The Banks and the Monetary System in the UK, 1959-1971

J.E. Wadsworth, J.E. Wadsworth

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136600784
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The annual Monetary Surveys published in the Midland Bank Review have become an established and authoritative source of reference for all students of money and banking and related topics, and for those concerned with general economics and current affairs.

This superb volume brings together reprints of these Surveys with a selection of special articles published in the Review since the 1959 Radcliffe Report on the working of the monetary system. In his introduction the editor discusses in outline Britain's financial dilemma. The period covered is an interesting and exciting one{emru}economic conditions in the UK were swinging from achievement in the early 19605 to near calamity, and in the international monetary field policy moved from convertibility for current transactions through tighter restrictions and devaluation, to the experiments of 1971.

The book is set out in four sections. The first section contains articles dealing mainly with official activities in the management of government debt, of the money supply, and of the banking system. In the second section are five articles describing and analysing London's money market operations, and examining the swift growth of non-bank financial intermediaries and the markets in which they are active, including the Eurodollar market. These are followed by the annual Monetary Surveys for the years 1959 to 1971, which tell the story of the struggle to preserve the parity of sterling, the devaluation of 1967, and the consequences for Britain's position at home and abroad; they also record developments in banking and the first effects of the new methods of credit control. The final section of appendices presents up-to-date statistics and charts and relevant documents illustrating the monetary and economic background of the period covered. This excellent text was first published in 1973.

1

The Radcliffe Report and the Banks November 1959

In this first chapter we call attention to observations and recommendations in the Report of the Committee on the Working of the Monetary System⁹ (Cmnd. 827), generally known as the Radcliffe Report, bearing directly on the joint stock banks and the banking system, because of the influence it exerted upon views and practices in Britain’s monetary affairs, and also because it provides a convenient benchmark upon which to begin these reprints of articles from the Midland Bank Review. We do so simply by drawing together extracts -giving the paragraph numbers - from the Report. The Committee itself, in its unanimous report on the way in which the monetary system of Britain operates today insists on the need to see monetary operations as part of general economic developments. ‘Monetary policy is necessarily moulded by the world in which it takes shape . . . [and] . . . conditioned by the facts of the economic situation and ideas of the time.’ (17) In Britain economic conditions and opinion have changed greatly since the Macmillan Committee reported in 1931, and ‘it is . . . no longer appropriate to charge the monetary authorities with unambiguous tasks that can be sharply differentiated from other governmental action’. (52) Nowadays, monetary measures may be employed in furthering five aims of government policy: ‘a high and stable level of employment; reasonable stability of the internal purchasing power of money; steady economic growth and improvement of the standard of living; some contribution, implying a margin in the balance of payments, to the economic development of the outside world; and a strengthening of London’s international reserves, implying further margin in the balance of payments.’ (69) ‘There are serious possibilities of conflict between them . . . and the freedom of governments in making these choices is not absolute’, (70) but ‘they must in the last resort be settled by government’. (64)

When discussing financial institutions, the importance of looking at the whole is likewise stressed; despite the great differences that exist in their activities and the facilities they offer, ‘we have been impressed . . . not by these differences but by the fact that the market for credit is a single market . . . It does not seem that any hard and fast lines are drawn, for instance between the supply of short finance and the supply of long finance.’ (125) Hence the authorities must act ‘not upon the “supply of money” (however that is defined) but on the liquidity position of the system as a whole’. (125) ‘The authorities thus have to regard the structure of interest rates rather than the supply of money as the centrepiece of the monetary mechanism. This does not mean that the supply of money is unimportant . . . nor . . . that the authorities have no special interest in the behaviour of the banks. As the most accessible lenders, they are peculiarly important in the total liquidity position. . . .’ (397)

By separating, as we now do, the comments on banking, notwithstanding the emphasis of the Committee on the fact that the market for credit is one, we seek to bring to the forefront the fresh view thus presented of banking in a modern economy. It is with the banks as part of monetary arrangements that the Committee is concerned, and not with their duties as business undertakings in competition with one another. Thus the tasks of administering a large clearing bank, with its widespread branch system and highly developed overseas business, are not examined by the Committee. It does not discuss concentration in banking, the capital structure of the banks, relations between ownership and control, or the return to shareholders – ‘the total profit position of the clearing banks [is] a subject into which we have made no inquiry’. (168) It is, however, remarked that the banks are ‘essentially commercial undertakings, in the sense that in form their first duty is to conduct their business in the interests of their owners’, but ‘this commercial interest has often been tempered by regard for a wider public interest’. (127)

The Committee comments that bank deposits on current account (demand deposits) are ‘peculiarly significant both from the point of view of economic policy and from that of banking policy (in the commercial sense)’, in that they ‘are “money” to a degree shared by no other asset except, for the smaller transactions, notes and coin’. (129) ‘All the larger transactions in the ordinary business of the country, and many of the smaller transactions, are settled by transfer of these deposits.’ Hence the banks ‘can always rely on the maintenance of a very large total of balances . . . Individual balances go up and down, depositors come and depositors go, but the total on current account goes on for ever.’ (128) The ‘theoretical mobility of the current account’ balance has ‘great force when banks are small and insecure, but firmly established banks as large as the present English banks can . . . safely regard their demand liabilities in total as containing a hard core of permanent resources.’ (130)

In recognizing the convenience and efficiency of the cheque service, the Committee observes that one bank (the Midland) recently introduced a personal cheque service for people requiring simply a cheque service at a low, established cost, though the other banks ‘have doubts as to whether the public really wants a “utility” banking service’. (958–9) Even so, it thinks that there may be ‘room for extending the means of transferring payments in the whole range of transactions to and by persons which are rather larger, or more occasional, than the small everyday transactions for which notes and coin are the obvious means of settlement’. (955) It refers to the successful development of ‘giro’ systems on the Continent, adding that ‘in the absence of an early move on the part of existing institutions to provide the services . . . there would be a case for investigating the possibility of instituting a ‘giro’ system to be operated by the Post Office’, with ‘the possibility of co-operation with the joint stock banks and savings banks’. (964) No doubt the Report was completed before the announcement in July 1959 that ‘the Clearing Banks are actively engaged in a re-examination of the whole problem of the transmission of payments, with a view to considering whether new procedures, or an extension of the existing arrangements for the settlement of debts by credits to an account, might widen the services now available to customers without sacrificing the highly developed cheque system operated through a country-wide branch organization.’

The Committee notes that ‘historically the great English banks depended little on the attraction of “small savings” . . . and in recent times the clearing banks have broadly, as a matter of deliberate and concerted policy, stood aside’ from this type of business; ‘in evidence to us the banks confirmed their adherence to this policy . . . The banks’ restrictive attitude . . . has been supposed to set corresponding limits on the kind of lending they could safely engage in; the truth is rather that it has limited their quantitative share of the total lending in the economy.’ (132) For monetary regulation, little significance is attributed to distinguishing balances held on deposit accounts (time deposits), which have ‘advantages in liquidity and convenience not fully shared by any other interest-bearing asset . . . Bankers . . . in practice appear to lump all their deposit liabilities together, and to treat them as in effect repayable on demand.’ ‘From the point of view of economic policy, therefore, the total of balances on deposit account has to be reckoned almost, but not quite, as relevant as are current account balances to the pressure of demand.’ (131)

In monetary policy bank deposits are seen as important but not as the main aspect of bank activity to be brought under investigation. Thus ‘the amount of money, in the sense of the amount of notes and bank deposits, is of considerable significance’ (392) but it is ‘only part of the wider structure of liquidity in the economy’. (389) ‘The spending is not limited by the amount of money in existence; but it is related to the amount of money people think they can get hold of, whether by receipts of income . . . by disposal of capital assets or by borrowing.’ (390) Hence ‘it is the level of bank advances rather than the level of bank deposits that is the object of . . . special interest; the behaviour of bank deposits is of interest only because it has some bearing, along with other influences, on the behaviour of other leaders.’ (395)

The Committee not only attributes less significance to the quantity of money in interpreting monetary developments, but also it finds little use for the associated concept of the velocity of circulation of money. After noting that velocity has increased in recent years, the Committee observes that it ‘cannot find any reason for supposing, or any experience in monetary history indicating, that there is any limit to the velocity of circulation; it is a statistical concept that tells us nothing directly of the motivation that influences the level of total demand.’ (391) In modern conditions, the Committee dismisses the existing statutory control of the note-issue as ‘otiose’, (523), and quotes the view of the authorities, who ‘do not regard the supply of bank notes as being the only, nor nowadays the only important, supply of money . . . The government’s function in issuing notes is simply the passive one of ensuring that sufficient notes are available for the practical convenience of the public . . . Bank notes are in effect the small change of the monetary system.’ (348) Nor can the Committee find ‘some up-to-date close parallel with the restriction of the note issue: some way of restricting by statute the supply of money . . . Regretfully, we cannot identify any quantity, the statutory restriction of which would solve the problem.’ (523)

Though the Committee looks at the level of bank advances primarily as of importance in monetary regulation, it also has something to say of bank activities as lenders, and these comments will be noted first. The Committee reports the emphasis placed by the banks on the short-term and self-liquidating character of advances, but goes on to point out that exceptions could always be found to the general rule, and that the attitude of the banks is changing, so that the range of acceptable proposals is increasing. With the observations on the ‘hard core’ of deposits in mind, the adherence to short-term lending need no longer be required as providing assets that may be turned readily into cash (130), but it is a preference that ‘still has some sound basis in that it limits the range of judgement required in the lending banker. The great majority of overdraft agreements made by the banks must be based, at least in large part, on the judgement of branch managers, and these managers may reasonably be expected to assess the capacity of a borrower to repay in a short time, though they could have no assurance in estimating long-term profitability.’ (136) However, ‘as long as the banks remain in [the] position of feeling that they could comfortably lend more on overdraft if only they could find more credit-worthy customers, they are likely gradually to modify their theoretical confinement to short-term lending. . . . The tendency to broaden the basis of lending is bound to continue.’ (142) The Committee remarks upon the ways in which the field of lending has been extending, through medium-term credit for exports, participation in tanker finance and ‘personal loans’, and itself suggests further expansion in two directions: term loans to farmers and to small businesses.

‘Whether for short-term credit (“seed-time to harvest”), medium-term credit for the purchase of livestock and machinery, or long-term credit for the purchase or improvement of lands and buildings, it is clear that the principal institutional source of credit [for agriculture] has in the past been, and still is, the joint stock banks.’ (915) ‘The joint stock banks regard the financing of farmers as one of their special concerns. . . . The banks are in practice able and willing to meet all creditworthy applicants for short-term credit and medium-term credit, and often for long-term credit also.’ (918) The Committee therefore sees no need for the establishment of a special institution to guarantee bank loans to farmers or of a new government institution to provide medium-term credit for agriculture, two of the proposals made by the farmers’ unions, but recommends ‘that the banks should be ready to offer term loan facilities within reasonable limits, having due regard to their liquidity requirements, as an alternative to a running overdraft for creditworthy farming customers.’ (922) The banks’ lending facilities should also be made better known to farmers. Almost immediately after the publication of the Report one bank (the Midland) announced term loans to farmers on lines similar to those suggested by the Committee.

Looking at borrowing by small businesses, especially those developing industrial innovations, the Committee draws attention to the sources of finance now available, including special institutions, hire purchase undertakings and the banks. It finds that ‘the banks recognize that small concerns stand in special need of their support and help them to the best of their ability’, (941) but that the usual terms of advances are not always suited to their needs. It therefore recommends that ‘the banks should be ready to offer term loan facilities within reasonable limits, having due regard to their liquidity requirements, as an alternative to a running overdraft for creditworthy industrial and commercial customers.’ (942) It stresses the importance of ensuring that ‘bank managers, solicitors and accountants who are the professional advisers of small businesses should be well informed about the existing institutions and what they have to offer’. (940) It also suggests that the upper limit for loans provided by the Industrial and Commercial Finance Corporation, of £200,000, should be increased and that consideration should be given to establishing an Industrial Guarantee Corporation, with government support, to facilitate the commercial exploitation of technical innovation (946 and 949).

The rate of interest payable by farmers on bank overdrafts varies with bank rate, and the Committee does not accept the contention of the farmers’ unions that the price of credit, from whatever source, was too high and should be stabilized in some way at the lowest possible level, irrespective of market rates. This would, in effect, represent a further government subsidy, in a form less satisfactory than the direct subventions now provided for agriculture.

For bank advances generally, the effect of movements in short-term interest rates on borrowing is not large, and ‘the banks do not ordinarily take any action independently of bank rate to deter or encourage overdrafts by altering the general level of overdraft charges.’ (137) The Committee thought that borrowers seemed to view interest rates as shifting through ‘three gears’, and movements within the high, middle or low range had little effect. A change of gear, as for instance the movement into high in September 1957, does have an impact, depending for its force and effect on long-term rates, on how long the new level is expected to persist. (442–7) Broadly speaking, large undertakings, including the nationalized industries and local authorities, showed ‘independence of interest rate changes’, (451) but small firms in various trades were likely to be influenced by a ‘change of gear’. (452) The evidence of the consequences of the direct restriction of lending by banks ‘was generally firmer than the evidence on the effects of changes in the cost of credit’, (455) but ‘the main effect . . . was to drive frustrated borrowers to other sources of credit, where borrowing was more expensive and sometimes more onerous in other ways’. (460)

Among comments on borrowing by local authorities, for other than temporary purposes, it is suggested that the Treasury should assist by ‘not restricting their access to the Public Works Loan Board at prevailing gilt-edged rates’. (597) When borrowing from the banks for temporary purposes, the local authorities – like the nationalized industries – should, the Committee suggests, receive preferential treatment for rates of interest charged, being required to pay a rate below that usual for industrial borrowers but above the Treasury bill discount rate, because ‘there is in practice no risk of default, and . . . irregularity of borrowing is a convenience at the expense of the banks for which local authorities should pay’. (599) The Treasury does not wish to see an extension of borrowing on bills by local authorities ‘on the principle that bill finance is proper only for self-liquidating transactions’. The Committee observes that ‘the Treasury ignores this principle in its own borrowing operations’. (600)

In comments upon the fact that the proportion of bank advances to deposits is still below the pre-war figure, the Committee notes that ‘in evidence to us the bankers appeared to be uncertain whether they would ever wish to get all the way back to the pre-war proportions, but there was no doubt whatever that they would like to see, and indeed expect to see, a decided increase over present levels.’ (140) Hence measures aimed at restricting advances ‘must be powerful enough to overcome this strong expansionary push’. (141) ‘Under present circumstances the total of bank advances is thus a function of the demand by customers who satisfy the slowly broadening standards of the banks’, while ‘the investments are the final residual item’; ‘given the availability of liquid assets, the amount of investments follows from the amount of advances, a rise in advances being compensated by a fall in investments and vice versa.’ (143)

In this orthodox view of the relationship between investments and advances, it is usually assumed that a rise in interest rates will impose a penalty on further growth in advances because the banks, obliged to sell investments to provide for the growth, will do so at a loss, since market prices will have fallen. The Committee finds that nowadays the force of this restriction on the activities of the banks is greatly reduced. It is made clear that, in regulating monetary conditions generally, interest rates and bond prices are of leading importance: the Committee looks upon ‘the structure of interest rates . . . as the centre-piece of monetary action’, (395) and ‘the management of the national debt’ as ‘an instrument of singular potency’ for influencing the structure of interest rates. (982) With the great increase in the national debt over the past twenty years, accompanied by a rise in the proportion of bank resources lent to the government, the sensitiveness of the banks ‘to changes in the terms and forms of borrowing by the public sector, and therefore . . . to the monetary policy of the authorities as exercised through debt management, have also greatly increased.’ (148) But the banks have so arranged their portfolios as to be insulated for long periods from influence in this form; ‘much the greater part [of their investments] is in bonds with less than ten years to run to maturity’ and since 1951 ‘their total holdings . . . have been more or less evenly divided between bonds with less than five years and bonds with more than five years to run to final maturity date.’ (144)

In these circumstances, the banks have ‘beyond their “liquid assets” (in the technical 30 per cent sense), a substantial cushion of short government bonds; by selling these bonds they can expand activities despite the restraint on their liquid assets.’ (506) Moreover, by arranging their holdings with maturities in echelon, ‘as long as they have a steady and substantial stream of maturities year by year in their bond portfolio, no manipulation of interest rates by the authorities can impose a penalty on banks that wish to expand advances by running down investments. . . . In recent years bond portfolios . . . have been such that even sharp rises in interest rates have not imposed on the banks a penalty sufficient to check them in their efforts to satisfy the needs of their borrowing customers.’ (145) And thus the Committee concludes that ‘unless the shape of the national debt is to be completely transformed by radical measures, the banks will always be able to hold a close succession of maturities to give themselves this facility in increasing...

Table of contents

• Cover
• Title page
• Copyright page
• Contents
• Acknowledgements
• Introduction
• SECTION A BANKING AND CREDIT POLICY SINCE THE RADCLIFFE REPORT
• 1 The Radcliffe Report and the Banks (November 1959)
• 2 The Failure of ‘Packages’ of Restrictions
• 3 Debt Management and Credit Control
• 4 The Supply of Money
• 5 Regulating Banks and Credit
• SECTION B LONDON’S MARKETS FOR MONEY
• 6 Old and New Activities
• 7 Further Developments in London’s Money Markets
• SECTION C THE ANNUAL MONETARY SURVEYS 1959–1971
• 8 Stimulation and Expansion
• 9 Years of Disappointment
• 10 Uneven Growth
• 11 Stagnation and Devaluation
• 12 Achieving External Stability
• SECTION D APPENDICES
• 1 Monetary chronology 1957-1971
• 2 Statistics
• 3 Charts illustrating monetary and economic background 1958-1971
• 4 Monetary documents
• 5 Banking structure
• 6 Articles of monetary interest published in Midland Bank Review 1958-1971 and not reprinted
• Index
• Notes