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International Socialism, Summer 1961


Henry Collins

Note on stagnation


From International Socialism (1st series), No.5, Summer 1961, p.29.
Thanks to Ted Crawford & the late Will Fancy.
Transcribed & marked up by Einde O’Callaghan for ETOL.


British Monetary Policy and the Balance of Payments: 1951-1957
by Peter B. Kenen
Harvard University Press, 1960.

This book is a study of monetary policy during the first six years of post-war Tory rule. Labour had begun, with Cripps at the Exchequer and Wilson at the Board of Trade, to dismantle the war-time apparatus of physical controls. The Tories accelerated the process. Committed to high expenditure on defence and the public services, and with a relatively high level of taxation established, they found the budget a comparatively inflexible instrument. This led them to lean heavily on monetary policy – on interest rates and the control of credit. Like the Radcliffe Committee – whose conclusions were not available to the author at the time of writing – Mr. Kenen finds this a broken reed.

In the nineteenth century, as he shows, the British balance of payments could be improved by raising the bank rate. At a time when Britain occupied a much more monopolistic position in international markets, a major result of this was to depress the price of imported raw materials. Britain’s problems were eased at the expense of the colonies, a result which the City tended to find satisfactory. Under mid-twentieth century conditions commodity prices are, of course, less responsive to fluctuations in British demand. The bank rate and control over the volume of credit exercised by the Bank of England were thought to be effective in determining the level of domestic activity. Through open market operations – the selling, by the central bank, of securities – the cash balances of the clearing banks can be lowered. This is supposed to make them less able to issue credit to their customers. In fact, as Mr. Kenen shows, they can themselves obtain credit from the discount houses. Under existing conditions the Bank of England is bound, for rather technical reasons connected with the issue of Treasury Bills, to maintain the discount houses’ liquidity if this should come under pressure. The enormous expansion in government finance and public borrowing, in short, have contributed to the obsolescence of traditional monetary policy.

This book is largely based on an American doctoral dissertation, with everything which that implies stylistically. Presenting a thesis in 1957, the author felt obliged to question, in a mild way, the realism of British monetary policy. But the full costs of this policy in terms of induced stagnation were not, at that time, apparent to the author, or to many other people. We are now paying them, all the same.

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