British Monetary Policy and the Banking System in the 1950s

Throughout the 1950s the British government practised demand management through the banking system by issuing a series of requests that they should control the levels of credit in the economy. Such an approach to economic management can be justified on two grounds [17, pp. 157-60]. From a macroeconomic point of view, the restraints on lending can be seen as a way of controlling monetary expansion and the growth of aggregate demand while avoiding prohibitively high interest rates. At the microeconomic level, qualitative advice and guidance can be used to influence the allocation of scarce resources towards those sectors deemed to be in the best interests of the government or the economy. The extent to which these justifications hold, however, is uncertain. The macroeconomic objectives may be quickly thwarted by the process of disintermediation; while the banks are restrained, other financial intermediaries will take advantage oflending opportunities. Secondly, the idea that the government or other monetary authority is best placed to dictate the optimal allocation of scarce resources may have some merit in a period of emergency, but to pursue such a policy over anything other than the short term will clearly have considerable secondary effects on the working of the credit market. This paper will outline the policy of credit restriction as it was imposed in Britain in the 1950s, discuss its macroand microeconomic mpact, and consider some of the implications of its use throughout he decade. The bare outlines of British demand-management policy in the period 1945-60 are well known and documented [10]. It is also well-understood that the extent of the authorities' freedom to pursue monetary policy was constrained by the discipline of the fixed-exchange rate system [15, pp. 90-92]. The post-war Labour government relied on low interest rates to minimize debt-servicing costs and to encourage investment in what they feared would be a depressed economy. Restraint of inflation relied on a tight fiscal policy,