 1
and the company shall pay only moderate dividends on Its
:paid-up capital, its charges on accommodations are com
paratively low.^5
Although the Corporation is expected to cater largely
65 Anon., Finance Corporation for Industry Limited
(a statement announcing its existence, dated January 23,
19k$> obtainable from the Finance Corporation for Industry)
p « 1.
Hi-T
to basic industries, in its first period because of the
liquid position of such industries very few firms in basic
industries had called for its accommodation. Consequently
it extended its operation in that period into a wide field
including diesel engineering, shipping, chemicals, gas
turbines, electrical components, e t c .66 But since 191+8 the
situation has changed, ©be demand for its accommodations
has been increased as evidenced by the increase in advances
from I } . . 8 million pounds to 11 million pounds in the
accounting year, 191+ 8-1 + 9.^
It is doubtful, however, as to whether it can confine
Its activities to basic industries only, since eoal and
transport industries were nationalized and cotton is get
ting direct aid from the government. Before the nationaliz
ation of steel, the steel industry was its main field of
operation. In 1950, the company had an aggregate advance
of 32,702,386 pounds and an aggregate commitment of
3l+,l60,255 pounds. Of the aggregate advance, 20,812,91+5 '
pounds or 61+ per cent were made to the steel industry; of
66 Post-war Britain, 191+8-1+9, op. cit., p. 6 8.
67 Ihe statement of Lord Bruce, Chairman of the
Board, Hie Economist, 157: 272, July 30, 191+9•
the total commitments, 32,237*055 pounds or 90 per cent
were to the steel industry.^® After the steel industry
is nationalized, the Corporation will probably find no
basic industry asking its assistance. The Corporation may
have to extend its facility to other industries. Moreover,
the Corporation finds that it is difficult to meet its
original requirements that any project it undertakes to
finance must have a commercially sound basis and offer a
reasonable chance of repaying the moneys advanced.
69 It
inspires speculation as to whether in the future the
company will be able to observe the commercial principle
and still perform the function fdr which it was created*
Complementary to the Finance Corporation for Industry,
but intended to render financial assistance for small
concerns, the Industrial and Commercial Finance Corporation
Ltd. was proposed by the Chancellor of the Exchequer at the
same time as the Finance Corporation for Industry was
proposed. The capital of the Industrial and Commercial
Finance Corporation was provided by the eleven London
68 The Economist, 158; llj.05, June 2l|, 1950.
69 Lord Braced statement, The Economist, 157: 273,
July 30, 19^9. *
clearing banks and the eight Scottish banks, roughly in
proportion to their then resources. The Bank of England
had a token subscription of the company*s capital. The
total authorized resources of the corporation were 15
million pounds in common stock and 30 million pounds in f
borrowing power.
The Industrial and Commercial Finance Corporation
provides medium, long-term and permanent finance in amounts
ranging from 5»000 pounds to 200,000 pounds* There is some
slight elasticity in the upper limit, but initial loans
will not be for less than the lower.70 The average size
of the Corporation transactions is about 1^5,000 pounds.71
The business done by the Corporation falls into two main
divisions: loans and investments. The loans amount to
6l.7 per cent of the total business, of which the secured’
loans are 35 per cent of the total. The investments,
consisting of preferred stocks (participating or non-
7° Finance for Industry, a pamphlet reprinted from
Accountancy, (England) February 1949* P* 1*
71 Long-term and Permanent Finance for Industry —
With Special Reference to the Work of Industrial of Com
mercial Finance Corporation Limited. (An address to the
Bankers1 Institute, Manchester, bv Lord Piecy, the chair
man of the company, March 19, 19lj.8.) p. 1.
i5o
participating, redeemable or non-redeemable) and common
stocks, are about 3 8 .3 P©** cent of the total business.72
No trade or industry is barred from the Corporation*s
business; but organizations of a professional type on the
whole fall outside of its scope. Mechanical engineering
tops the list of its financial commitments; next is metal
i
industries. A sum of twenty-seven industries makes up its
list of clients.73 During its first four years, the ICPC
had made available over 19 million pounds to some 290
concerns.
The Corporation, collaborating with the Development
Areas Treasury Advisory Committee, had provided a rather
large portion of it's facilities for many concerns in
Development areas.7% An increasing proportion of the cor
porations resources seems to be utilized in providing
working capital rather than fixed capital.75
It should be noted, however, that, although the
72 Lord Piercy, Finance for the Saaller Industrial
ist (Extract from Board of Trade Journal, January 7, 1950).
73 Idem
7^- Economist. 158: 1133* May 20, 1950.
75 Idem
151
Finance Corporation for Industry and the Industrial and
Commercial Finance Corporation were proposed by the British
government, both companies are owned in large part by the
private financial institutions in Britain, and are formally
independent from government control* Furthermore, both
companies have stressed commercial principles in their
conduct neither to finance uneconomic concerns for
political or social reasons, nor to provide capital at
exceptionally low rates*
Nevertheless, these two companies can be legitimately
regarded as a part of the governments controlling machi
nery in the field of finance for they were sponsored by
the government in the first instance. In the second place,
although the members of their respective Board of Directors
are formally elected or appointed by the respective share
holding institutions, most of them actually elected or
appointed are persons having close connections with the
government.76 jn £&© third place, both companies- provide
extensive advisory services to their clients as to problems
of finance, government policies and other matters. They
keep In close touch with government departments controlling
7^ Economist, l l j . 8: 705-6, May 2 6, 191[_5*
152
■ supplies. They also submit their advances and investments
to the Capital Issues for Treasury1s approval. In the
1 fourth place, the Companies are not very anxious to make
i
a profit. For example, in the writer*s knowledge the ICFC
has not paid any dividend on its capital stock.77 For
■ about four years since Its inception, the ICFC had had to
provide no less than 6,000,000 pounds for bad and doubtful
1 debt, while Its total volume of transactions was only 19
i million pound.78 And finally, the then Chancellor, during
. debate declared that the project of establishing these
companies represented a part of a new technique, an attempt
to establish such a connection between the government and
i
private business as would promote the public interest in
: the presence of a positive government policy in the economic
!field.79
i
; Public investment. — The post-war British government
has been undertaking an unprecedentedly large scale of
public investment.
77 Finance for Industry; "The ICFC in a Hesitant
Economy," The Economist, 1133. May 20, 1950.
7® Finance for the Smaller Industrialist, op. cit.,
p. 1.
79 The Economist, llj.8; 705, May 26, 1945*
153
The British central government has set up the Public
¥/orks Loans Commissioners who, obtaining resources from
1 the National Debt Commissioners, provide loans to local
authorities at an interest rate which is below the market
rate. The Public Works Loans Act, 19^8, raises from 250
\
million pounds to 5>00 million pounds the total amount
which the National Debt Commissioners may provide for the
, Public Works Loans Commissioners. And the maximum commit-
i
| ments of the latter to the local authorities is raised
from i j . 0 0 million pounds to 680 million pounds.®0
Besides sponsoring big housing projects, the British
government, in the post-war period, has been undertaking
heavy investments in the nationalized industries and
social services. Indeed, as compared to the fixed invest
ments of private manufacturing industries, the public
Investments are disproportionally large. The gross fixed
Investments of the manufacturing Industries were estimated
at 370 million pounds in 19^1-7* millions in 19^4-8 » and
l ) - 5 5 millions In 19^4-9 1 millions in 1950; yet the total
gross fixed investments of fuel and power, transport
communications, and social services were estimated at 436
Midland Bank Review, August 19^8, p. l£.
15k
; million pounds, i f . 9 7 millions, 6l0 millions and 625 millions
. in respective years.®-*-
i
It should he noted, however, that public investment
Is much more a subject of fiscal policy rather than credit
. control or monetary policy because the public investment
fund is either from taxes or public borrowing. Heverthe-
, less, there is a close relationship between the public
investment program and credit control.
t
The Over-all Picture of British Investment Planning
At first the Labor government did not have an over
all plan for capital investment. The Labor governmentfs
approach to planning, as has been shown previously, was a
piecemeal, Individual project approach. At least in the
first stage of their post-war administration It was so.
Furthermore, the Labor government approached planning from
the viewpoint of physical resources rather than financial
resources. Hence, investment control in the early post-war
years (roughly ) largely relied upon the priority
control of raw materials, e. g. steel and timber, and the
direction of the productive capacities of the building and
8l See Table XII, infra, p. 19&*
155
engineering industries, by way of issuing permits.
Over-all quantitative investment plans. — It was not
until the end of 1914.7 that the Labor government presented
to the Parliament a short run overall capital investment
program.82 the long rim program was set still a year
later in the memoranda submitted to Organization for
European Economic Cooperation, commonly referred to as the
British four-year plan.®3
In the memoranda, the aggregate domestic investment
wa3 estimated at a rate of approximately 20 per cent of
Great Britain’s gross national product annually.®^- While
this figure is high as compared with the 15 per cent figure
of 1938s the actual Investment was even higher. In 19^9 lb
was 22 per cent. It was one of the chracteristies of the
planning of the Labor government, namely, the undertaking
of an excessive investment program. In 19^6 in spite of the
great shortage of raw materials and the huge deficit in the
balance of payments, the British carried out a gross capital
investment of 1,300 million pounds.For the three years
82 Capital Investment in I9I 48 (Cmd. 7568). 31pp.
83 Cmd. 7572, Ch. IV.
8I 4 Ibid., p. 32.
85 See Table XIII, infra, p. I8I 4.
156
19^7-3-1.9 the gross domestic capital formation had averaged
23 per cent of the gross national product.®® The 2,000
million pounds investment in 193-1-7 was carried out in a year
when there was a deficit of 630 million pounds ($2,500
million) on the balance of payments on the current
account.87
The evil of the excessive capital investment has been '
fully seen in the events of 194-6-5 0. First of all, the
balance of trade was adverse; a large deficit of balance
of payments was incurred; payment crises occurred; the
gold reserve deteriorated; and the government ended up
with a devaluation of sterling. Secondly, inflationary
pressure was persistent in the British domestic market. An
QBEC report showed that while inflation had ceased in most
of the QEEC countries, it persisted in Great Britain.®®
Thirdly, the big government sponspored programs gave rise
to pressure that made it impossible for private industry
in general to add to its working capital or even, in some
cases, secure adequate maintenance of its existing
86 Idem
87 Economic Survey for 193-1-9 (Cmd. 76I 4. 7 )* p. 23.
88 The Economist, 157: 9&Q, November 5» 193|-9*
157
c a p i t a l . Had the Canadian and the American credits and
gifts, including Marshall plan money, not been provided
for, it is doubtful whether the British government would
have been able to carry out the program, To the extent
that this has been true, American dollars have financed
the British socialization program.
The Over-all qualitative investment plans. — The
Labor government was even more interested in allocating
the capital among various uses. In the memoranda cited
above it was announced that the resources available for
investment were to be concerntrated on the £ollowing
purposes:-
(a) the expansion of home agriculture and
fisheries;
(b) the development of basic industries, particu
larly steel, coal, oil, basic chemicals and
cement, in order to make possible the un
fettered expansion of Industrial production;
(c) the strengthening of the public utility ser
vices where necessary, particularly electricity,
transport and port services, In order to
support the expanding level of industrial
activity;
(d) the modernisation of industrial equipment so as:
to increase the volume and reduce the cost of
production;
(e) the development of new raw materials and alter-
89 Hoy Harrod, Are These Hardships Necessary (second
edition; London: Rupert Hart-Davis, I9I 4.7), p. 2 9.
158
native sources of supply for existing raw
materials at home, In the Colonies and else
where oversea;
(f) the removal of shortages of widely used basic
products, such as ball bearings, precision chain,
refractories;
(g) the provision of essential services, such as
housing, and of basic social services, such as
water, health services and education (particu
larly on the technical side), which contribute
to the nation*s economic strength,?0
The British government even figured out the percentage
distribution of capital investment among different uses
such as follows;91
%
Fuel and Power 15
Transport and Communications 18
Agriculture 6
Industry (including Iron and Steel
and Shipbuilding) 33
Housing 16
Social Services (Water Supplies,
Health, Education, Sc.) 7
Defence and Public Administration 5
100
In order to insure that investment resources are
canalized in the desired direction, the British government
has adopted a wide range of controls. In addition to the
above discussed methods such as the control over capital
90 Cmd. 7572, p. 32.
91 Ibid., p. 33* Both the concentrated purposes and ,
the percentage distribution of capital resources were re
produced In Capital Investment in Britain (British Infor
mat ion Paper: Id. 9°9» January,”T9W)> PP* k-“$ •
issue under the Borrowing (Control and Guarantees) Act, the
subsidies and guarantees, and the direct public investment,
etc. the British government has established the licensing
of all building work above small fixed limits, statutory
distribution schemes for steel and timber and arrangements,
and statutory (or voluntary) division of output of plant
and machinery between the home and export markets. In the
case of the nationalized industries the Boards of those
industries are required by statute, when framing programs
of reorganization or development involving a substantial
outlay on eapital account, to act on lines fixed from time
to time by the responsible minister.92 indeed, the controls
over physical resources and nationalized industries are
even more important in terms of effectiveness and volume,
as compared with those controls within the broad meaning
of credit control.
Criticisms of British Investment Planning
The British government In the post-war stage has been
using many controls except the control over the price of
borrowing* The discard of the traditional technique of
92 Cmd. 7572, p. 33
manipulating interest rates may be regarded, in this
connection, as the distrust of the market mechanism for
selective purposes. In other words, the British Labor
government does not believe that the Interest rate may
serve as a selective device for achieving a socially desir
able allocation of Investment. This is rather a preoccup
ation or bias on the part of the Laborites. The discussion
of this matter is reserved for a later section.
It is interesting to note that the Labor government’s
investment planning was fundamentally in agreement with
the proposal made by Sir William Beveridge in his remark
able book, Full Employment in the Free Society.93 He
proposed that a National Investment Board be. set up with
the power to control in detail all private Investment. The
proposed Board is supposed to see to the social priorities
so that "first things should be produced first."9^ The
Capital Issue Committee Is doing exactly what the proposed
Board Is supposed to do.
The Labor government was apparently trying to take
over the ultimate responsibility of investment. With the
93 (New York: W. W. Norton, 1945)* PP* 156-8; 175-80.
94 Idem
control apparatus on hand, the Labor government tried to
enforce its views by allocating resources industry by
industry, and even firm by firm* Such a practice, I. e.
replacing the market mechanism with central direction, or
in other words, replacing the decisions of private manage
ments with the judgments of politicians is the essence of
economic planning* It is doubtful as to how much better
this practice is, or is there any better than it as com
pared with the orthordox practice. It is certain, however,
that the investment planning as such is not free from
criticism. The excessiveness of the total investment
program has been noted. As to the planning of the com
position of Investment, the following criticisms, in the
writerfs judgment, are valid: In the first place, it would
cause the economy to stagnate. As the decision making is
shifted from managers to public servants, the Intimate and
detailed knowledge is no longer fully utilized in decision
making. Firms with promise can not by their own effort
secure additional capital, while the government is not in
a position to observe the future prospect of individual
firms and even new Industries. In past history there were
many new goods which were over the horizon and concealed
from contemporary observers. It is useless to try to
162
predict what is coming, but if freedom and scope for such
new developments are provided, jiew developments will grow.
Unfortunately the British seheme of investment control is
just working in the opposite direction.
She scheme of investment planning especially operating
through physical controls, presents almost insuperable
obstacles to the newcomer. It handicaps the more efficient
firms effect expansion, even if they do not need outside
financial resources. Often not only large firms but large
and certain types of output are unduly favored in the
working of the planning.Furthermore, the pure financial
measure of the Investment planning handicaps the new and
small firms. The control over capital issues, for example,
prolongs the already lengthy procedure of new Issues and
deprives many small firms of the opportunity of using the
new Issue market which is Increasingly Important to the
financing of small firms.
95 Thomas Wilson, Modern Capitalism and Economic
Progress (London: Macmillan, 1956)* pp. l?8-9*
96 R. F. Henderson, “The Significance of the New
Issue Market for the Finance of Industry,” Economic Journal,
58 1 6 6, March 19l|-8, F. W. Paish, ”The London New Issue
Market,” Economica NS19: 9-10, February 1951.
In the second place, the Investment planning would
ultimately develop Into the control of consumers. The
essence of the investment planning is to assure the obser-
vence of the social priorities. It implies that the unplan
ned private investment may not observe the principle of
social priority. However, this implication is unreasonable
If the demand which guides the unplanned private invest
ment is coincident with the social priority. The implic
ation therefore must presuppose that Individual priorities,
which are behind the demand function, may not be in accord
with the social priorities established by the government.
It Is the purpose of investment planning to assure the
social priorities at the expense of Individual priorities,
in the event of their conflict.97
THE CHEAP MOHEY POLICY
The post-war monetary policy of the British authorities
is cheap money, although there Is a difference in degree
between the Daltonian and the Crlppsian policy* There are
97 John Jewkes, in his Ordeal by Planning (Hew York:
Macmillan, .19l f - 8), made this point In conjunction of erltiz-
ing Beveridge*s proposal of Investment planning. See his
book# p. 72.
16k
theoretical reasons for this cheap money policy, and this
theoretical frame work may quite well he taken as the
preliminary discussion of the monetary policies of Dalton
and Gripps, the two Chancellors of the Exchequer in this
stage•
Arguments for Cheap Money
Cheap money may he referred to as a low rate of
interest, A low rate of interest was announced hy the full
employment white paper as the necessary condition for post
war full employment,98 This view is clearly an adaptation
of Keynesian theory. Judging from the spread of this theory,
from the important position held by him until his death,
and from the relevant literature, one can unmistakingly
sense the tremendous influence of Keynes* theory,
Keynesian employment theory, — In brief, Keynes*
theory is that the level of employment is determined by
the effective demand which consists of the demand for
consumption and that for investment at the given level of
national income. The consumption function, which determines
the demand on consumption and is the relationship of
98 Supra, p. 113.
165
propensity to consume to the national income, is almost
certain under given social circumstances*
The level of investment is determined at the point
where the prevailing rate of interest coincides with the
marginal efficiency of capital. In a modern wealthy country
the propensity to consume is certainly low (that means the
volume of investment must be large in order to bring about
full employment) and the marginal efficiency of capital Is
also low; therefore, the rate of Interest, which corres-
ponds to the marginal efficiency of capital at full employ
ment must be low.99
Keynes even argued that, although the business cycle
is due to fluctuations of the marginal efficiency of
capital rather than the high interest rate, still a low
interest rate Is essential for recovery, and furthermore,
... the remedy for the boom Is not a higher rate- of
Interest but a low rate of interest! For that may enable
the so-called boom to last. The right remedy for the
trade cycle is not to be found in abolishing booms and
thus keeping us permanently in a semi-slump; but in
abolishing slumps and thus keeping us permanently in
a quasi-boom. 3-00
99 John Maynard Keynes, The General Theory of Em
ployment, Interest and Money (New York: Harcourt, Brace
& Co., 1 9 3 6). if03p'p. Especially Chs. 3, 13, 15, 16, 17,
1 8, and 2 0.
100 Ibid., p. 322.
His contention is that a rate of Interest, if it is
high enough to overcome the speculative excitement during
the boom, will check every kind of reasonable new Invest
ment at the same time. And that, to him, is like a medicine
which cures the disease by killing the patient.
There is not enough space in this paper to discuss
Keynes1 General Theory. However, certain relevant points
must be mentioned In passing. First, the maintenance of a
low interest rate in times of boom almost certainly means
the promotion of inflation. For, a low interest rate in
times of boom discourages saving while It encourages invest
ment (also consumption); and the measure necessary for the
maintenance of a low interest rate in boom, which is the
injection of money, is certainly inflationary. Second, in
the absence of any maneuver on the part of monetary auth
ority, the rate of interest tends to be high in times of
boom as a result of the working of market forces, and the
resultant high rate of interest tends to keep investment
in line without cutting reasonable new investment, if the
environment Is favorable for the working of market forces.
It is only under Keynes* specific assumption that people
101 Ibid., p. 323
167
In the organized capital market are predominately for
speculative gain rather than geniune investment, that a
rate of interest high enough to eheck speculation would
cut every reasonable investment* Third, Keynes rightly
pointed out himself that, in times of full employment and
especially when a tremendous inflationary threat exists,
such as was true in the post-war stage, the maintenance of
a low interest rate, by virtue of promoting effective
demand, would certainly raise prices instead of employ
ment. 2 This is to say that Keynes* arguments for a low
interest rate were not applicable to the post-war economic
conditions in Great Britain.
In fact, Roy Harrod interpreted the would-be position
of Keynes under present capital market conditions to the
effect that the working of the price mechanism would not
produce a rate of Interest high enough to eliminate the
post-war Inflationary pressure, thereby making it impossi
ble to dispense with direct controls.While this situa
tion was pretty much agreed upon by observers, it would
not necessarily support the contention that a low rate of
102 Ibid., Ch. 21.
103 Roy Harrod, op. clt«, p. 12ip*
168
interest is preferable. For a rate of interest high enough
to cure the post-war inflationary threat may not be obtain
ed, yet the' working in that direction is helpful and cer
tainly harmless, and on the other hand, a low rate of
interest surely adds to the inflationary pressure.
However, Roy Harrod argued that in as much as allow
ing the rate of interest to rise does not help the present
grave situation and does entail a danger of unemployment
later, a policy of maintaining a low rate of interest is
preferable, for a low rate of interest has other favorable
consequences.^^*
Equalization of income distribution. -- Another arg
ument advanced by Keynes in supporting a low rate of
interest is that a low rate of interest reduces the income
of rentiers and thus brings about a reduction of inequality
of income distribution which, on the one hand, is a desir
able social goal itself; and in turn is a means to bolster
affective demand.3-^5 This argument has a weight in labor
circles. Hugh Dalton, then the Chancellor, spoke approving
ly of Keynes* phrase, Mthe authanasia of the rentier," as
IOI4. Roy Harrod, op. cit., p. 12l|..
105 Keynes, op. cit., pp. 375-7*
169
a goal of his Gheap money policyshould be noted,
however, that, unless one is ready to take the position
as Keynes did regarding the supply of capital independent
from individual saving.-^7 one cannot help but think that
the euthanasia of the rentier is also the euthanasia of
the incentive to save and to progress. A reduction of the
rate of interest affects the bond-holders only, not the
share holders or other equity-investors. The bond-holders
represent not only rich people, but also millions of under-
priviledged people who may have invested their small
savings in bonds by themselves or through their life
insurance company. Furthermore, the rich investors, under
present British conditions of heavy taxation on incomes
without hitting capital gains, are more likely to seek the
short-term capital gains rather than the income from invest
ment. As a result of the Daltonian ultra-cheap money policy
driving the long-term gilt edged rate from 3 per cent to 2 - J -
per cent in 19i i . 6- l j . 7t the losses from the yield which was
subject to high income tax, have been more than compensated
106 Hugh Dalton spoke at the Bournemouth Labor Party
Conference in 19I 4. 6. See Young, op. cit., p. I 4.O•
107 Keynes, op. cit., p. 3 7 6.
by the appreciation of the capital value which was not
taxable. Consequently, Dalton*s policy really gave a bonus
to anyone who wished to realize his capital whether for
consumption or for business expenditure. It Is definitely
inflationary. Finally, while the investors lost heavily
under this policy the speculators did well by It. So, as
F. W. Paish commented, "If Dr, Dalton was the rentier*s
enemy, he was much more the speculator’s friend. " - * - 0®
In view of this fallacy of the ultra-cheap money
policy, R. S. Sayers suggested that the important thing is
the stable bond market, rather than the stable interest
rate. And he advocated the maintenance of a stable bond
market at a low interest rate.l®9 Such a suggestion, of
course, is still Inflationary and Its practicability is
doubtful5 however, it is much more moderate than the ultra
cheap money policy.
Considerations of government burden. — It is often
argued that a small rise in the interest rate would add
a tremendous burden on the Treasury in times of a hugh
108 F. W. Paish, “Cheap Money Policy," Economica.
NSll}.: 175* August 19^7.
109 R* S. Sayers, "Central Banking in the Light of
Recent British and American Experience," The Quarterly
Journal, of Economics. 6 3: 198-211, May 19^ . 9 .
171
public debt which is outstanding. It is true in superficial
reasoning that a half per cent reduction of interest on a
total of a 2 5>6 3 2,0 0 0,000-pound national debt would save
the British Treasury about 125 million pounds a year.HO
And considerations of this burden were one of the chief
reasons for the adoption of cheap money policy. Yet this
kind of reasoning is superficial* In the first place, in
times of heavy inflationary pressure like the post-war
situation, a rise of interest rates is a safeguard against
inflation* In other words, if interest rates are not allow
ed to rise the cost of all other items of government expen
diture will tend to increase. It would, thus, be wrong to
regard every addition to the national debt charge due to
higher rates of interest as a net burden to the Treasury; or
every reduction from the debt charge is net gain to the
Treasury. In the second place, approximately one-fifth of
the ’ ’ marketable’ * debt is held by the ’ ’ public department, "HI
110 The debt figure was recorded on March 31, 19l}-7»
See ’ ’ The Size and Shape of the National Pebt,” Midland
Bank Review, February 1950, p. 1.
Ihe estimate of Treasury saving was given in
’ ’ The Changing Shape of Britain's Monetary System, Part II:
Post-war Transition,” Midland Bank Review, February 19^8,
p* 3*
111 **The Size and Shape of the National Debt, ”
op. cit., p. 1.
172
1. e. tlie agencies of the central government; and, thus,
the interest charge on the debts so held is but a transfer
accounting process within the government. There is no gain
or loss to the Treasury by the changes of interest rates on
them. In the third place, the cheap money policy for a
period of time cannot reduce every interest charge to the
Treasury. Only as outstanding securities reach maturity
and call for a new borrowing or refunding operation can a
reduction of interest rates reduce the interest charge to
the Treasury. With all these considerations, it is easy to
see that the burden to the Treasury from a rise of interest
rates is over exaggerated. Indeed, it was calculated that
during the 19if-5**M> ultra-cheap money drive, the British
Treasury saved from interest charges only 6.I 4. million
pounds gross, or 3 .5 million after payment of income and
surtax.
Inappropriate economic conditions. -- It Is perhaps
interesting to note that some additional arguments for
cheap money have been advanced by a prominent banker,
Linlithgow, the Chairman of the Midland Bank. His proposi
tion may be summed up as follows: a high rate of Interest
112 F. W. Paish, "Cheap Money Policy," op. cit.,
P. 175.
173
is inappropriate to the post-war condition, for it might
lead to positive deflation as the experience after World
War I had shown; for it is capable of inducing a thoroughly
irrational order of priorities among capital projects; for
the working of interest rates requires many conditions
which are absent nowadays, such as equilibrium in the
balance of payments, an international gold standard, a
high degree of flexibility of cost and prices, and an
open market for capital and credit.113
Linlithgow’s analysis about post-war conditions is
unquestionably correct. There is no free and flexible
market for goods and services and also for credit and
capital. But the point is this: all those who argue for a
higher interest rate are for the restoration of the market
mechanism, and they rightly think that the use of financial
measures, which if they gradually replace the direct con
trols, would bring about the functioning of a free mar
ket. 11^- Moreover, if economic planning is indispensable
in the post-war British economy, the kind of planning
113 The statements by the Chairman of Midland Bank
Ltd. at stock-holders annual meetings on January 13*-. 194®*
and January 23* 1950.
l l l | . Thomas Wilson, op. cit., pp. 173-176.
1
1 7 1 * .
which, uses financial measures is preferable in a democratic
country than that which relies on direct controls,11^
Irrational priority. — Except in the extreme case
where the use of capital is completely wasteful and in that
case the remedy should be sought in the way of prohibition
or other regulations, it is hot understandable as to how
the reliance on the interest rate would establish a wrbng
priority order. If private investment, directed by marlcet
forces, Is carried on by the anticipation of demand, the
priority order thus established can hardly be said to be
wrong unless, of course, one assumes the irrationality of
the consumer*s demand. And in a democratic country, the
consumer’s free choice simply must be supreme, even though
it is assumed irrational. Moreover, the government direc
tion of Investment cannot be against the consumer’s demand.
For example, It is unwarranted for a government to build
more ships if the people do not want them, and let them
idle, while other goods that the people want are not
provided. Thus, prudent social priority and the legitimate
115 James Edward Meade, Planning and the Price
Mechanism (London: George Allen Unwin, 19^7")» pp. 18-31,
especially p. 2 9.
175
commercial priority can hardly be at variance* It is for
this reason that the function of the interest rate as a
selective device sorting the conflicting claims against
the limited resources becomes one of the strong arguments
for the use of the interest rate technique. How a high
rate of interest might work in the post-war period was
adequately described by james E* Meade, who said:
The post-war period is a time of great strain on
British capital resources* Much capital re-equipment
and renewal is necessary as a result of war demage and
of the Inevitable neglect of many lines of our capital
installations during the war. What is wanted above all
Is a policy which will get peace time production going
again. We need quick returns. After the immediate
pressure clues down, then Is the time to undertake the
large, revolutionary, long-lasting reorganizations of
our capital equipment. And this is exactly what people
would have every Incentive to do if the rate of
interest were high now and were expected to be low
again in the futre. At a high rate of Interest, what
remains profitable Is the type of capital expenditure
which Is not too expensive but will make a large and
quick difference to output or to costs, even though
the improvements may not be very long-lasting.
Judging from the foregoing analysis the post-war
cheap money policy, especially the Daltonian ultra-cheap
money policy, unlike the cheap money policy in the 1930*s
and during the war, was not well founded. An observer of
the British post-war economic policy most likely does not
ll6 Meade, op. cit., p. 31
176
approve of the British cheap money policy, especially as
practiced from 19l } - 6- l | - 7» even though he by no means endorses
R. G. Hawtrey*s view, which was expressed as: for a sole
financial measure which consists of a very dear money and
forced loans.^7 ^phe usefulness of a rise in the rate of
interest should not be overlooked by some superficial
arguments; one of them is that a sharp increase in the rate
of interest is impracticable while a moderate increase of
it is ineffective.-*-^® Of course, all arguments in favor of
a higher interest rate should be read in the light that
the high rate will be applied to private borrowings as
well as public borrowings.
Daltonian Ultra-Cheap Money Policy
A cheap money policy was determined upon in Great
Britain even before the Labor government was elected in
19i|.5>*"*"^ Yet as soon as Hugh Dalton assumed the Chance
llorship in 19l } . 6, he was not satisfied with the then
117 R. G. Hawtrey, "Monetary Aspects of the Economic
Situation,” American Economic Review, 38: 2-55* March 19i}-8.
118 This is the most common form of arguments against
dear money policy. A good Example is found in T. Balogh,
"Britain*s Economic Problem,” The Quarterly Journal of
Economics, 6 3: 32-67* February 19^-9*
119 White paper on Employment Policy was published
in 19I j i } . . See supra, p. lOLj..
£
17?
prevailing cheap money, i. e* 3 P©*» cent on long-term gilt-
edged securities and 1§ per cent on Treasury bills. The
aim of driving the rates of interest down both on long-term
and short term securities, was declared, and subsequently
actions were taken.
Methods used. -- In the drive, three methods have been
used extensively, namely, propaganda, injection of money,
and the maneuver of the holdings of public departments.
Almost immediately after the Labor government assumed
office, Hugh Dalton officially declared that the government
would not tolerate the existing money rates and demanded a
cheaper money. Later in his interim Budget speech on
October 23, 19^-5, in which he announced the reduction of
rates on Treasury bills and TRD’s, he gave a clear and
stressed warning that his intervention would extend to the
gilt-edged market, He promised only to retain existing
rates fbr "saving” securities for the duration of the
"Thanksgiving Campaign” I . e., to December of that y e a r . ^20
Subsequently, Dalton told the British people from time to
time that in the future the rate of interest was going to
120 "Cheap Money In Retrospect," The Economist Banking
Supplement, November l6, I9I 4. 6, p. 3. . .
178
fall. In his April 19I 4.6 Budget speech, for example, Dalton
said: "I have frequently declared — - that the aim of the
government is to cheapen money and to lower rates of
interest to the greatest extent that economic and financial
conditions will permit. f l ^l the propaganda convinced
the British speculators and investors of government securi
ties that the interest rate was to fall later, they would
believe that the present government issue had a higher
yield than future issues or the prices of the present issue
would be higher than that of future issues. They therefore
were willing to asorb the new government issue at that time.
The second method and also the most fundamental method
is the Injection of money Into the market. There are
several ways to inject the money. Open market buying on
the part of the Bank of England and the Issuing of circu
lating notes are the two orthodox ways and they were both
utilized by the Labor government.Yet a more recent and
121 Idem
122 It should be noted that, the Bank rate was kept
constantly at 2 per cent since 1939* ®ti© Labor government
did not use the Bank rate technique extensively in the
sense that it was not used as the leading force of the
ultra-cheap money drive. It was partly because the 2 per
cent was (is) considered as the lowest minimum, below which
It did not and could never fall; partly because the extreme
179
remarkable development is the technique of floating debt*
It has been long recognized that central authorities had
considerable influence over short term rates, simply
because the Bank of England stands ready to rediscount the
short term paper at the Bank rate* Since the decline of
commercial bills, especially international acceptances, the
central authorities virtuely can dictate the rate of short
term bills* Now, whenever the Treasury finds that the
investing public is unwilling to absorb the long-term
securities on the terms currently offered, the Treasury
borrows short term funds from the banking system, by means
of tap Issue of Treasury bills, which are almost the only
kind of short term bills In the market,' or by means of
Treasury Deposit Receipts, which are virtuely compulsory
loans from the banks to the government* The short term
liquid position of the money market throughout the entire
period.
As to the control of the quantity of credit, there
was a favorable development to the authorities, namely the
banks1 window dressing was abandoned since December 31,
19l{-6. Since then the monthly statements of the London
clearing banks are compiled as on the third Wednesday in
each month; and the cash ratio was agreed upon at 8 per
cent constantly. Thus the precise figure ot\ the quantity
of money is since currently made known to the authorities*
See "The End of Window-dressing," The Economist, l5ls
96 1-6 5# December l i j . , 19ij-6.
l8o
borrowings from the banking system result in an expansion
of bank deposits, from which the public receives little or
no interest; and as this process continues the terms offer
ed on long-term loans may be expected to appear gradually
more attractive, and the new long-term issue be conse
quently absorbed. In this way, the government is able to
induce the investing public to accept its long-term
securities at lower rates of Interest.^3
The third method employed In the drive of lowering
the interest rate is the maneuver of holdings of public
departments. The public departments, as usually spoken of,
include the National Debt Commissioners, the Exchange
Equalization Account, and the Issue Department of the Bank
of England. Of these, the National Debt Commissioners is
by for the most important body, which holds the funds, in
the form of government securities, of the post-office
savings accounts, trustee savings banks and the National
Insurance Fund. It was estimated that the holdings of the
public departments* excluding the EEA, and the Issue
Department of the Bank of England, represent perhaps as
123 W. Manning Dacey, ' ’ The Cheap Money Technique,”
Lloyds Bank Review, NS No. 3, pp. 50-53» January 1947*
181
much as 5»500 million pounds, or well over one-fifth of
the total British national debt.^k was acknowledged
by the Chancellor that the holdings of the EEA and the
Issue Department of the Bank of England could be varied
from time to time in support of an official policy.^5 with
such huge holdings, both in the short term bills and in
long-term gilt-edged, there is a masse de maneeuvre. One
type of this maneuver is that, about the time of a gilt-
edged reaching maturity, the publie departments will sell
their holdings of Treasury bills in the market and buy up
the maturing gilt-edged* For it has been customary practice
among investors to sell the security shortly before matu
rity in order to realize the greatest capital gain. With
the maturing gilt-edged securities, the public departments
are able to convert Into a new Issue or to absorb the un
sold new issue of the gilt-edged, and sell It at the
opportune time. Another type of the maneuver is that the
publie departments simply engage in open market operations.
They may, for example, sell their Treasury bills and buy
1 2 l { . "The Growing Importance of Government Finance,"
Midland Bank Review, May 19k9> P» 3? "The Size and Shape,
or the National Debt," Midland Bank Review, February 1950,
pp. 2-3.
125 Idem
182
the long-term gilt-edged in times of rising interest rate,
and thus they provide the liquid-assets for the banking
system as well as competition in buying the gilt-edged
securities .3-26
The results of the ultra-cheap money drive* — With
these three ntethods the Chancellor of the Exchequer was
foi* a time able to bend interest rates to his will. He
started with the rates on the floating debts. The rate paid
by the Treasury on TDRs was reduced from the wartime figure
ll/ 8 Pei* c©n^ to £/g per cent, effective on October 22nd,
1914.5* and since then it has remained at that figure. The
allotment rate for Treasury bills promptly fell correspon
dingly, from a norm of fractionally over 1 per cent to |r
per cent. These changes were formally announced by the
Chancellor the next day. Other short money rates immediately
followed suit. And the banks, compelled by their reduced
earnings in short term assets, cut their maximum allowances
on short term or notice deposits from 1 per cent to -§ per
cent, and, as from November 30th, 19lj-5> suspended allow
ances altogether on current accounts.127
126 Idem; W. M. Daeey, op. cit., pp. 53-57»
127 ”Gheap Money in Retrospect,” The Economist Banking
Supplement, November 1 6, 19M>* p. 3» ~
When the short term rates were pushed down and the
market was convinced that a future reduction of interest
rates was impelling, the speculators as well as the
investing public were induced to purchase the existing
securities eagerly, Thus the market prices of these sec
urities were pushed up. The rise in the price of existing
securities was quickly followed by an issue of new secur
ities carrying (except in May 19lj-6 the Savings Bond issue
which was miscalculated) a rate of interest low enough to
consolidate the preceding rise in security prices.
Yet such an ultra cheap money drive was a costly one.
As shown in Table VIII, it caused an expansion of 800
million pounds or 18 per cent increase in London clearing
bank deposits within a year. And thus the inflationary
pressure on the British economy was so heavy that even a
system of direct controls, which had accomplished so much
in the war, was nearly helpless in keeping the economy in
temporary balance. A series of crisis occurred In 19lf7,
of which the fuel crisis and the convertibility crisis
were the most severe ones.
Keynes, the master theorist for a low interest rate,
rightly pointed out that there is a limit to the manipu
lation of the interest rate below which the interest rate
TABLE VIII
CHANGES IN DEPOSITS OF LONDON CLEARING BANKS
1945-1950
j February
million pounds
1939 1945 1946 1947 1943 1949 1950
1
t Current Accounts 1,212
2,904 3,073 3,603 3,700
3,S10 3,844
j Deposit and other
' Accounts
964
ol
U " \ |
^1
1,606 1,916 1,942 2,007 1,997
Total Deposits 2,176
4,405 4,634 5,519
5,642
5,817 5,841
Balance with other
! Banks, etc.
53 145 143
170 132 190
195
1 Net Deposits 2,113 4,270
4,541 5,349
5,460
5,627
5,646
Rate of Increase on
previous year in year
in Net Deposits
6.3%
17.3$ 2.1# 3.1# 0.3#
Source; Bank of England Report for the year ended 23th February 1949. p. 7;
Bank of England Report for the year ended 23th February 1950. p. 9»
cannot fall.-^® The British economic conditions of 1947
were clearly a warning to the central authorities that they
just went too far. It showed that the 2i| per cent yield on
gilt-edged was artificially low. It is doubtful whether the
market would tolerate any further reduction of interest :
rates even If the authorities desired it. Yet the author
ities were awakened by the unpleasant events. Dalton in
May, 1947, admitted that a reduction in the floating debt
was more desirable than a lower rate of Interest at that
time.^*29 The injection of money was restrained. As soon
as this had been done, the price of securities went down,
that Is another way to say that the interest rates went
up again. For example, 2|r per cent consols regained then
yield to 3*07 per cent at the end of 194-7> even higher
than its yield in Autumn 19454 (before the ultra cheap
money drive), which was 2.84 per cent; the 2 ■ § • per cent
savings bond 1964*6 7, issued in 1946, stood at 95^/l6 at
the end of 1947* Of course, the government had already
gained a reduction of interest charges on new Issues made
at that time; but the subscribers to the issues lost about
128 Keynes, op. cit., chs. 13 and 15*
129 2he Economist, 152; 812, May 24, 1947,
185
thirteen years’ net income on the securities after paying
a tax at 9s to the pund, in* a period of eighteen m o n t h . ^ 0
Prom the view point of the Treasury, rates on public
debts were hardly burden some in 19^ 4- 5• The then prevailing
rates were already low. For example, the 2^- per cent con
sols, which yielded i f . . 39 per cent in 1 9 31* had a yield of
only 2.92.^31 And the average charge on public debts was 2
per cent, which was almost the exact figure for 19i } - 8-9»^^^
Except for reasons based on the intellectual bias of the
socialist, it is hard to understand that Dalton thought
it good statesmanship to press interest rates down still
further at a time when inflationary forces were only kept
in check with the assistance of a formidable system of
direct controls. The Daltonian ultra cheap money policy,
which was directly conflicting with the then general
economic policy, was rightly critized by most observers.
About the end of 19^7* Dalton gave way to Cripps as the
Chancellor.
130 "Cheap Money Epilogue," The Economist, iSk* 66-7*
January 10, I9I 4- 8.
131 See Table IV, supra, p. 63*
132 "The Size and Shape of the National Debt," op.
cit., p. 3* . . .
186
Orippsian Disinflation Policy
As soon as Sir Stafford Cripps assumed the Chancellor
ship, he noticed that one of the impelling problems of the
British economy was inflation* In his April 19J 4 -8 Budget
speech, a definite disinflation program was formed. Al
though the attempted disinflation measures were very In
adequate, still the program was in sharp contrast with
Dalton’s expansive monetary policy.
Steps taken. — Before the April Budget speech,
several events had Indicated a change in government policy.
The attempt to place the British Transport Stock at a rate
below 3 per cent was abandoned In January I9I 1 - 8. Since then
the government or government guaranteed Issues have been
at 3 per cent or more.^33 in January I9I 4- 8, the Treasury
gave notice to local authorities stating a raise of per
cent on loans from the Local Loans Fund was being put into
effect, so that loans of more than fifteen years duration
would, until further notice, carry interest at 3 per cent^P^
This is a clear indication of the government’s policy that
it will tolerate a 3 per cent rate on long term loans.
133 Annual Reports of the Bank of England, 19il-8, 19ii9»
and 1950, p. 2. '
13if 1 1 Cheap Money Epilogue,1 1 op. cit., p. 66.
187
Although this is still a low rate, it is higher than the
19i | - 6-lf 7 government objective*
Several specific monetary restraints also have been
made by Cripps, but they were largely in the same pattern
which emerged during World War II. At the beginning of 19^8*
a memorandum, which was not a replacement but a supplement
of the 19kS memorandum, was issued by the Treasury to the
Capital Issues Committee stating:
The general rule must be postponement of capital
outlay, whether on building or on plant and madinery,
except where the project gives a considerable return,
directly or Indirectly, in increasing exports or saving
imports from difficult sources, or is of importance to
ustries as agriculture, coal and steel
The Capital Issues Committee was asked to give priority
in its consideration of these desirata. The memoranda of
many capital outlays were financed by public authorities
or by business savings. Accordingly, the Public Work Loans
Board was asked to exercise restraint; and to observe the
rules as laid down to the Capital Issues Committee. At the
135 As quoted in Midland Bank Review, February 19^8,
136 Midland Bank Review, May 19^-9» P» 13; Midland
Bank Review, February 19f>0, p. l l j _ .
production.
such a nature have been issued from time to time.* * “ 36 Yet
p. 7.
188
same time, the Chancellor appealed to businessmen for their
voluntary co-operation.3-37 The banks were asked, from time
to time, to follow the same rule in their landing, and
"In their credit policy to use every endeavour to ensure
that inflationary presures are held in check.-*-38
All these requests have been followed quite satisfac
torily. Yet that*s all that the Chancellor of the Exchequer
has demanded from the monetary weapon* The Bank rate re
mained at a low of 2 per cent, and there was no contraction
of the quantity of money.3-39 And even those requests were
no more specific than the requests of Dalton, the ultra
cheap money Chancellor.
The difference between Dalton and Gripps, as far as
the monetary policy is concerned, lies only in that Cripps
did not, as Dalton positively did, drive interest rate
further down by injecting money. Instead his monetary
137 Midland Bank Review, February I9I 4- 8, p. 7*
138 "Control of Bank Advances," The Economist, 1^7i
9 6 3, October 29 > 19^9*
139 Bank deposits continued to rise In 19l|-8. It was
only after 19l| 9» an monetary equilibrium may be said being
established. See Table I, supra, p. 2; Table X, infra,
p. 19q«
189
policy was designed to keep money neutral.3-5-^
Fiscal policy as the chief weapon. — • The chief weapon
of Cripps* fight for disinflation was fiscal policy. As has
been quoted, Cripps repeately spoke of the budget as the
most powerful weapon available to the government, The
taxes, both direct and indirect, were raised. Government
expenditures, such as food subsidies were cut or limited*
A budget surplus was deliberately aimed at, in spite of
its political unpopularity. The result was that an overall
budget surplus of 352 million pounds for the financial year
195- 8-5-9 was produced, and 62 million pounds for 195-9-50. *^5-^
The surpluses were used for repaying public d e b t .-*5-3 More
over, the available cash resources of the Treasury was
used to repay active indebtness to the banking system
rather than to add holdings of longer-term securities.^55-
lliO ’ ’Towards a Monetary Equilibrium,” The Economist,
1 5 6: 995-1001, May 28, 195. 9.
l5-l Supra, p. 176; The Economist, 158: 213* January
28, 1950.
^5-2 The Economist, 158: 786, April 8, 1950.
153 Midland Bank Review, May 195-9* P» 13; The
Economist, 158: '135-6, June 17* 1950.
154 The Economist, l£8: 135-1* June 17, 1950.
190
The preference of a budget surplus to a restriction of
credit has a throretical basis in Keynes1 General Theory*
Besides the reason which have been discussed1 previously
that a high rate of interest is always unfavorable to full
employment, fiscal policy has the merit of directness and
effectiveness in influencing effective demand. Deficits in
the revenue budget, in this new theory, become income-
producing and employment-creating expenditures. It logically
implies that, reversely surpluses in the budget are the
inflation-diminishing forced savings.
Consequences of the neglect of the monetary measure. —
While there is no argument against the use of fiscal policy
for disinflation, there certainly are criticisms over the
discard of monetary policy as a positive measure. First, It
is rightly argued that a budget surplus would not mean
anything if it Is associated with an expansion of the credit
basis, i, e. money supply. The 200 million increase in bank
deposits in I9I 1 - 8-J 4. 9, counterbalanced to a large extent the
352 million budget surplus.With the neglect of the
monetary aspect, the disinflation effort was considerably
undermined. The inflation persisted in Britain after a
ikS See Table X, infra, p. 19^4-*
19 X
disinflation campaign of almost two years .Xlf6 Second, there
are certain positive advantages of the restriction of credit
over a budget surplus as a disinflation measure* One of the
advantages is the timing. While fiscal policy operates in
the medium and long-term rather than in the short term,
credit control is usually felt immediately.X^7 Another
advantage is that credit control would neither hurt the
incentives as high taxes would, nor involve political
difficulty as a reduction in public expenditure especially
in social services expenditure would. One more advantage
which may be mentioned in passing is that restriction of
credit as through raising interest rates would increase'
people’s savings instead of public savings, -- this is
considered an advantage if the free enterprise system is
preferred.
However, it is not argued that the fiscal policy
should give way to monetary policy. It is recognized that
a budget surplus is a useful tool for disinflation. But,
monetary policy should at least be in coordination with
lij.6 ’ "fighter Credit, Lower Taxes,” The Economist,
157: 987-89, November 5* 19i}-9- -
llj-7 W. M. Scammel, "The Changing Aims of Fiscal
Policy,” Westminster Bank Review, May 1950, p. 7-8.
192
fiscal policy. Indeed, the two are hardly separable. Yet,
the British authorities in the post-war period under review
did not avail themselves as they should have of the mone
tary tool to curb Inflation. With the result that the
balance of Trades was in a severely unfavorable position,
and the reserves for sterling were deteriorating. And
finally a devaluation to $2.83 per pound took place in
September 19^9* Internally, British government was unable
to do without retaining certain direct controls, such as
price controls, floods rationing, building licensing, import
controls, etc.^ij.8
lif8 MA Survey of Existing Controls,w Labor and
Industry in Britain. 8: 165-6, December 1950.
TABLE II
SELECTED DATA ON THE BALANCE SHEETS OF THE
BANK OF ENGLAND, AS AT THE END OF
FEBRUARY 1946-1950
Thousand Pounds
Notes in
Circulation
Discount
and
Advances
Government
Securities
(Banking
Department)
Other
Securities
(Banking
Department)
Banker1s
Deposits
1946 1,322,070
9,373
214,560
35,727 241,730
1947
1,377,020 12,231
306,931
39,121 296,322
1946 1,233,362 10,156
256,759 41,437 292,711
1949 1,231,636 23,579 322,034
51,607 303,310
1950 1,250,025
19,450
472,139
54,016
300,439
Source: Annual Reports of the Bank of England, 1947-1950.
sO
TABLE I
SELECTED DATA OF LONDON GLEARING BANKS, 1945-1950
■ Monthly Total
i Average deposits
Current
accounts
Deposit
and other
accounts
Coin, notes and
balances with
Bank of England
Balances Money at call
with other and short
banks, etc. notice
i
(1) (1) (1)
(2) (1) (1) (2)
: 1945 4,692 3,127
1,566 492 10.5
141
206
4*4
i 1946 5,097 3,377
1,720
523 10.3 165
300
5.9 .
1947 5,650 3,690
1,959 473 3.4
136 450 3.0 '
jl946 5,913 3,650 2,062 466 3.2
199 473
8.0 ,
: 1949 5,974 3,940
2,034
496
6.3
202 510
8.5 '
■ 1950 Jan.* 6,035 4,035 2,027 502 3.2
193 571 9.4 ■
Feb. 5,641
3,644 1,997
476 3.2
195 539
9.2
Bills discounted Treasury deposit
receipts
Investment Advances to cus- 1
tomers and other
accounts
: (1)
(2)
(1)
(2)
(1)
(2)
(1)
(2)
1945 163 4.0 1,311 36.6 1,156 24.6 763
16.4
' 1946 457
9.0 1,492
29.3 1,345 2o *4
333
17.4 '
1947 723
12.3 1,303
23.1 1,474
26.1
1,107
19.6
' 1946 744 12.6
1,234 21.7 1,479
25.0
1,319 22.3
1949 914 15.3 933 16.4 1,505 25.2 1,440 24.1
1950 Jan.* 1,229 20.2
627 10.3 1,512 24.9
1,526
25.1
Feb. 1,169 20.0
471
3.1
1,503 25.7 1,564
26.8
Source: Monthly Digest of Statistics, No. 51, March 1950, p. 117.
(1) Million pounds.
(2) Percentage of total deposits. H
sO
*January 18 and February 15, respectively.
TABLE XI
PRICES AND YIELDS OF BRITISH GOVERNMENT SECURITIES, 1945-1950
Average prices and yields(1)
Short
dated(2)
Medium
dated{2) 3 /2°/o War Loan 2^/2°/o Consols
Price Yield Price Yield Price Yield Price Yield
1945 100.4 2 *44 100.2
2.99 103.7 2.94
85.6 2.92
1946 102.2
2.09 105.4 2.55
106.0
2.4$ 96.3
2.60
1947 101.4 2.IB 103.7 2.67 104.5
2.60 90.6 2.76
194$ 101.7
2.02
95.$
- 5T7g
102.8 2.81 7$.0 3.21
1949 101.5 1.94 95.4 2 .$3 9$.5 3.55 75.9 3.30
1950 January 100.2 2.22 92.0 3.10
90.9 3.$5 69.7 3.59
February 100.1
2.23 92.2
3.09(3) 91.4 3.$3
70.2 3.56
1(1) Average of working days, allowing for accrued interest. In calculating the
- yields for short-dated and medium-dated securities, redemption is assumed at
the later date if price is below par and at the earlier date if price is above
par. For 32/l°/o War Loan a flat yield is taken if price is below par and re
demption is assumed in 1952 if price is above par. For 2^-/2°/o Consols a flat
yield is taken throughout. Income tax is neglected in calculating the yields.
(2) Representative securities, changed from time to time namely, Short-dated: 5°/o
Conversion Loan 1944-64 in 1935 to 193$> 2X/2o/o National War Bonds 1952-4 in
1945 to 1949; 2l/2°/o Exchequer Stock 1955 (l3/4°/o Exchequer Bonds 1950
"assented” until 15 February) from January 1950. Medium-dated: 4°/° Funding
Loan 1960-90 in 1935 to 193$; 3°/o Savings Bonds 1960-70 in 1945 to December
1947, 2l/2°/o Savings Bonds 1964-7 from January 194$•
(3) Yield assuming redemption in 1964, 3*19*
Source: Monthly Digest of Statistics. No. 51, March 1950, p. 120.
o
\n
TABLE XII
ESTIMATED GROSS FIXED INVESTMENT 1947-1950
(Principal Sectors)*
1947
million pounds
194^ 1949
1950 % of
1950 total
Fuel and Power.............. .. . 130 162 198 223 12.4
Transport and Communications . . 266 266 322
295 16.4
Shipping .................. .. .
69 76 68
54 3
Agriculture, forestry and fisheries 70 81 81 81
4.7
Manufacturing industry ........ 370
424 455
450 2$.2
Housing (including repair and
maintenance) . ................ 460 492
475 451 25.3
Other social services .......... 40
69
90 107 6
Administration and defence . . . 50 65 74 89 5
Northern Ireland .......... . . 20
27 37 36 2
Total .....................
1,465 1,682 1,790 1,786 100
^Compiled from Economic Survey for 1949 (Cmd. 7647). Economic Survey for
1950 (Cmd. 7915TI ‘ — :
H
vO
O'
TABLE XIII
THE FINANCE OF CAPITAL FORMATION
1
j
million pounds
1938 1946 1947 1948 1949
Est.
1950
j
1 Public Savings:
Current surplus of public
I authorities . . . .......... -81
mm
495 492 435
j Depreciation allowances . . . . 90
- -
100 110 100
; Transfers to capital accounts .
7
- - 204
216
135
Total public savings . . . . 16 -
-
799
818 680
1 Private Savings:
Depreciation allowances . . . . 360 600
645 675 865 900
Sums for inventory revaluation 400
75
100
Other private saving, including
324
additions to tax reserves 566
637 805
Total private saving . . 684
-
' -
1,641 1,577 1,805
Total domestic saving .......... 700
905
1,410 2,440 2,395 2,485
Borrowing and gifts from abroad 70 380 630 150 70 -50
Gross domestic capital dormation 770 1,285
2,040 2,590 2,465 2,435
As percentage of gross national
product ....................
15 % 14 % 21%
25%
22% 21%
Source: National Income and Expenditure of the United Kingdom.'1946-1948
(Cmd. 7S2^77"PP.“77 I7n ^ " r m T 'tn^a^grTIn Britain: 1950.'
H
vO
-J
TABLE XIV
FLOATING DEBT OF BRITISH GOVERNMENT, 1945-1950
million pounds_________ ________________
i Ways and Means Advances
Total Treasury By Bank of By Public Treasury
! Bills England Departments Deposits
! by_Banks_____
( Outstanding at end of period
i " ~ " ~ ' - - i . f
j
1945 6,294.0 4,226.0
3.5
423.0
1,636.5
1946 6,720.1 4,595.6
««•
443.0
1,636.5
1947
6,503.3 4,300.7
—
205.6
1,402.5
1943
6,355.5 4,579.1
«. . .
265.4
1,511.0
1949
6,146.9 4,933.0 —
291.9
372.0
1950 January 5,340.0 4,922.0
•mmm
334.5 533.5
Febryary
5,759.3
4,360.2 2.2
402 *4 494.5
Source: Central Statistical Office, Monthly Digest of Statistics, No. 51.
March 1950, p. 113.
CHAPTER V
SUMMARY AHD CONCLUSIONS
This study Has made an analysis of the development
and policies of credit control in Great Britain from the
nineteen-thirties down to nineteen-fifty. The analysis was
made according to the three stages of the British economy
in the period under review, viz s the prewar stage of the
nineteen-thirties, the World War II, and the post-war,
19^6-1950* Within each stage, the development of the
theories, the institutions, the techniques, and the policies
have been examined in the light of the then general econ
omic conditions and the general economic policies of that
country* It has been found in this study that the develp-
ment of credit control in Great -Britain In these two de
cades had these characteristics: (1) Pure domestic con
siderations took the place of the international movement
of gold as the guiding principle. (2) Policy making has
been increasingly concentrated In the hands of the Chancel
lor of the Exchequer. (3) While the controlling devices of
credit have been increasing in number and effectiveness,
the relative importance of credit control in the British
government*s general economic policy and its execution has
200
been declining. ( ! { . ) Inspite of differences in economic
conditions in the different stages, a cheap money policy
persisted through-out these two decades. (5) Within the
scope of eredit control, qualitative control has increas
ingly assumed the more important role over quantitative
control.
Pure Bornestlc Considerations
Since the abandonment of the gold standard in 1931 >
the international gold movement, which dominated the
British credit policy for almost a century, has lost its
significance. Instead it has been replaced by consideration
of domestic economic conditions.
There were several events responsible for this develop
ment. First was the world-wide economic depression in the
early ninetteen-thirties which compelled the British
authorities to consider the domestic unemployment situation,
even though they were skeptical as to the effectiveness of
a domestic credit policy. Second was World War II which
made the British economy a planned war economy. Third was
the election of a Labor government in 19M>> which brought
about the socialist national planning. Every form of
national economic planning Is by its very nature national-
201
lstic.
The adoption of a domestic credit policy has been
facilitated, first by the abandonment of the gold standard
and the operations of the Exchange Equalization Account,
and later by the exchange control system which was inaug
urated in the war and was perpetuated by post-war legis
lation* It has been concluded that although the abandonment
of the gold standard was brought about primarily by forces
other than the then British credit policy, it was a pre
requisite for a pure domestic credit policy for a country
largely living on foreign trade like Great Britain* The
gold Standard Act of 1931 released the tie between gold and
sterling only. The free gold market was still maintained*
In order to complete the isolation of the international
movement of gold from the domestic money market, the
Exchange Equalization Account was set up* With its resources
which consisted purely of Treasury bills, the Account was
able to perform its function satisfactorily, by buying and
selling gold and foreign currencies. When the exchange
control system was installed the British domestic money
market was fairly protected*
The impacts of this development are clear. First of
all, the well protected London money market lost much of
202
its international importance. It is recognized that the
decline of the London money market in its International
importance has causes other than this development. However,
since the London money market became primarily a domestic
one, much of its former International significance was in
evitably lost. The second impact is that it required a
greater control of credit by the central authorities as well
as provided a greater discretion to them. The working of
the gold standard is largely automatic. When sterling be
came inconvertible paper money, it enable the central auth
orities to manage it according to their judgment and will.
Yet at the same time its functioning called for management.
The third impact was that the isolation of the London money
market from the rest of the world facilitated the program
for national planning* It set a barrier between the domes
tic economy and the foreign economics and thereby it was
hoped that the domestic economy would be protected from
foreign economic instatilities. It was also hoped that
financial conditions could be made to cooperate fully with
the national plans.
In view of the importance of foreign economic rela
tions to Great Britain, it is not certain that such a
development is favorable to British people. Yet such a
problem is out side scope of the present study.
203
Centralization of the Policy Making Power in the Hands of
the Chancellor of the Exchequer
Before the abanconment of the gold standard, the
credit policy of Great Britain was made by the Bank of
England as well as the Chancellor of the Exchequer acting
independently of each other. And there was an inclination
among most of the Chancellors to decline their responsibi
lity to the money market. The Bank of England, therefore,
used to be the dominant policy making body.
This situation, however, has been changed. The Cur
rency and Bank Notes Act of 1928 provided that the changes
in the fiduciary issues should get the approval from the
Treasury for a short period and from Parliament for more
than two years. Later the Currency and Bank Note Act of
1939 completed the dissociation of the gold reserves in the
Bank of England * s Issue Department and the Bank Notes.
Furthermore, since the abandonment of the gold stand
ard, the Bank of England has lost its former compass. The
guiding principle since then has been the internal economic
circumstances, about which the Chancellor of the Exchequer
is supposed to know a great deal and over which he is
supposed to have a great influence.
The shift of policy making power from the Bank of
England to the Treasury or the Chancellor of the Exchequer
took several steps* At first it was due to the voluntary
action on,the part of the Bank of England. Since the very
beginning of the period under review the Bank of England
has never failed to follow the wishes of the Chancellor of
the Exchequer, although there was nothing in the law to
prevent it from acting to the contrary. Later the shift of
policy making power was indicated by some statutes, such
as those setting up the Exchange Equalization Account, the
Exchange Control Acts, etc., which made the Bank of England
the executive body of the policies determined by the Chan
cellor of the Exchequer. Finally, the Bank of England was
legally subordinated to the Treasury by the Bank of England
Act of I9I 4. 6, which made the Treasury its sole shareholder
and provided the Treasury with the power to direct the
Bank of England.
Through acquiring the control over the central bank,
the Chancellor of the Exchequer surely has the control over
the money market. But it is not all. He has other sources
of power.
As a powerful member of the Cabinet who is vested with
the coordination of all the economic policies of the British
government under the present system of economic planning,
205
he has the power to look into the various phases of* the
British economy. As to the money market, he has the direct
responsibility and authority of supervision and control,
Under the Defense Regulations and later the Borrowing
(Control and Guarantees) Act, he is to review all capital
issues and secured borrowings above 10,000 pounds. Since
the war it has become a habit for him to issue circular
letters directly or through the Bank of England, asking the
banks* compliance with his policy in making advances* He
may also supervise the organizations of the money market.
Another source of his power over the money market
derives from his power over public finance. Since the de
cline of commercial bills, the liquidity of the banks is
largely dependent upon the floating debts of the government.
As the liquidity ratio of the banks is most influencial in
the determination of the banks* lending policies, the
floating debts have much more significance in the money
market than is commonly recognized. Moreover, since the
outstanding public debt constitutes a large portion of the
money market assets, the money market is naturally respon
sive to the actions of the Chancellor. Indeed, the fiscal
tool, or more precisely, the manipulation of the public
debt has been one of the most powerful and frequently used
206
tools of the Chancellor in controlling the money market.
As things developed in the post-war stage, the credit
policy has been virtuely dictated by the Chancellor, Such
a development coincided with the general tendency of
centralized decision making in Great Britain. As a result
of this development, the Bank of England has lost much of
its importance in policy making. At the most, it is an
administrative agent of the Treasury. A corollary from this
is that the financial requirements of the government are
apt to be the dominant factor in determing the credit
policy. This is evidenced by the adoption of a cheap money
policy throughout these two decades, although such a policy
may not necessarily have been in accordance with require
ments of general economic conditions of that moment.
Changes in Controlling Devices
Fundamentally, the change in monetary standard, the
change in monetary objectives and the shifting of policy
making power account for the changes in the controlling
devices.
The Bank rate which had worked so successfully and
had assumed a very significant role in the past, has
lost its ground. It was divorced from the international
gold movement by the abandonment of the gold standard.
207
The eligible papers are now mainly the Treasury bills,
in contrast with the commercial bills before* Since the
Treasury could not tolerate being bound by the Bank rate,
it has made the Bank rate to suit its will* Consequently
the Bank rate has been constantly at 2 per cent, except
in moments of extreme emergency. Indeed the Bank rate
is *no longer used as an effective device for credit con
trol. At times the Bank of England itself has by-passed
the Bank rate, namely, hiring brokers to stand-by to
purchase the bills at the market rate, instead of forcing
the market to the Bank and discounting or lending at the
Bank rate. Under the present circumstances, It is doubt
ful that the Bank rate will resume any significance at
all. This does not mean that a low Bank rate is an unneces
sary condition for a cheap money policy; the contrary
Is true. However, it does mean that the Bank rate will
probably not be changed freely In response to the credit
situation.
Unlike the Bank rate, the open market operations have
been used extensively. They have been extensively used by
the Bank to broaden the credit base since the nineteen-
thirties* They have been used also by the Exchange Equaliz
ation Account to isolate the gold movements from the
}
208
domestic credit conditions. Since the war the public de
partment have used this device too in the support of the
governments monetary and fiscal policies.
The operations of the public departments are a part
of manipulations of public debts, which constitute a dis
tinctive device of credit control in Great Britain. The
buying and selling of public securities of public depart
ments, together with the changes in the compositions of
their holdings which constitute well over one-fifth of
the total British national debt, have been one of the
effective tools in the execution of credit policies.
Another part of the manipulations of the public debts has
been exercised directly by the Treasury. The Treasury can
choose to borrow from the banking system in the form of a
floating debt or from the public in the form of high grade
securities. The short term borrowings from the banking
system mean an expansion of bank deposits and thus an
expansion of credit; and vice versa. The manipulation of
the public debt became significant only when the amount of
the public debt was great in absolute terms as well as
relative to other money market assets.
Another distinctive new device for credit control is
propaganda, it has been long recognized that psychology
209
played an important role in the money market. However, it
was not until the Daltonian ultra-cheap money era that
propaganda was extensively used. Of course, changes in the
Bank rate, and the very persistence of a policy had had
definite psychological effects before, but none of these
was direct propaganda. In contrast, Hugh Dalton repeatedly
announced that cheaper money was to come with an aim of
convincing the market. This device was temporarily effec
tive as a supplementary measure. Yet at the end the market
would outsmart the propaganda as the experience of Hugh
Dalton in the post-war period showed.
The above mentioned devices are quantitative ones.
Quantitative credit control was almost the only credit
control in the nineteen-thirties. But since the war,
qualitative control has assumed importance.
Qualitative credit control was first facilitated by
the system of wartime direct controls inaugurated during
World War II. In as much as direct controls reduce the
demand for credit generally, as well as some particular
demands, they are quantitative as well as qualitative.
Controls over materials, labor and outputs reduced the
requirements of business. Price ceilings and rationing
diminished directly the demand for consumer credit, and
210
indirectly contracted the demand for commercial credit by
reducing the volume of business transactions* In this way
the direct controls may be viewed as a quantitative credit
control beeause they reduce the demand for eredit generally.
But they hit different industries and consumers differently
in degree. Thus they can be logically viewed as a device of
qualitative credit control too.
Credit control through the control over demand in this
way was entirely a new conception of credit control. Al
though direct controls aided in credit control, their
inauguration arose from the very distrust of financial
controls. Similarly the other qualitative devices were
employed chiefly because the traditional quantitative
credit controls were viewed as unsatisfactory for certain
purposes, such as distribution of financial resources. The
control over capital issues and the restriction of bank
loans were designed as a remedy for the defect of the
quantitative controls.
Changes in devices were, therefore, associated with
(1) the shifting of policy making power from the Bank of
England to the .Treasury, as indicated by the fact that
devices directly available to the Treasury increased in
importance; ( 2) the distrust of credit control and the
211
market mechanism; (3) the increased desire of central
direction of national economic activities.
Besides the changes in devices which were used, a
development, which is fundamental regardless of which
device is used, was the availability of more accurate
information. First of all, the central authorities and
the banks and the public are now much more accurately
informed about the general economic conditions and develop
ment than before World War II. During the War, the govern
ment’s fact-finding organization was greatly extended. In
I9I 4.O, the Central Statistical Office was formed to collate
and expand the entire field of government statistics. The
Central Statistical Office, now under the Statistics of
Trade Act of 19^j-7» shares with the Board of Trade in
collecting important statistical data. The data in recent
years has been published regularly in the Monthly Statis
tical Summary, the annual economic survey, and the white
papers on the balance of payments, on national income and
expenditure, and on capital investment.
As to the money market conditions the Bank of England
always has sources of information from its own balance
sheet, the direct market contact through brokers, the
personal contact through its Directors, and the data fur
212
nished voluntarily by the banks. But due to different
accounting procedures and the different dates of the data,
the data furnished by the banks was neither comprehensive
nor comparable. Furthermore, the ’ ’ window dressing” in the
cash reserves figures was publicly known. The Bank of
England therefore was not able to know currently and
accurately the money market situation. However, there were
improvements during the period under review. After 1931>
the banks kept a constant ratio between the till money and
the balance at the Bank, and they currently notify the
Bank of England as to their till money position. A classi
fied advances figures has been published regularly by each
clearing bank. Since December 31, 19^1-6, the London Clearing
banks have agreed to publish their weekly statements as on
the Wednesday, and their monthly statements as on the third
Wednesday in the month* In the meantime the cash ratio of
each clearing bank was agreed upon At 8 per cent constant
ly. Moreover, under the provisions of the Bank of England
Act of 19J . J . 6, the Bank of England has the legal right to
request information from any bank provided that the
information is not concerned with a particular customer of
the bank, and the bank may be heard.
With the -improvement in the information and the exten-
4
213
sion of controlling devices, the central authorities were
able to control credit more effectively at the end of this
period than at the beginning.
Changing Positions of Credit Control in the Government
Economic Policies
It seems paradoxical that, while there were develop
ments of centralization and improvements in the tools of
credit control, the general tendency in this period has
been for its importance in government economic control to
decline.
In the nineteen-thirties, credit control in Great
Britain was the predominant measure for the central auth
orities to use to influence national economic activities.
There was no direct control over materials and labor. There
was no subsidy, no government bulk-buying. The only measure
that the central authorities ever used extensively to cope
with the impelling problem of depression was credit control.
There was an attempt to cut the wages but it was stopped
shortly after its start. There was never an attempt to use
deficit financing as the pump-priming device; on the con
trary the budget was balanced from 1932-19 3 7.
Such an unique position of credit control in British
234
economic policy however was changed during World War II.
The necessity of Imposing direct controls in time of war
was recognized by the Treasury in 1937* And when the war
broke out in 1939* the financial controls and the direct
controls were imposed at the same time under the Defense
Regulations. Yet, since May 194-0* direct controls have
replaced the financial controls in importance in British
wartime economic planning. The direct controls accomplished
not only what credit control could but also what it could
not accomplish. Demand for credit was effectively dimi
nished. Prices were curbedj goods were fairly distributed.
Productive resources were concentrated in producing essen
tial goods. Under these circumstances, credit control
remained chiefly to facilitate government finance.
Such a position of credit control was maintained until
194- 8* In the earlier post-war years, most of the wartime
direct controls were still effective. And the central
authorities in formulating their economic plans, preferred
to look to angles other than finance, such as manpower and
raw materials, etc.. Credit control remained for the con
venience of government finance as its chief raison d’etre.
It was not until Sir Stafford Cripps assumed the
Chancellorship that the financial measures revived somewhat
*
2l£
In importance in government economic policies. However, Sir
Stafford Grlpps used chiefly fiscal tools rather than mone
tary tools in his disinflation policy. It is recognized,
of course, that the fiscal and the monetary tools are
closely related. Nevertheless, in as much as they can be
distinguished from each other, the monetary tool was at the
best playing a neutral role In the disinflation policy.
Ihere are several reasons accountable for this decline
of importance of credit control in British national econo
mic policies. One reason Is the general tendency towards
a centrally planned economy in Great Britain. A centrally
planned economy, in the common use of the words, is a
departure from a market economy, which credit control tacit
ly assumes. A corollary from this reason is that many
measures, which are more effective than credit control, are
made available to the government. Another reason for the
decline of credit control in the determination of general
economic policies lies in the fact that the increasing
importance of government finance in terms of its quantity
as well as its economic implications. When tax revenues of
the central government range from 30 to i j .0 per cent of the
national income, taxes naturally exercise tremendous In
fluence on the economy. When the national debt amounts to
/
216
well over twenty billion pounds, and becomes the chief
money market assets, its impact can hardly be overlooked
by any observer. Moreover, the increased volume of govern
ment finance requires the money market suit its operations.
This was the case of British government finance after the
outbreak of World War II. Besides, the changes in the
dominant economic theories has excised a great influence
upon the shifting of monetary tools to fiscal tools. XTp to
the first half of the nineteen-thirties, the dominant
economic theories on the business cycle were those of D. H.
Robertson, R. G. Hawtrey, P. A. von Hayek and the early
writings of J. M. Keynes. All these theories stress the
influence of banking policies on the business cycle, and
thus recommend strongly credit control. Since J. M. Keynes*
theory of employment has made known to the world, the
notion of the deflationary discrepancy in aggregate con
sumption and in the aggregate investment has been popular
ized. While Keynes retained monetary policy, i. e., keep
ing the interest rate low as one of his three tools, he
considered that there were many obstacles which limited
Its effectiveness. He really had more confidence in the
other two of his tools, namely, taxes to redistribute
national Income and public spending to offset the Insuf-
217
fieiency of private spending, which are in the proper
province of fiscal policy.
However, it is recognized that there are certain
advantages of credit control over other controls. In con
trast to direct controls, credit control, by way of con
trolling interest rates and the quantity of money operates
through the market system, and thus preserves initiative
and freedom. In contrast to fiscal tools, It has the
advantage of timing and is less harmful to incentives. With
the decline of Its importance as compared with other tools,
the British government in recent years has not gained from
its benefits. Indeed the neglect of such a tool is largely
responsible for the persistence of inflation in the post
war stage in Great Britain.
Cheap Money Policy
In spite of the quite different conditions of the
British economy In the different stage of this period, the
cheap money policy was closely followed throughout the
period. The chief reason is the changes in the roles
assigned to credit control.
In the nineteen-thirties the inauguration of cheap
money policy in Great Britain was with a view of reducing
the interest burden of the government as well as to promote
recovery. The reduction in the interest burden together
with the restriction of government spending in the event
of a decrease in government revenue showed the conservative
policy of the government. This brought back some confidence
in the government from the financiers and the private inves
tors. Moreover, a cheap money policy with no restriction on
borrowing benefits the private borrowers just as much as
the government. Although the extent that the business
activities rely upon the interest rate and the effective
ness of the cheap money policy are controversial, one thing
is unquestionable, namely, a cheap money is normally the
necessary condition of recovery from depression. Because
the marginal efficiency of capital is low in depression,
the interest rate which is favorable to investment at a
time of a low marginal efficiency must be low. The per-
sistance and well coordinated cheap money policy, in Great
Britain in the nineteen-thirties, not only did no harm to
the recovery, but also rendered positive help to it,
although it is hard to say how much it helped.
In World War II, the cheap money policy was not aiming
at the same thing as that in the nineteen-thirties. In the
war, the economic problem was inflation rather than de
flation. On the other hand, as the government expenditure
219
expanded tremendously, the government needed to borrow
large sums at low Interest rates. Aiming at this double
objective, the credit policy in World War II was to make
the money cheap and plentiful to the government and not
to the civilians. This was done by the simultaneous im
position of various direct controls, qualitative restric
tion of credit, and a cheap money policy. In as much as the
demand for credit from the private concerns had effectively
diminished as a result of the various direct controls,
qualitative credit controls were at best a second line of
defense against inflation. It was only with the aid of a
well devised system of direct controls that the cheap money
policy added little immediate force to inflation. Such a
cheap money policy may be justified on grounds of wartime
necessity. In terms of results, the rises of prices and
wages were comparatively successfully checked.
However, the justification of a wartime cheap money
policy can not'be validly applied to the post-war cheap
money policy which followed the blueprint of the wartime
control. There was a heavy Inflationary pressure accumulat
ed during the War. And there was a strong sentiment for tlje
removal of direct controls. Moreover, the government could
no longer justify itself in keeping private borrowers out
i
220
©f the money market* Finally, in so far as there was exces
sive demand for credit in the post-war period, it called
for a high interest rate to restore the equilibrium by dis
couraging borrowing as well as stimulating the supply of
loanable funds.
The arguments advanced in favor of a cheap money in
the post-war period are apparently not convincing. The
Keynes* contention that the remedy for boom is a low rate
of interest is based on certain unsound assumptions and is,
as Keynes would say himself, inapplicable to the post-war
situation where the full employment has been reached and
the inflationary^pressure is great. Another Keynes* arg
ument, that a low interest rate brings about equitable dis
tribution of income or the euthanasia of the rentier, is
surely fallacious as proved by the Dalton’s experience, in
which the speculators gained at the expense of the poor
small investors. The burden of interest charge on the gor*
vernment was a weighty argument. However, it was much over
exaggerated. The blame of the post-war market conditions,
under which it was impossible to raise interest rates high
enough to dispose of the direct controls and also impossi
ble for the working of interest rates to bring about a
desirable allocation of resources, is not completely
l.y
221
groundless. It should be noted, however, that, although
a high interest rate would not do away immediately with
the post-war inflation problem, yet It surely would help
to fight it and gradually to dispose of It. Moreover, the
use of a dear money policy presumes the intention of
restoring the free market mechanism. A*s to the question of
allocation of resources, unless one assumes the irration
ality of consumers* demand, the anticipation of which
directs the investment and production, one has no ground
to assume irrational allocation of resources under the free
market mechanism.
The post-war period was a time of great strain on
British capital resources. A quick return to capital invest
ment was immediately needed. The long-lasting reconstruc
tions should be a later step in planning. It the interest
rate was raised for a period, the reconstruction work would
just follow the right steps. Even assuming an over-all
economic planning was necessary for the post-war British
economy, the kind of planning which uses financial measures
is preferable in a free country than that which relies on
direct controls. Unfortunately this was realized only after
Sir Stafford Cripps assumed the Chancellorship. However,
even Cripps did not avail himself of the monetary tool.
222
The unsoundness of the post-war British credit policy
was clearly shown by the events. The Daltonian ultra-cheap
money drive, which forced the long-term interest rate from
3 per cent down to 2- g - per cent, caused an expansion of
almost 900 million pounds of bank deposits within a year.
It Is concluded, therefore, that the cheap money policy
certainly added tremendous difficulties to the direct
controls, for It definitely promoted inflation, for curbing
which those direct controls were retained.
Even the Crippsian disinflation program through a
budget surplus was almost ruined by the neglect of the
monetary tool, for the budget surplus was largely offset
by the expansion of bank deposits in 19^ 1 - 8. It was only when
the bank deposits ceased to grow that the budget surplus
was effective in fighting inflation. Had Cripps adhered
less to a cheap money policy, he probably would have been
more successful; and there would probably have been but
little mention of the inflation problem in the reports of
the Organization for European Economic Co-operation after
3-9^9*
Qualitative Control; of Credit
In the nineteen-thirties credit control in Great
Britain was almost wholly a quantitative one. There were
!
some discussions about the need for qualitative controls,
such as the bridging of the Macmillan gap, and the res
trictions on excessive foreign long-tern lending, etc.
Yet the results of these discussions were only the public
ation of the classified advances by the banks and the
establishment of some small concerns for some special credit
needs.
Qualitative credit control assumed importance only
after the outbreak of World War II. During the War, the
Capital Issues Committee was set up under the Treasury, in
accordance with the Defense Regulations, to review capital
issues. Only those Issues for defense purposes or for the
maintenance of food supplies got the approval. The banks,
in making their advances were asked by the Treasury to
restrict credit to non-essential trades. These qualitative
restrictions of credit were designed to direct productive
resources to defense production and to make government
borrowing easy.
The full development of the qualitative rationing of
credit was yet a post-war product of the Labor government.
And this is especially true in the field of long-term
credit, For short term credit, the Labor government was
doing no more than the issuing of memoranda, circular
letters, suggesting policies, although the power to ration
short term credit was provided by Clause I j . (3) of the Bank
of England Act, 19ij-6. With regard to long-term credit, the
Labor government first perpetuated the wartime measure of
reviewing capital issues by the enactment of the Borrowing
(Control and Guarantees) Act, 19l|-6* It was expected that
with this control investment would be guided by ”social
priority” rather than by commercial priority. Later the
Laborites adopted some positive measures to insure that
"social priority” Is observed. One of these positive
measures was the government guarantee, which was authorized
in the field of export trades under the Export Guarantees
Acts, and In any industry in Great Britain under the
Borrowing (Control and Guarantees) Act, 19I 4- 6. .Another
positive measure was the rendering of financial assitance
to private concerns In the development areas. fhe third
positive measure was the establishment of two sister
finance companies, namely, the Finance Corporation for
Industry Limited, and the Industrial and Commercial Finance
Corporation Limited, although these two finance companies
are owned largely by the private financial institutions,
and allegelly operate on commercial principles, they may
still legitimately be regarded as Instruments of the govern-,
ment* k final positive measure was direct public investment.
The Labor government, however, not only thought of
control over long-term eredit, but also investment planning.
Indeed, the whole credit control was only a part of its
investment planning. Since 19^7* ' tiie annual capital invest
ment plans have been set, in which the overall aggregate
of capital investment was estimated and followed. Yet the
\
Labor government was even more interested in allocating
the capital among various uses. In a memorandum submitted
to the Organization for European Economic Co-operation in
October 19^4-8> in which a British four-year plan was re
vealed, the Labor government set a percentage allocation
of capital among important Industries. In such a plan of
investment planning, there are many measures other than
credit control, such as public investment and control over
materials and labor.
Such a frame work of qualitative credit control repre
sents a complete distrust of the free market mechanism. The
Laborites arbitrarily set up a principle of social priority
In contrast to commercial priority. There Is no theoretical
reason to believe that in the long-run norm social priority
can be at variance with commercial priority. The commercial
priority derives from the individual consumers priority.
i
226
The social priority in economics just can not be anything
but the aggregate consumers’ priority which is inevitably
the commercial priority. The only difference would probably
be that the social priority is that priority which the
political officers think Is or should be the aggregate
consumers’ priority, and that the commercial priority is
the priority directly determined by the consumers. Assuming
the correctness of the politicians* judgment and their
willingness to follow consumers* demand, the so-called
social priority must be the same as the commercial priority.
The variance between them must arise from either their
misjudgment or their unwillingness to follow consumers’
demand. In either case, the logical outcome would be the
rationing of consumers* demand.
Furthermore, such a qualitative allocation of credit,
industry by industry or even firm by firm, would result In
economic stagnation, for there Is a natural tendency In
such a setup to discriminate against new industries, new
firms, and small but efficient firms. ,
' It should be noted, however, that such a qualitative
allocation of credit is a variation of credit control. For
credit control is considered as operating chiefly through
the channels of free markets, and such a qualitative
227
allocation of credit represents a tendency of discarding
the free market mechanism. This explains the paradox of
the post-war Labor government. On the one hand it neglected
quantitative controls, and on the other hand, it stressed
the qualitative allocation of credit. It is concluded that,
had the Laborites no such a bias against the free market
mechanism, they would probably use quantitative credit
controls more extensively, with which they would probably
more effectively and easily solve the post-war Inflation
and other derived economic problems.
BIBLIOGRAPHY
BIBLIOGRAPHY
A. STATUTES
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I
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31pp*
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C. BOOKS
Anderson, Benjamin M., Economics and the Public Welfare.
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Bagehot, Walter, Lombard Street. Fourteenth edition;
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Balogh, Thomas, Studies in Financial Organization. Cam
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Beveridge, William H., Fall Employment in a Free Society.
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Chandler, Lester V*, The Economics of Money and Banking.
New York: Harper & Brothers, 19l£HV "732pp.
Clapham, Sir John H., The Bank of England: A History. New
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Conway, L. T., International Position of London Money
Market. Philadelphia: University of Pennsylvania Press,
l9Jji>." 102pp.
Ellinger, Barnard, The City — The London Financial Markets,
Westminster, England: P. S. King & Stapples, 19i|-5T
Ij.29pp.
Ellis, H. S., Exchange Control in Central Europe. Cam
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Foster, Major B., and Raymond Rodgers, editors, Money and
Banking. Third edition; New York: Prentice-Hall, 19^7•
64pp.
Franks, Sir Oliver, Central Planning and Control in War and
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Garis, Roy L., Principles of Money, Credit and Banking. New
York: Macmillan, l93i+-» 1056pp.
232
Goodbar, J. E., Managing the People’s Money. Hew York: Hew
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Hansen, Alvin H., Monetarv Theory siftd Fiscal Policy. Hew
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Harrod Roy, Are These Hardships Necessary? Second edition;
London: Rupert Hart-Davis, 19U7- 178pp.
Hart, Albert G., Money, Debt and Economic Activity. New
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Hawtrey, R. G*, A Century of Bank Rate. London: Longmans
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D. PERIODICAL LITERATURE
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"Banking in the First Year of War," The Economist Banking
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"Banking under Control," The Economist, 150:259-60, February
1 6, 194. 6. -------------
I
23b
Barclays Bank Review, 23s11* February 19* 48.
Barclays Bank Review, 25*11, February 1950.
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158:1339-13*1-9, June 17, 1950.
"Cheap Money in Retrospect," The Economist Banking Sup
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"Cheap Money Epiloque," The Economist, 1^:66-?, January
1 0, 19* 48.
"Cheap Money How," The Economist, 153:25-6* July 5* 19*1-7*
"Control of Bank Advances," The Economist, 157*983, October
. 29, 19*4-9 •
"Conversion and Monetary Policy," The Economist, 157:1308,
December 10, 19*4-9 •
"Dalton’s Speech," The Economist, 152:812, May 2 * } . , 19*4-7•
Dacey, W. Manning, "The Cheap Money Technique," Lloyds
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1P:350. March 17, 19*4.5*
"Exchange Account’s Profit," The Economist, 159:1*4-1, July
. 15, 1950. - - ■
"FCI and Steel, " The Economist, 158:1*4.05, June 2* 4, 1950.
"Finance for Industry," The Economist, 1* 4. 8: 120, January
27, 19*4-5*
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235
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Midland Bank Limited: Statement by the Chairman on the
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December 31, 1949*
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December l4» 194&*
"The Evolution of Exchange Control in the United Kingdom --
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May 20, 19^0. ~
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November 5# 1949*
i
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237
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November l6, 19^0, p. I } . .
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Creator Ho, Yen Hui (author)

Core Title British credit control, 1931-1950

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag economics, general,OAI-PMH Harvest

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Contributor Digitized by ProQuest (provenance)

Advisor Garis, Roy L. (committee chair), Anderson, William H. (committee member), Phillips, E. Bryant (committee member)

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