Monetary Policy and Financial Repression in Britain, 1951–59 by William A. Allen (auth.)

By William A. Allen (auth.)

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The first stage of the reactivation of monetary policy, in November 1951, did not take the pressure off sterling, but after Bank rate had been increased to 4% in the Budget on 11th March 1952, the dollar exchange rate promptly, though temporarily, appreciated into the upper half of its fluctuation band. It fell back during the spring and required moderate support at the lower limit during June, but it returned to the upper half of the band more lastingly from October onwards. K. S. 2). One symptom of the increased attractiveness of sterling after the Bank rate increase of 1952 was the behaviour of covered interest rate differentials against the dollar.

Bearing in mind that monetary policy had been tightened at a time when the gold and foreign exchange reserves had been falling precipitately and the external situation seemed desperate; and that the outflow of reserves had ended and gone into reverse after the second increase in 1952–54: Years of Growth 41 Bank rate (to 4%) in March 1952, this was a serious omission. 10 What were the external effects of the new monetary policy? It seems plausible that if there had been no increase in interest rates offered to external holders of sterling, the fall in the reserves would have continued and some drastic action would have been forced on the government and the Bank of England.

1952–54: Years of Growth 43 10. The Economic Section’s failure to consider the external effects of monetary policy might have reflected an unrealistic belief that exchange controls protected the domestic economy from external financial influences, or it might have reflected the rift between the Overseas Finance division of the Treasury and the rest of the organisation. The establishment of Overseas Finance as a separate division was probably unavoidable as a result of the massive task of managing external debts, but it carried the risk that the external effects of domestic policies, and the internal effects of external policies, would get overlooked.

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