Bank History - The Bank of England: 1950s to 1979

In 1957 the Radcliffe Committee was appointed to examine the working of the monetary system. Its recommendations led to changes in the Bank's approach to public relations, and the importance that was placed on economics and statistics. Overall, however, the impact on domestic monetary policy was relatively limited.

The overriding problem in the 1960s was the plight of sterling, and a series of crises culminated in devaluation in November 1967. Following this there was pressure from the International Monetary Fund for changes in the approach to monetary policy.

The Bank itself was also dissatisfied with many elements of domestic policy and developed its own solution in the form of Competition and Credit Control, introduced in 1971. This coincided with the new Conservative Government's interest in liberalisation, and a booming economy which had to be checked with new measures. It also saw the secondary banking crisis, which broke at the end of 1973, and the ensuing changes to supervision of the banking sector.

For many years the Bank had taken an interest in industry, occasionally becoming involved in rescue operations, and this concern was formalised with the creation of the Industrial Finance Unit in 1975.

Throughout the 1970s, exchange rate policy remained an important issue and was a source of contention between the Bank and the Treasury. So to were operations in the gilt-edged market, and what was an appropriate monetary target. This produced some discussion within the Bank about its 'independence'.

The period ends with what were claimed to be the most radical changes to the Bank's organisational structure since it was founded in 1694. Hide

The Committee on the Working of the Monetary System (the Radcliffe Committee) was appointed in April 1957 and reported in August 1959. It was the most important investigation into money and banking in the period. Shortly after the Committee was announced the Governor, Cameron Cobbold, wrote this private and candid letter to the chairman, Lord Radcliffe, with his thoughts on a range of issues on monetary policy. Mynors - Humphrey Mynors was Deputy Governor.

Further reading chapter 3. Hide

A common view of the Bank's press relations at this time was to 'keep the Bank out of the press and the press out of the Bank'. However, while the Radcliffe Committee was deliberating there were signs that this was beginning to change. In this document the Deputy Governor, Humphrey Mynors, sets out his thoughts on the subject to the Governor which included the publication of what was to become the Bank of England Quarterly Bulletin (first published in 1960). Cobbold's annotation at the end reads 'I think so. Could JMS [Executive Director, John Stevens] take it on as an appendage to his statistical enquiry? CFC 19/6'.

Further reading chapter 3. Hide

With Radcliffe about to report, the Bank was keen to be giving the appearance that it was already taking action in various fields. One important move was to bolster the capability in statistics and economics. A new department, the Central Banking Information Department, was created with a division specifically devoted to economics, and the Bank sought to recruit and second more economists.
GWM - Guy Watson
JSFf - John Fforde
WMA - Maurice Allen (Executive Director, Economics)
CCO - Chief Cashier's Office
JMS - John Stevens (Executive Director, Home Finance)

Further reading chapter 3. Hide

The special deposits scheme was developed by the Bank and announced in 1958 but it was not until 1960 that it was first put into operation. Under the scheme, clearing banks had to place a certain percentage (say 1%) of their total deposits with the Bank. The thinking was that bank lending would be controlled because the imposition of special deposits would produce adjustments to the liquidity of the banking system. It relied on the cooperation of the clearing banks who agreed to accept the scheme as a way of avoiding legislation.

Further reading chapter 6. Hide

Starting in the summer of 1961 there were a series of sterling crises which culminated in devaluation in 1967. As the Governor noted, the persistent rumours about a devaluation and the feeling that there were fundamental problems with the UK economy were important factors. The Governor's suggested actions (reviewing government expenditure, central bank co-operation to defend sterling, warnings on the growth in bank credit) came to be familiar. Cameron Cobbold retired as Governor in June 1961 and this was one of the final written policy contributions.

Further reading chapter 4. Hide

Treasury Bills were sold at the weekly Treasury Bill tender. This tender was underwritten by the London Discount Market Association, though other banks were also able to bid. The arrangement attracted criticism from some quarters but the Radcliffe Committee found that it performed an important function. Though shortcomings in the tender were clearly recognised, the Bank was keen to retain it. This note was written by Hilton Clarke who was Principal of the Discount Office, and also includes annotations by Leslie O'Brien (at the time an Executive Director) and Cromer (in the Governor's red ink).

Further reading chapter 6. Hide

The level of liquid assets held by banks, as measured by the minimum liquidity ratio, was an important banking convention. It was also something that some observers thought could be used as a control mechanism and there was much discussion about whether the ratio should be prescribed. The Bank's preference was that the ratio should be determined by the banks for banking reasons rather than be dictated by the monetary authorities.

Further reading chapter 6. Hide

Roy Bridge was the Bank's expert on foreign exchange markets. He was trenchant in his views and firmly opposed to devaluation. 'Highway robbery' was a favourite Bridge phrase when talking about any possibility of devaluation. His mention of 1949 was a reference to the last occasion that sterling was devalued.

Further reading chapter 4. Hide

The various Chancellors of the Exchequer during Cromer's period as Governor became used to his letters warning of the dire consequences for the country if certain actions were not taken. Perhaps the frequency and predictable content of the correspondence reduced their impact. Cromer had a notoriously stormy relationship with Prime Minister Harold Wilson and only served one term of office as Governor, leaving the Bank in the summer of 1966.

Further reading chapter 5. Hide

Exchange controls were used in an attempt to maintain the United Kingdom's reserves of sterling. Although controls were relaxed in the 1950s, the various sterling crises of the 1960s saw controls reimposed and across a widening area. For example there were limits on the amount of cash that could be taken on foreign holidays. Another target was emigrants. The interest in this document is Cromer's annotation which shows his moral objections to such devices. Exchange controls were abolished after the new Conservative Government was elected in 1979.

Further reading chapter 5. Hide

On 18 November 1967 sterling was devalued by 14.3% from $2.80 to $2.40. In the period before this, large amounts were expended in trying to support the rate. The constant battle faced by the Bank's foreign exchange dealers was recorded in the daily market report. Roy Bridge (Assistant to the Governors) wrote pithy comments at the top of these and 'crucifixion' was the perfect summation of his feeling on the final day before devaluation.

Further reading chapter 5. Hide

In 1968 the International Monetary Fund dispatched a mission to London to discuss various aspects of British monetary policy. John Fforde wrote this note on the operations of the gilt-edged market (where Government stock was bought and sold) in order to explain the Bank's position. Fforde had joined the Bank in 1957 as an economics adviser and by the time of this paper was the Chief Cashier. This note was typical of his elegant and tightly argued style.

Further reading chapter 9. Hide

After sterling's devaluation in 1967 the International Monetary Fund had imposed targets for Domestic Credit Expansion (DCE). Officials in the Bank, and the Treasury, were sceptical about the concept and this is revealed in this note. It was written by Andrew Crockett from the Economic Intelligence Department, and the annotations are those of Adviser Charles Goodhart, who was the Bank's leading thinker on monetary policy and theory. Crockett and Goodhart went to write the seminal article 'The importance of money' published in the 1970 Bank of England Quarterly Bulletin.

Further reading chapter 8. Hide

'Competition and credit control' was unveiled by the Bank in May 1971 and it was put into operation in September. Its origins are complex but what the Executive Director for Home Finance, John Fforde, described as his 'curious and rather emotional note' is one of the key documents and sets out much of the thinking behind the policy. CJM - Christopher (Kit) McMahon, Executive Director Economics LKO'B - Leslie O'Brien, Governor.

Further reading chapter 10. Hide

In the late 1960s the aero-engine manufacturer Rolls-Royce got into financial difficulty. Though this was of no direct relevance for the Bank's monetary policy operations it did have implications for the reputation of the City and the Bank took a close interest. As this note shows, the Bank was working behind the scenes with the government and various banks to try and resolve the situation. GMG - Malcolm Gill, Governor's Private Secretary.

Further reading chapter 15. Hide

At this time there was growing dissatisfaction within the Bank about political interference in the setting of interest rates (then called Bank Rate). To get around this, the Bank began to explore ways of introducing a market element into the process, which would also be in line with the views underpinning Competition and Credit Control. In this document John Page (Chief Cashier, 1970-80) discusses the various options. Although he came down against any change on this occasion, it was not long before a market-determined formula was introduced as Minimum Lending Rate in October 1972.

Further reading chapter 10. Hide

Faced with rapid money growth in 1973, following the introduction of Competition and Credit Control, and fuelled by the 'Barber boom' , the Bank had to think of new monetary policy tools which did not entail a return to the sorts of controls that Competition and Credit Control had been designed to do away with. This paper, written by Adviser Charles Goodhart, explores the various options. The outcome was the supplementary special deposits scheme.

Further reading chapter 10. Hide

At the end of 1973 a number of small or 'fringe' banks experienced financial difficulties in what became known as the secondary banking crisis. The crisis led to a review of banking supervision and this work ultimately resulted in the Banking Act of 1979 which created a new formalised two-tier structure of supervision. This 1974 document, which was sent to the Treasury, traced developments in supervision and the background to the crisis. It went through several drafts, a process in which Richardson took a personal interest (as an example see p.17).

Further reading chapters 10 and 11. Hide

Going back to Montagu Norman in the 1930s, the Bank had taken an interest in industrial finance. This was furthered by the Bank's involvement in post-war initiatives such as the Industrial and Commercial Finance Corporation, and the Rolls-Royce crisis of 1971. As Governor from 1973, Gordon Richardson also took an interest in the subject and appointed Sir Henry Benson, from the accountants Cooper Brothers, as an adviser. In 1975 an Industrial Finance Unit (later Industrial Finance Division) was established within the Bank. This draft, by the Executive Director for economics, Christopher Dow, shows the formulation of the idea and the Unit's role.

Further reading chapter 15. Hide

It is not always easy to work out who was responsible for exchange rate policy during the 1970s. Kit McMahon was the Executive Director with responsibility for overseas matters. By 1976 sterling was under pressure again and large sums were being expended in support. This note reveals McMahon's frustrations about tactics and strategy. Pressure on sterling continued through 1976 until eventually the United Kingdom had to seek help from the International Monetary Fund. The Governor's annotation reads 'As you know I spoke to Sir D. Wass in the sense of this excellent paper before seeing it after speaking to you. You are writing to Sir D. Mitchell & I shall follow up on hearing the reaction'.

Further reading chapter 14. Hide

During the latter half of the 1970s there was some discussion at the top of the Bank about the direction in which it should be heading particularly in terms of its 'independence', however defined. The debate included this interesting contribution from Executive Director Kit McMahon about a variety of issues concerning the relationships with government and the Treasury, Bank independence, and openness.

Further reading chapter 15. Hide

In this document John Fforde addresses, in characteristic style, the various criticisms levelled at the Bank's operations the gilt-edged market, and he raises some complaints about the appropriate monetary aggregate to use. The pianists analogy is typical Fforde. His suggestion for a Quarterly Bulletin article to explain the Bank's policy on gilts was taken up and it was published in 1979.

Further reading chapter 13. Hide

Lord Croham (Sir Douglas Allen) was appointed as an adviser at the Bank in 1978. As a previous Permanent Secretary at the Treasury and then Head of the Home Civil Service and Permanent Secretary, Civil Service Department he was well placed to undertake a thorough review of the Bank's structure. The outcome was a complete reorganisation which gave greater clarity to the roles of the Executive Directors and saw the dismantling of the Chief Cashier's Department and the power traditionally associated with that post. The changes were implemented at the beginning of 1980.

Further reading chapter 16. Hide