The Bank of England: 1950s to 1979

Published by EH.NET (January 2011)

Forrest Capie, The Bank of England: 1950s to 1979.? New York: Cambridge University Press, 2010. xxviii + 890 pp. $150 (hardcover), ISBN: 978-0-521-19282-8.

Reviewed for EH.Net by John H. Wood, Department of Economics, Wake Forest University.

This volume is the latest in the useful series of commissioned histories of the Bank of England: by J. H. Clapham (1944) for 1694-1914; R.S. Sayers (1976) for 1891-1944; and J. S. Fforde (1992) for 1941-58.? Forrest Capie, Professor of Economic History at the Cass Business School, City University of London, has the hardest job of all.? When the Bank of England is mentioned in relation to the first period and most of the second (until the suspension of convertibility in 1931), we think we know what we?re talking about, which is the development and then the operation of a central bank whose responsibilities are the convertibility of the currency subject to the sometimes conflicting responsibilities of government finance and financial stability.? The post-1931 years saw the subordination of the Bank to the Treasury, when Bank Rate became the responsibility of the Chancellor of the Exchequer and departed from 2% for only two months between June 1932 and November 1951.? The story becomes much more complex as the responsibilities of the Bank were expanded to the domestic as well as the international value of the pound and full employment, while its political constraints continued.

The Bank became just another government department pursuing the multiple goals of Keynesian economics, which in this case meant easy money to support aggregate demand, a fixed exchange rate, and attempts to deal with inflation and sterling weakness by credit and exchange controls.? The Bank?s links to the past were also weakened by the belief, especially in government, that instead of a monetary phenomenon the price level was a cost-push consequence of business and trade-union powers.? The occasional use of Bank Rate depended on the ability of the Bank to persuade reluctant Chancellors.? A consequence of these often conflicting goals was a series of sterling crises.? The table of contents is dominated by sections entitled ?crisis,? and sometimes ?crisis to crisis.?

Capie has given us a thorough account of the problems facing the Bank, its responses, and the views of its staff, which we should be able to combine into the Bank?s model of monetary policy.? This proves not to be an easy task, partly because of the Bank?s inability or unwillingness to engage in economic arguments, and partly because its situation involved severe political constraints as well as the usual economic problems.? The Bank?s suspicion of and antagonism to economic theory has a long history.? Its denials before the 1810 Bullion Committee, former Governor Thomson Hankey?s rejection of Walter Bagehot?s lender of last resort argument in 1867, and its unwillingness in the 1920s to consider J. M. Keynes?s analyses of the real effects of money in the short-run are well known.? Capie records the continuation of these attitudes.? In the 1950s, as earlier, Bank officials were more concerned ?to defend themselves against economists … than in using them in the pursuit of improved policymaking? (p. 33).? ?The Bank of England is a bank, not a study group,? Governor Cameron Cobbold (1949-61) said (pp. 54, 99).? ?It took great pride in knowing how financial markets operated,? Capie writes, but ?its capacity to offer advice on economic theory … was extremely limited [and] to be avoided? (p. 64).? It began to hire economists in the 1960s but they had not yet begun to influence the senior staff or policy at the end of the period of this study.

The Bank?s complaints of government spending were not necessarily inconsistent with the view that money matters.? Sometimes, however, it seemed to have joined governments and economists in a general state of denial of the effects of money, or even its ability to control it.? When changes in Bank Rate appeared to have little effect, governors told chancellors that ?the contribution of monetary policy was not to be overestimated because inflationary pressure was mainly a result of the ?cost and wage structure? rather than monetary factors, and consequently, the battle must ?mainly be fought in the wider fields of economic policy.?? This was part of a general belief that inflation had non-monetary sources? (p. 83).? The Bank of England was behind other central banks in keeping track of the money stock, only adopting money measures in the 1960s and targets in the 1970s as conditions of IMF finance.? At the end of the decade the Bank still had no definite position on the definition, control, or influence of money.

This thorough and interesting account is an indispensable reference for anyone who would understand the Bank of England, or more generally the theories, institutions, and politics of British economic policies before the changes that followed 1979.

John H. Wood, Reynolds Professor of Economics, Wake Forest University, is author of A History of Central Banking in Great Britain and the United States, Cambridge University Press, 2005, and recently with Sandeep Mazumder, ?The Great Deflation of 1929-33 (Almost) Had to Happen.?

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