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This chapter explores the 1971 Competition and Credit Control financial liberalization, which saw the British state relinquish most of its direct controls over credit creation and instead rely on interest rates to govern lending. In the 1960s, Britain’s worsening trade performance had resulted in a series of currency crises, to which Harold Wilson’s government responded in 1967 by devaluing sterling. In aid of devaluation, the government enacted a series of contractionary measures. An important element of this disciplining strategy was the tightening of monetary policy through state-imposed lending ceilings. However, people proved resistant to this reduction in their living standards, and thus endeavoured to combat income losses by extending their bank borrowing. Further, due to falling profitability, companies faced a liquidity crisis that threatened to derail the export recovery. As such, the state authorities sought to use the lending ceilings to both restrict credit to persons and extend credit to companies. This hybrid disciplining/palliation strategy was extremely difficult to operate with the blunt monetary instruments at hand. In addition, the lending ceilings were becoming increasingly politicized. Consequently, the Treasury and Bank sought to discover a better system of monetary governance. It was the Bank that designed the uniquely arm’s-length CCC proposals. Yet these proposals were accepted by the Treasury and government in significant part because they appeared to offer a depoliticized mechanism through which the state could redistribute credit resources from persons to companies in aid of augmenting Britain’s world market competitiveness in a moment of intensifying crisis.

The aim of this chapter is to reappraise three perspectives that exist in relation to the Heath premiership and economic management. First, the chapter considers whether the Heath premiership betrayed the liberal economic ideas implicit within the Selsdon agenda (agreed upon by the Conservatives when in opposition) via a number of high profile U-turns in economic policy once in office. This common assertion is challenged via analysis of Competition and Credit Control (CCC), which is argued to have made a significant contribution to the erosion of the Keynesian consensus vis-a-vis economic management. Second, the chapter examines the Heath governments supposedly poor record in tacking inflation. comparing it to that of the Thatcher era. Third, the chapter scrutinises the macroeconomic objectives of the Heath administration contextualising its disappointing economic performance.

The Bank of England's ‘consultative document’ on Competition and Credit Control (C&CC) was published on 14 May 1971. It was a landmark occasion, representing a decisive break with the prior system of maintaining direct controls over bank lending to the private sector; the intention was now to achieve the monetary authorities’ objectives of policy via the operation of market mechanisms, notably adjustments in interest rates and open market operations. Although the ‘credit control’ aspect was, over the next few years, notably less successful than the encouragement of competition amongst the banks (where the London clearing banks previously had maintained a restrictive cartel with the support of the authorities), nevertheless the direction of travel towards a more liberal, market-based system, remained, despite a partial reversion towards a direct control system in the guise of the ‘corset’, introduced at the end of 1973, and finally laid to rest in June 1980.

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

Within the financialisation literature, a number of approaches identify the coexistence of financial expansion and productive stagnation. Yet there is no consensus on which direction causality operates between these two phenomena. This impasse has been widened by the lack of attention paid to the role of statecraft strategies in mediating possible causal mechanisms. This article contributes to rectifying this shortcoming by focusing on the governance advantages granted to states through financial deregulation. By presenting archival evidence on Britain’s 1971 Competition and Credit Control deregulation, this article lends support to financialisation accounts that argue that weaknesses in the productive economy spurred financial expansion, yet it also indicates that the state’s desire for depoliticised forms of governance played a crucial role in mediating this relationship. This further suggests that International Political Economy should focus on the strategic manner in which states relate to mar...

Evaluates and replicates an improved specification of the transactions’ demand for money model, and shows that some empirical econometric equations which appear to ‘break down’ out of sample, had already ‘broken down’ but had not been rigorously tested for constancy. New observations can highlight pre‐existing failure, so regime changes help evaluation. Congruence defines the null of model validity (matching the evidence in all salient respects), but the nature of destructive testing reveals that there are no sufficient conditions for model validity in an empirical social science. However, a stringent list of necessary conditions exists. Personal computers with powerful, friendly software (PcGive) facilitated a leap in productivity: model evaluation could be undertaken at home in one evening. The M1‐demand equation did not exhibit predictive failure on data, which included the new 1979 policy on monetary control.

In the context of the move to grant operational independence to the Bank of England in 1997, this article analyses the extent to which a ‘depoliticisation’ strategy was required to prevent ministers adjusting monetary policy for short-term political gain. It does this by assessing the degree to which monetary policy-making had become politicised in postwar Britain. The article argues that the politicization of monetary policy-making has been widely misunderstood and that a distinction needs to be drawn between Treasury politicization, understood as the Treasury gaining ascendancy over the Bank, and Ministerial politicization, understood in terms of pressure being brought to bear on the Chancellor to alter monetary policy for short-term political gain. Contrary to most existing accounts, it notes that the Bank retained an extraordinary degree of autonomy until the early 1970s when in the face of the Competition and Credit Control fiasco, its authority was weakened, and the Treasury finally took the reins handed to it by the Radcliffe Committee over a decade earlier. By way of conclusion, the article begins an assessment of whether Ministerial politicization has been a feature of British economic management and offers a tentative suggestion that the available evidence does not support the view that politicians have sacrificed the longer term ‘national interest’ in the pursuit of short-term political gain.

Our tradition in Britain is of a less formal system of supervision than is customary in some other developed countries; and my long experience has not weakened my faith in this tradition. Lord O’Brien of Lothbury HBOS has prudent corporate credit provisions in place. Issue closed. Financial Services Authority evaluation, October 2007 Introduction In Chapters 5 and 6, we discovered the following: (1) shareholder capital started declining during World War I and by the 1950s, it had reached exceptionally low levels; and (2) by the early twentieth century, the Bank of England and the Treasury were reluctant to see banks collapse; as a result, a policy emerged that meant that the banking system (and the major clearing banks in particular) were essentially insured by the Bank and taxpayers. As a consequence of these two developments, the potential for risk shifting was accentuated because shareholders (and depositors) stood to lose relatively little if their bank collapsed, with taxpayers ultimately bearing a substantial proportion of the downside risk. However, this chapter describes how bank regulation acted as a check on risk shifting by banks for four decades or more after 1939. In this chapter, we perceive bank regulation as rules that constrain banks from risk shifting even if the stated or actual rationale for the rules is unrelated to constraining bank risk taking. Bank regulation takes three forms in this chapter. First, there is the informal and nonstatutory regulation of banks by the Bank of England, with the Bank making its wishes known through ‘nods, winks and raised eyebrows’ rather than regulatory edicts. Second, there is economic regulation, whereby banks are subject to nonstatutory controls as an integral part of the government’s monetary, credit and fiscal policies. Third, there is statutory regulation that is prudential in nature; that is, its rationale is to prevent banks from taking excessive risks.

Each separate panic has had its own distinctive features, but all have resembled each other in occurring immediately after a period of prosperity, the hollowness of which it has exposed. So uniform is this sequence, that wherever we find ourselves under circumstances that enable the acquisition of rapid fortunes, otherwise than by plodding industry, we may almost be justified in auguring that the time for panic is at hand. D. Morier Evans Introduction The previous chapter established that there were major banking crises in the United Kingdom in 1825–6 and 2007–8 and that in the interim period, there was a series of what we termed minor crises (i.e., 1836–7, 1847, 1857–8, 1866–7, 1878–9 and 1974). In this chapter, we develop narrative accounts of these major and minor crises. The main reasons for doing so are twofold. First, we need a qualitative idea of the extent and scale of these crises to confirm (or otherwise) the results from the quantitative measures of stability developed in Chapter 3. In particular, we explore how each crisis developed and analyse anecdotal evidence of its severity. In addition, to understand why they failed, we examine the major institutions that experienced difficulties or failed during each crisis episode. Second, we want to examine the possible triggers for and precursors to each crisis. Because easy monetary and credit conditions and speculation are important elements of both the Kindleberger and Minsky explanations for crises, we examine monetary and credit conditions in the run-up to each crisis and also consider whether speculation in assets of various types preceded each crisis.

On 17 November 1967, after a three-year battle to defend the pound, the British government finally admitted defeat and informed the International Monetary Fund (IMF) that sterling would be devalued from $2.80 to $2.40 the next day.2 The Fund’s Managing Director, PierrePaul Schweitzer, reacted ‘without surprise and with little comment’, dispatching a team to London that evening armed with a set of policy recommendations.3 This chapter shows how, in the aftermath of devaluation, the IMF provided the catalyst for the most thorough investigation into monetary policy in the UK since the Radcliffe Report. The conclusions reached by the Bank, and then the Treasury, appeared to offer an alternative to a monetary system tested almost to destruction by the post-devaluation lending controls. The result was the most radical overhaul of monetary policy since the Second World War, Competition and Credit Control (CCC), in 1971. Along the way, key Bank officials discarded some of their Keynesian principles for a system predicated on controlling the money supply. The process stalled several times. But in 1971, the Heath government’s refusal to raise interest rates in the face of rising inflation provided the final spur for the Bank to overhaul the system of monetary control.

After four months of consultation within Whitehall and the City, Competition and Credit Control (CCC) became fully operational in September 1971.2 Credit rationing by cost replaced rationing by control. Quantitative ceilings were removed after several years of often-painful operation, special deposits were repaid, and the decades-old banking cartels were dissolved.3 What followed was one of the most intense periods of monetary chaos in recent British history. By the time the policy was de facto abandoned in December 1973, the broad money supply had grown by 72 per cent. Britain’s highest-ever inflation, and the worst banking crisis since the nineteenth century, followed hard on the heels of CCC, and despite its adroit handling of the ‘Lifeboat’ operation to rescue the stricken secondary banks, the Bank’s reputation suffered a serious blow.4 Failure to control the money supply under CCC would shape the Bank’s attitude to monetary policy for years to come.

It was inevitable that competition and credit control (CCC) would be followed by transitional problems, some anticipated and some less so. Monetary conditions were made more difficult when accompanied by the coincidental expansionary policies of the Heath Government. When exogenous shocks such as the oil-price rises and some attendant exchange-rate changes were added, they resulted in turmoil. The need to address monetary control intensified, and talk of monetary aggregates and targets then came increasingly to the fore and were finally made explicit and public in 1976. What was less clear was how firm the belief in them was or how strong the commitment to achieving them was. As far as tackling inflation went, the emphasis still was heavily on incomes policies. It was only after the advent of the new Conservative Government in 1979 that interest rates began to be used more aggressively. Whereas the monetary variables had been remarkably steady for 100 years, in the 1970s there was wildly different behaviour. The money multiplier (M3) had been stable at close to 4 from 1870 to 1970, but after 1970 it rose abruptly and was almost 10 by 1981. The components of the multiplier that reflect the behaviour of the non-bank public and of the banking sector, respectively, followed different but relatively easily explained paths. There is not much to remark on for the banks' reserve-deposit (R/D) ratio. Since the Second World War, the minimum reserve requirement of 8 per cent imposed on the clearing banks remained until 1971.

The following text is taken from the publisher's website. "While many argue that the financial and commercial interests of London have exercised a dominant influence over government economic thinking, others claim that the financial sector has been constricted by government. The relationship between the British government and London has become central to debates on modern British economic, political and social life. This collection of essays brings together leading financial and political historians to directly address the issue."

Variations in sterling M3 are often closely associated with changes in sterling bank lending to UK residents. Such lending increased considerably after the removal of direct controls in the Competition and Credit Control reforms of 1971. The company sector, in particular, reduced its traditional reliance on the capital markets in the 1970s and increasingly began to use bank lending as a source of external finance. It is therefore not surprising to find that the breakdown of the broad demand for money function in the 1970s was accompanied by similar problems in the modelling of bank lending equations. Whereas studies based upon data periods covering the 1950s and 1960s, such as Norton (1969) and Artis (1978), had indicated that reasonably stable bank lending equations could be isolated, Cuthbertson and Foster (1982) found that, when later data periods were considered, the isolation of such functions became more problematical. Their study looked at bank lending to industrial and commercial companies, and in particular how such lending was modelled in versions of three large macro models current in the early 1980s.

An alternative approach to the modelling of monetary aggregates is that based upon the notion of ‘disequilibrium money’. Artis and Lewis (1974, 1976) were the first to formulate such a concept, in their attempt to explain the breakdown in the UK money demand function in the 1970s. In the traditional approach to estimating money demand equations, it is implicitly assumed that the actual money supply is always equal to the aggregate short-run demand, so that the money market is continually in equilibrium. Such an assumption is uncontroversial when the money stock is demand determined, as is generally assumed to have been the case in the UK in the 1950s and 1960s. However, the assumption appears to be a less applicable characterisation of the UK money market after 1970, particularly for broad money. Artis and Lewis argue that large independent changes in the UK money supply, in the early 1970s, led to a disequilibrium in the money market in which supply exceeded demand. This expansion in the money stock occurred for a number of reasons. An important factor was the Competition and Credit Control reforms, which created a new spirit of competition in the banking system and abolished the direct controls on bank advances. In addition, budget deficits incurred by the government in the early 1970s were largely financed by money creation.

This note presents an estimate of a demand function for broad money (£M3) for the UK, 1964ii–1985iv. It shows no sign of structural instability due to Competition and Credit Control, and forecasts well for twenty quarters post-sample (1981i-1985iv). A key innovation is the allowance made for financial innovation by including the interest rate available on new, high-interest chequing accounts in the equation.

The simple, conventional approach to the determination of the money supply utilises a multiplier that links the money supply to the volume of high‐powered money. In the tradition of Friedman and Schwartz the multiplier is an expression including the currency ratio of the public (c) and the reserve ratio of the banks (r). In this note it is argued that such an approach must be altered for the UK institutional environment since the introduction of Competition and Credit Control. A modified multiplier expression is defined including the ratio (e) between banks' eligible liabilities and their holdings of deposits that are included in sterling M3. The modified model is then presented diagrammatically.

When deciding upon the balance of its portfolio an economic agent must take into account many different types of risk. The most obvious are those about future asset prices and transaction flows which respectively lend the problem its speculative and precautionary aspects. This paper develops a model of UK bank behaviour under the Competition and Credit Control (CCC) conventions which allows for both types of risk and yet is sufficiently tractable to be fitted empirically. Following previous UK studies we suppose that banks are risk averse, maximising expected utility over a discrete decision period, and assume that the distribution of asset returns is independent of that of cash and reserve losses. In addition we assume that if the precautionary balances chosen by the bank initially are insufficient to cope with outflows of funds during the decision period without infringing the CCC conventions, then the bank will face transactions or penalty costs. This assumption distinguishes our model from those used in previous UK studies and gives it its precautionary aspects.' The basic model is set out in Section I of the paper. It is noted that reserve assets, cash and short term money market items have similar speculative risk characteristics, so that the banks' problem can be separated into precautionary and speculative sub-problems, the first involving holdings of cash and reserve assets, the second involving the remaining portfolio items. The resulting relationships are discussed in Section II. These may be estimated using simultaneous non-linear equation methods. The results are discussed in Section III.

In 1971 the authorities brought about reforms in the British banking system and techniques of monetary control which were of a magnitude and importance unparalleled in all the years since 1945. The substance of the reforms was set out in a series of official documents, statements and speeches and the reforms themselves and the changed conditions they initiated can be referred to collectively as Competition and Credit Control, after the title of the consultative document in which the Bank first published its proposals.1

The important events in the life of a government are not always those which excite most attention or argument; quiet omissions can also have resounding consequences. The point is aptly illustrated by the case of the money supply when Mr Barber was Chancellor, especially after the introduction of Competition and Credit Control. The great political arguments of the early 1970s were focused away from money and banking, on to the problems of EEC entry, trade union reform and the role of the state in managing industry. Yet what was happening to the monetary system, largely unnoticed except by those with specialist interests, had profound economic and political results. Competition and Credit Control unleashed powerful competitive forces in banking; these forces were for a time so far beyond official control as to make it impossible for the authorities to fulfil their traditional duties of controlling the volume of credit in the economy and preserving the prudential soundness of banks.

The rules of Competition and Credit Control which were applied to the discount houses in 1971 remained in operation unchanged until July 1973, at which time they were radically revised. It was in the authorities’ attempts to work the new policy in the solution of economic problems during this two-year period, that the discount houses and others were to find answers to some of their most disturbing questions.

The authorities operated Competition and Credit Control unchanged for barely two years before the introduction, in 1973–4, of significant modifications to the mechanism of control. For the discount houses the changes involved abandonment of their 50 per cent public-sector ratio, while for the banks a supplementary credit-control scheme was devised whereby pressure would be exerted on the liabilities, rather than the assets, side of their balance sheets.

Shortly after the introduction in September 1971 of Competition and Credit Control (C and CC), the liberating new deal for the banking world, Mr Edward Heath’s Conservative Government adopted an economic growth strategy which implied an expansionary monetary policy. The combination of these two developments provided the signal for Britain to embark on a major financial spree. C and CC had removed various discriminatory restrictions on the bigger banks and, in the buoyant climate, no adequate new restraints were imposed instead. The way was thus clear for competition across the banking board in a euphoric atmosphere. All banks, large and small, were looking for business and it became increasingly tantalising to the slower-moving to see the rich profits made by the swifter-footed. Competition was free, but there seemed plentiful room for all: any idea that, because the larger banks had freer scope to expand, the fringe concerns would wither away was proved false while the boom lasted. Increasing fortunes were made by many with large stakes in the newer entrepreneurial banking ventures, though whether they were fully retained depended on later events.

‘Competition and Credit Control’ made its public appearance in the form of a consultative document issued on 14 May 1971 ‘as a basis of discussion with banks and finance houses’. Further papers followed, and the scheme was introduced in September. The relevant papers are in BEQ June, September and December 1971.

Publisher Summary This chapter describes assets and liabilities in the monetary sector in the United Kingdom. The growth of the banks in two fundamental types of business that includes acceptance of deposits and the supply of finance was considerably hampered over a number of years by a succession of official credit restraints. The situation changed with the introduction of competition and credit control in September 1971. Although direct credit controls were reimposed at intervals during the 1974–1980 periods, the banks have been able to expand lending and compete more actively for deposits, including bidding for funds in the various money markets. Traditionally, the clearing banks have concentrated on short-term finance for working capital but they are much more flexible in both the length and purpose of their lending. In the personal market, the banks have entered the mortgage market offering secured loans for house purchase over periods up to 30 years while over 40% of their nonpersonal lending is medium term. At the same time, the banks have drifted away from the money banking towards service banking. This development started in 1958 when banks acquired shares in leading finance companies.

These are the developments after the introduction of C.C.C. in September 1971. In June 1972 there was a run on sterling, and the pound was floated; at the same time the sterling area came to an end with the extension of exchange control between the U.K. and the rest of the sterling area. In 1973 and even more in 1974 a number of undertakings found themselves in financial trouble. But it is convenient to begin by noting two changes in the framework of the system. The first is a consequential change, and not of fundamental importance: the replacing of Bank rate by a Bank of England Minimum Lending rate. The other is a change of substance: the introduction of a quantitative controlling mechanism to prevent the credit position getting out of hand: the system of Supplementary Special Deposits.

In 1971 the monetary authorities1 in the UK adopted a new approach to monetary management, a change of policy announced and described in several papers on competition and credit control. The subsequent experience of trying to operate this revised system has, however, been troublesome and at times unhappy. The purpose here is to examine certain aspects of recent monetary developments in order to illustrate a number of more general analytical themes which may have relevance among several countries.

The paper analyses an M3 demand for money equation for the United Kingdom. Attention is paid to the policy change that occurred in 1971 with the introduction of the measure known as Competition and Credit Control. Classical and Bayesian single equation instrumental variables procedures are developed to investigate the exogeneity of the short-term interest rate and the constancy of the parameters of the underlying relationships. The parameters of the short-term equation have changed as well as the exogeneity status of the interest rate variable but the parameters of the long-term equation appear to be less affected by the policy change.