Download Origins and Measurement of Financial Repression: The

Origins and Measurement of
Financial Repression: The British
Case in the mid-20th Century
Garrick Hileman
Cambridge Centre for
Alternative Finance
Financial History Workshop, Brussels, 27 May 2016
OriginsandMeasurementofFinancialRepression:TheBritishCasein
themid-20thCentury
GarrickHileman
Abstract: A disagreement has emerged over whether advanced countries such as
BritainengagedinfinancialrepressionfollowingtheSecondWorldWar.Areviewof
the historical and archival evidence shows that policies associated with financial
repression played an important role in sustaining post-war Britain's record-setting
levels of public debt. In Britain, eleven pieces of legislation and sixteen
polices/directivesareidentifiedthatsupportedfinancialrepressionduringthisperiod.
A critique of two leading methods for measuring financial repression highlights the
need for additional measurement tools, such as a proposed composite indicator of
financialrepression.ThepaperdiscussesvariousaspectsofBritishfinancialrepression,
suchasinterestratepolicy,capitalcontrols,directedlending,andtheconscriptionof
theBritishbankingsystem.FreemarketbondyielddataareusedtocalculateBritish
government savings attributable to financial repression of over 8% of GDP in 1948,
whichismorethandoublepreviousestimatesforBritainandsignificantlygreaterthan
estimatesfordevelopingcountriesduringthe1970s-80s.
JEL:H63,E58,E61,E62,H12,H27,P24
Keywords:financialrepression,capitalcontrols,sovereigndebt,debtsustainability,inflation,
Britisheconomichistory,Britishbankingsystem,interestrates,financialregulation,
macroprudentialregulation
1Introduction
Financialrepressionhasreceivedrenewedacademicandpublicattentioninrecent
yearsaspartoftheongoingeconomicandpolicydebateoverhowbesttoachieveeconomic
growthwhilesustainingpublicdebts.Therenewedinterestinfinancialrepressionhasbeen
promptedinpartbythehighestlevelsofpublicandprivatesectordebtsinadvanced
economiessincetheSecondWorldWar,theperiodwhichsomescholarsarguewasthelast
timeadvancedcountriespracticedfinancialrepressiononawidescale.
Untilrecentlyproblemsposedbyunsustainablelevelsofsovereigndebtwerenearly
exclusivetodevelopingeconomies.Accordingly,emergingmarketshavebeenthefocusof
sovereigndebtresearchandpolicymakersoverthelastfourdecades.However,debt
sustainabilitymeasuresthataretypicallyemployedbydevelopingcountries,suchas
repudiationandinflation,areviewedasimpractical,undesirable,orevenimpossibleformany
advancedeconomiestoimplement.Atthesametime,outstandingdebtsanddeficitsarelarge
enoughthatothertraditionalmechanismsforachievingfiscalbalance,suchasreductionsin
governmentexpendituresorassetsales,areviewedbymanyasinsufficienttomakeamaterial
impactonsovereigndebtsustainability.Ifadvancedeconomiesareultimatelyunableto
achievesufficienteconomicgrowthtomaketheirdebtssustainablethenfinancialrepression
maybethemostcompellingpolicyoption.
AdisagreementemergedbetweenReinhartandSbrancia(2011)andTaylor(2011)over
theevidenceofwidespreadfinancialrepressioninthepost-SecondWorldWarperiod.1The
disagreementisexploredinmoredepthlaterinthepaperbutcanbesummarizedasfollows:
ReinhartandSbranciastatethatthedeclineintherealvalueofpublicdebtisprimafacie
evidenceoffinancialrepression,whileTaylorcounteredthatthetruereasonswhyrealyields
ongovernmentdebtmayturnnegativearenotalwaysclear.
1
(C.M.Reinhart&Sbrancia,2011;Taylor,2011)
Thispapermakesthreecontributions:first,existingmethodsformeasuringtheeffects
offinancialrepressionarecritiqued,revealinganumberofmethodologicalissuesand
limitationsthatcanbeaddressedinpartthroughaproposedcompositeindicator(composite
index)offinancialrepression.Second,thedisagreementovertheexistenceoffinancial
repressioninpost-SecondWorldWarperiodisexploredbyexaminingtheBritishcasein-depth,
andawiderangeoffinancialrepressionpoliciesemployedbyBritainareidentified.Last,an
alternativemeasureofBritishfinancialrepressionispresentedusingfreemarketbondyield
data;Britishfinancialrepression‘savings’arecalculatedatover8%ofGDPin1948,whichis
significantlygreaterthansavingsestimatesforothercountriesduringthepost-SecondWorld
Warperiod.
Theremainderofthepaperisstructuredasfollows:section2coversthedefinitionand
historyoffinancialrepression.Section3comparestwoleadingmethodsformeasuringfinancial
repression.Section4exploresthecaseofBritishpost-SecondWarfinancialrepression.Section
5concludes.
2Literaturesurvey
Beforeanystudycanbeundertakenitisusefultohaveaprecisedefinitionofthetopic
tobestudied.However,arrivingatbothaclearandgenerallyagreedupondefinitionofthe
termfinancialrepressionisproblematic;awiderangeofpoliciesandpracticescanbe,and
oftenare,placedunderitsbanner.Thetermfinancialrepressionisfrequentlyemployedasa
pejorativetocriticizeparticularpolicies,evokingstrongreactionsinacademicandpolicy
discussions.Addingfurthertroubleistheinterchangeableusebysomescholarsoftermslike
fiscalrepressionwithfinancialrepression,sometimesinthesamepaper.2Overlapcanalsobe
foundbetweenpoliciesassociatedwithfinancialrepressionandthepoliciesthatfallunderthe
moreagreeablytermedmacroprudentialregulation.3Forexample,increasedreserve
requirementsandholdingmore‘safe’governmentdebtinlieuofothercapitalisconsidered
bothprudentorthodoxyforachievingfinancialstabilityaswellasacorecomponentoffinancial
repression.
Financialrepressioncanbedefinedasanymeasuretakenbycentralauthoritiesthat
directslendablefundstowardsthesovereign’spubliclyissueddebt,oftenonattractiveterms
(belowmarket).Inotherwords,intheabsenceoffinancialrepressionthegovernmentwould
havetopayahigherrateofinteresttoenticelenders;otherwisethegovernmentwouldrisk
losingsignificantinvestorfundstootherfreemarketinvestmentsthatgeneratehigherratesof
return.Hereweseeoneofthedifficultiesinidentifyingfinancialrepression,whichisthe
relianceonthecounterfactualthateconomicactorswouldbehavedifferentlyifcertainpolicies
werenotinplace.
Thecorepolicyelementsoffinancialrepressioncanperhapsbebestgroupedintotwo
categories4–capitalcontrolsanddomesticfinancialregulation:
2
(Drelichman&Voth,2008)
Forfurtherdiscussionsee(C.Reinhart,Kirkegaard,&Sbrancia,2011)
4
Frameworkadaptedfrom(C.M.Reinhart&Sbrancia,2011,p.6)
3
1. Captivedomesticcreditproviders,whichtypicallyincludethebankingsystem,pension
funds,insurancecompaniesandotherinstitutions(e.g.,governmentagencies).Such
entitiescanbeownedordirectlyoperatedbythegovernmentunderaregimeof
financialrepression.Alternatively,firmscanalsoberegulatedornudgedthroughmoral
suasion.Publicdebtfinancingfromtheseentitiesisoftendirectedbythegovernment
viathefollowingmechanisms:
a. Reserverequirementsthatgovernboththepercentageandtypeofcapital(e.g.,
governmentdebt)andmustberetainedbythebankingsysteminreserve
againstdeposits.
b. Exchangeandcapitalcontrolsthatrestrictbothinstitutionsandindividualsto
domesticsavingsandinvestmentvehicles,therebypreventingthemfromtaking
advantageofpotentiallymoreattractiveoffshorereturns.
c. Preferentialtaxtreatmentforgovernmentdebtoverothercompetingfinancial
instruments,suchasequities.5
d. Restrictionsonholdingcertainassets(i.e.,foreigncurrency,gold),including
prohibitingtheownershipofgold,orlimitationsonthesaleortransferofgold
withinorbeyondthedomesticmarket.
2. Interestratecapsintheformofrateceilings,orotherindirectmeasuresthathelp
maintainlowinterestrates.Lowratescanbothreducegovernmentdebtexpenseand
influencethedemandforgovernmentdebt.Forexample,savingsdepositsthatare
regulatedtopayalowerrateofinterestthangovernmentdebtwillincentivizethe
migrationofcapitalintogovernmentdebt.
Theabovedefinitionoffinancialrepressionisbynomeanscomprehensive.Indeed,a
myriadofmeasuresareoftensuggestedasaformfinancialrepression.Forexample,
governmentrestrictionsontheactionsofcreditratingsagencieshasbeencharacterizedas
financialrepression.6Insum,whilethebroadconceptoffinancialrepressionisgenerallywell
5
6
Formoreonthisspecificareasee(Campbell&Froot,1994)
(Evans-Pritchard,7July,2011)
established,thereisroomfordebateoverpreciselywhichpoliciesoractionsshouldandshould
notbeconsideredfinancialrepression.
2.1Historicaloverviewoffinancialrepression
Tomoreclearlydefineandunderstandfinancialrepressionitishelpfultoexamineits
origins.Somepoliciesassociatedwithwhatcametobecalledfinancialrepressioninthelatterhalfofthe20thcenturyhaveexistedlongbeforethetermwasinvented.Restrictionsoninterest
andusurydatebacktoatleast1800B.C.andtheBabylonianCodeofHammurabi.7Lending
withinterest,orinterestratesconsideredusurious,haveoftenbeenframedinmoraland
religioustermsandarechastisedinboththeKoranandOldTestament.Forexample,Jews,like
Christians,wereingeneralnotsupposedtolendmoneyatusuriousratesofinterest,butthe
OldTestamentbookofDeuteronomycontaineda‘get-outclause’forJewslendingtogentiles.8
Morerecentlyasystemofcompulsorygovernmentfinancecalledprestitiwasin
operationin14thand15thcenturyVeniceandFlorence.9Restrictionsonthefreemovementof
capital,suchastheexportofspecie,areseenasearlyas16thcenturySpainandtheNapoleonic
period.10However,exchangecontrols,astheyarecommonlyunderstoodandpracticedtoday,
arguablyfirstcameintowiderexistenceduringtheFirstWorldWarwhenGermanyintroduced
exchangeregulationsshortlyafterhostilitiescommenced.11On3April,1918Francefollowed
suitandenactedexchangecontrolstolimitcapitalflight.Britain,undertheguidanceofathen
youngemployeeoftheExchequernamedJohnMaynardKeynes,practicedalighterversionof
capitalcontrols,whichincludedlicensingimportsandplacingrestrictionsonthewayinwhich
warloanscouldbespent.12Later,inhis1936GeneralTheory,Keynesexpressedhimselftobeat
leastasometimeproponentofinterestratecaps,stating:
7
(Lane,1937)
(Ferguson,2008,pp.35-36)‘Untoastrangerthoumayestlenduponusury;butuntothybrotherthoushaltnot
lenduponusury’
9
(Blitz&Long,1965)
10
(Cooper,Tarullo,&Williamson,1999,pp.6-7)
11
(Dulles,1929,p.223;Moulton&Mcguire,1923,p.166)
12
(R.F.Harrod,1951,pp.204-205)
8
“…therateofinterestisnotself-adjustingatalevelbestsuitedtothesocialadvantage
butconstantlytendstorisetoohigh,sothatawisegovernmentisconcernedtocurbit
bystatueandcustomandevenbyinvokingthesanctionsofmorallaw.”13
Whilecapsoninterestcanpreventmonopolistoroligopolisticlendersfromabusingtheir
pricingpower,capsalsobringdownthecostofborrowingforgovernment.
GurleyandShaw(1955,1960)werethefirsttoarticulatethebroadereconomicsystem
offinancialrepression.14In1973ShawandMcKinnonsimultaneouslycoinedtheterm‘financial
repression’intheirrespectivebooksontheroleofthefinancialsectorineconomic
development.15McKinnonandShawfocusedontwochannelsfortransmittingfinancial
repression:first,thereductionintheefficiencyofthebankingsectorinallocatingsavings,
meaningbankersoperatinginafinanciallyrepressedenvironmentareunabletomanagecredit
accordingtomarketratesandprices.Second,maintainingartificiallylowinterestratesreduces
thesavingslevel,whichinturncanreducecapitalaccumulation.16
Thetermfinancialrepressionbecamesomewhatofacatch-alldescriptionforexcessive
financialregulationindevelopingeconomiesbypromotersofthe‘Washingtonconsensus’,
whichwasasetofpoliciesassociatedwiththepushformarketliberalizationinthe1970s1980s.McKinnon,Shawandsubsequentscholarsfocusedtheirresearchontheeconomic
developmentbarrierscreatedbyfinancialrepressionforlessdevelopedeconomies.
13
(Keynes,1936,p.351)
(J.G.Gurley&Shaw,1955;JohnG.Gurley,Shaw,Enthoven,&BrookingsInstitution.,1960)
15
(McKinnon,1973;Shaw,1973)
16
(Shaw,1973,Ch.2and3)
14
2.2Economicimpactoffinancialrepression
SinceGurleyandShaw'sgroundbreakingworkinthemid-1950s,anumberofresearch
studieshavefoundthatfinancialrepressionhasanegativeimpactoneconomicgrowth.17A
morespecificcriticismoffinancialrepressionisthenegativeimpactithasonthemarginal
productivityofcapital;controlssuppressinginterestratesbelowtheirequilibriumlevelcause
projectswithotherwisepositivereturnsoninvestmenttogounfinanced.18Financial
developmentislikelytosufferundersuchconditionsasthelowreturnonfinancialassets
reducestheincentiveforsavingstobeallocatedtothefinancialsystemforintermediation.19
Theresultingdragoncapitalaccumulationundercutsentrepreneurshipandeconomic
development.
Capitalmobility,whichisrestrictedbyfinancialrepression,helpschannelresourcesto
theirmostproductiveusesbothlocallyandworldwide.CapieandWood(2002)studiedthe
effectsofBritishcapitalcontrolsandfoundthattheyresultin‘deadweightlosses’,meaning
higherprices,reducedproduction,andincreasedbureaucraticandadministrativecosts.20
Capitalcontrolscanalsobedifficulttoabandononcetheyareinplace,andtheycannegatively
impactacountry’sattractivenessasadestinationforforeigncapitalbyreducingthe‘free
market’credibilityofthenationsthatimplementcapitalcontrols.Exchangecontrolscanalso
createwhatamountstoaquotaonimports,thustriggeringanincreaseinrelativedomestic
prices.21Foreignexchangerationinghasalsobeenshowntohaveanegativeimpactonoutput
andemployment.22
Boththeempiricalandtheoreticalliteratureclearlysupportthecasethatfinancial
repressioncannegativelyimpacteconomicgrowth.However,itmustbenotedthatrobust
17
Seeforexample(Easterly,1993;Galindo,Micco,Ordoñez,Bris,&Repetto,2002;Lanyi&Saracoglu,1983;
Roubini&Salaimartin,1992;WorldBank,1989)
18
(Goldsmith,1969)
19
(DelaTorre,Gozzi,&Schmukler,2007)
20
(Capie&Wood,2002)
21
(Agénor,1992,p.11;Bhagwati,1978;Greenwood&Kimbrough,1987)
22
(Austin,1989)
economicgrowthandfinancialrepressionmaynotbemutuallyexclusive.Forexample,manyof
thecountriesthatReinhartandSbranciaargueashavingactivelyengagedinfinancial
repressionfollowingtheSecondWorldWaralsomanagedtogenerateoutsizedeconomic
growth.From1948to1973therealGDPofWesternEuropegrewtwiceasfastasduringany
otherperiodofcomparablelength,beforeorsince.23Inotherwords,ifReinhartandSbrancia
arecorrectintheirassessment,the‘eraoffinancialrepression’followingtheSecondWorld
Warcoincidedwiththe‘goldenageofeconomicgrowth’.
Alsoofnoteisthefactthatfrom1945through1980therewasnotasinglemajor
systemicinternationalbankingcrisis.Thisfactstandsinstarkcontrastwithrepeatedbanking
crisesthatoccurredbothbeforeandfollowingthe‘eraoffinancialrepression’.24Onepossible
explanationforthisphenomenonisthat,incontrasttothegrowinginternationaltrade
integrationfollowingtheSecondWorldWar,financialintegrationacrossborderswasprevented
throughanumberofrestrictions.25Asnotedearlier,financialrepressionpoliciessharesome
commonfeatureswithprudentialmeasures,suchasbankreserverequirementsthatmandate
anincreaseingovernmentdebtholdings.Researchhasshownthatbankingcrisesoften
foreshadowsovereigndebtdefaults.26
Arguablyoneofthemostimportantelementsoffinancialrepressionisitsimpacton
publicdebt.Governmentsareoftenforcedtopayahigherrateofdebtinterest,orinextreme
casescanbeentirelyshutoutofdebtmarkets,astheratioofpublicdebt-to-nationalincome
(debt-to-GDP)climbs.Inflation,whichoftenaccompaniesfinancialrepression,iscapturedin
nominalGDPandcanhelpreducethedebt-to-GDPratio.However,significantinflation,or
negativerealinterestrates,neednotaccompanyfinancialrepressiontohaveapositivedebt
sustainabilityeffect;anybelow-marketinterestratereducestheservicingcostofgovernment
23
(B.Eichengreen,1996)
(Bordo&Landon-Lane,2010;CarmenM.Reinhart&Rogoff,2009)
25
(Obstfeld&Taylor,2004)
26
(C.M.Reinhart&Rogoff,2011)
24
debt.However,likeinflation,financialrepressionisonlyeffectiveagainstgovernmentdebts
thataredenominatedinthedomesticcurrency.
3Measurementoffinancialrepression
GiovanninianddeMelo(1993)andReinhartandSbrancia(2011)developedmethods
forquantifyingandmeasuringtheimpactoffinancialrepression.Thissectionofcontainsa
discussionofthesemethods,theirresults,andsuggestedalternativeapproaches.
3.1GiovanninianddeMelo
Giovannini’sanddeMeloassembledataforasampleoftwenty-fouremergingmarket
countriesfortheperiodof1972through1987.27GiovanninianddeMelocalculategovernment
revenuefromfinancialrepressionasthedifferencebetweenthegovernment’sforeignand
domesticcostoffunds,multipliedbythepublicdebtofthecentralgovernment:
FR=(if–id)*PD
wheregovernmentrevenuefromfinancialrepression(FR)iscalculatedbysubtractingthe
artificiallylowdomesticinterestrate(id)fromtheforeignmarketinterestrate(if),andthen
multiplyingbygovernmentpublicdebt(PD).
Theirresultsestimatethe'governmentrevenue’fromfinancialrepressionrangedas
highas5.8%ofannualGDPinMexico,or40%oftheMexicangovernment’staxlevies.To
determinetheir‘market’ratetheauthorsutilizedatafromtheWorldBankDebtorReporting
System,whichisbasedonforeign‘commercial’debtinterestfromfinancialinstitutionsthat
havefloatedLIBOR-basedborrowingsoninternationalmarkets,suchasNewYorkandLondon.
27
(Giovannini&Demelo,1993,p.957)Somedataismissingforsomeyears,andtheauthorsacknowledgethe
debatabledecisionofincludingGreeceandPortugalintheirsample,bothofwhicharegenerallyconsideredas
‘advanced’countries.
Oneproblemwiththismethod,whichtheauthorsdonotdiscuss,isthatcommercial
ratesofinterestarenearlyalwayshigherthangovernmentrates,oftenbyasignificantmargin.
Accordingly,commercialratesmaynotberepresentativeofforeignsovereignrates,leadingto
anupwardbiasintheirfinancialrepressioncalculations.Asecondissuewiththeirmethodis
thatratesofinterestcansignificantlyvarybytypeoffinancialinstitution.Manydifferenttypes
offinancialoperatingentitiesbesidesdepositories,suchasinsurancecompanies,investment
banks,specialtyfinancelenders,andautofinancecompanies,canbeclassifiedasa‘financial
institution’.Indefenceoftheauthors,itwasanotuncommonpracticeduringtheperiod
studiedforgovernmentstoown,orexercisesomedegreeofcontrol,overdomesticfinancial
institutions.Itcouldthereforebereasonabletoarguethatfinancialinstitutionsservesarea
reasonableproxyforthemarketinterestratethatforeigninvestorswouldrequiretohold
government'sdebt.However,theauthorsfailtomakethiscase.
Aperhapssignificantconceptualproblemwithrepresentinganinterestratefromthe
periodunderstudyasa‘market’rateisthepervasivenessoffinancialrepressionduringthe
period.28Thelooseningofcapitalcontrolsandfinancialderegulationtookplaceoverthecourse
ofthesampleperiod,notbeforetheperiodofstudy.29Onepossiblewayofaddressingthis
issuewouldbetosegmentandcomparedatabetweendifferentsubperiods.However,suchan
approachwasnotundertakenordiscussedbytheauthors.
Theauthorsexcludedebtheldbythecentralbankintheirfinalcalculation,asthe
interestisreturnedtothegovernment.However,thedebtholdingsofmonetaryauthoritiesare
includedintheireffectivedomesticinterestratecalculations“becausethetreasurynormally
remuneratesthecentralbankforitsholdingsofinterest-bearingtreasurydebt”.30Whilethe
explanationforexcludingcentralbankholdingsinthefirstinstanceseemsreasonable,the
inconsistenttreatmentofcentralbankholdingsisnotsufficientlyjustifiedbytheauthors.
28
(C.M.Reinhart&Sbrancia,2011)
(Obstfeld&Taylor,2004;D.Quinn,1997)
30
(Giovannini&Demelo,1993,pp.956-957)
29
Last,theauthorsuseoftheterm‘governmentrevenue’todescribetheeffectsof
financialrepressionisproblematic.Thegovernmentdoesnotinfactcollectanytaxrevenue
fromfinancialrepression.Thebenefitsgovernment’srealizefromfinancialrepression,suchas
reducedinterestexpense,areinfactmoreakinto‘savings’thanrevenue.
3.2ReinhartandSbrancia
ReinhartandSbranciareferenceGiovannini'sanddeMelo'smethodsandtakeasimilar
‘bottomline’approachtocalculatethe‘liquidationeffect’,whichtheyalsorefertoas‘financial
repressiontax’,throughanexaminationofrealinterestratesofgovernmentdebt.31They
assembledataforaten-countrysampleofadvancedanddevelopingeconomies,includingthe
UnitedKingdomfor1945-1980.Theirresultsshowthatnegativerealinterestrateshada
significantimpactonreducingtherealcostofpublicdebt.ReinhartandSbranciaacknowledge
thesimilaritybetweentheirsandGiovanninianddeMelo’smethod.Theydonot,however,
considertheGiovanninianddeMelomethodappropriateforthepost-BrettonWoodsera
becausemanycountriesdidnothavemuchifanyexternaldebtdenominatedinaforeign
currency.
ReinhartandSbranciaconstructa‘synthetic’debtportfolioforeachsamplecountryto
determinetheappropriatedomesticinterestrate.Next,theycalculatetherealinterestrate(rt)
foreachcountryasfollows:
rt =
it −1 − π t
1 + π t Where π andiareCPIinflationandnominalinterestrates,respectively.Savingstogovernment
occuranyyearinwhichtherealinterestrate(rt)isnegative.The‘liquidationeffect’,or
31
(Sbrancia,2011,p.35)Theauthorsalsostatetheyhavealsochosentoremain“silentabouttheoptimalityor
desirabilityofrelyingonthismechanismtoreducedebts”.
‘financialrepressiontax’inanygivenyear,issimplycalculatedbymultiplyingthenegativereal
interestrate(rt)bytheoutstandingpublicdebt.
ReinhartandSbranciaalsoproposea“supplementary”methodforcalculatingdebt
liquidationthattakesintoaccountcapitallosses,ordeclinesinbondprices,ongovernment
debt.Thismethodcouldbeimportantforgovernments(orcentralbanks)thatpurchasetheir
country’sdebtinsignificantquantitywhenitisadvantageoustodoso.ReinhartandSbrancia
calculateaholdingperiodreturn(HPR)foreachdebtinstrumentasfollows:
HPRt =
( Pt − Pt −1 ) + Ct
Pt −1
WherePtandPt-1arebondpricesattimetandt-1,respectively,andCtistheyearlyinterest
payment.Similartotheirpreviousmethodpresentedabove,agovernmentdebtliquidation
yearisdeterminedasanyyearinwhichtherealreturnofthedebtportfolioisnegative.The
authorsdonoteseveralproblemswiththissecondapproach,suchashowtofactorinnonmarketabledebt(forwhichthereisnopricedata),aswellasthegeneraldifficultyofobtaining
historicalbondpricedataforsomecountries.
Withthefirstmethod,Reinhart’sandSbrancia’sfindingsfortheUnitedKingdom
suggestthatnearlyone-halfoftheyearsfrom1945-1980(including1948-1953)weredebt
liquidationyears,withanaveragenegativerealinterestrateof3.8%.32TheirresultsfortheUK
usingthesecondmeasurewereslightlylowerthantheirfirst,withliquidationasapercentage
ofGDPof2.4%versus3.2%,respectively.However,theyonlyutilizebondpricedatafortheUK
fromthe1960onwards.
32
Atthetimeofwritingtheirfulldatabasehasnotyetbeenmadeavailableforamoredetailedreviewofmethods
andresults(i.e.,individualyearsorisolatedperiods).
OneofthefirstquestionstoemergefromReinhart’sandSbrancia’sworkiswhythe
years1945-1947werefoundtobenon-debtliquidationyearsfortheUnitedKingdom?As
shownlater,significantinflationcontinuedaftertheendofthewar.Further,whiledebtlevels
peakedin1946,theUK’soveralldebtpositionwasroughlysimilarin1948asitwasin1945,the
firstpost-waryearthatauthorsidentityasadebtliquidationyear.Partoftheexplanationis
thattheirmethodologymaybeoverlyconservative.Theyconsideradebtliquidationyearas
oneinwhichrealinterestratesarenegativeasopposedtowhenrealinterestratesaresimply
belowmarketrates.Theauthorsjustifytheirhigherthresholdduetothedifficultyand
conceptualchallengesassociatedwithdeterminingatrue‘market’rateduringaperiodof
widespreadfinancialrepression.True,negativerealreturnsondepositsandbondswereanear
universalphenomenonduringmuchofthepost-warperiod.Further,eveniftherewereno
restrictionsoninterestratesinarelativelyfreemarketlikeSwitzerland,itisreasonableto
believethatglobalrateshadsomedownwardinfluenceonSwissrates.
Whileitisunclearhowtobesttoadjustfortheeffectof‘worldinterestrates’inanyuse
ofmarketratesincalculatingtheeffectsoffinancialrepression,acknowledgementofthis
problemisinsufficientjustificationforaltogetherdisregardingmarketrates.33Duringandafter
theSecondWorldWarsophisticatedfreemarketsdevelopedinlightlyregulatedvenues.34In
Switzerland,forexample,foreignsecuritiesandcurrenciesweretradedatsignificantdiscounts
totheirofficialrates.35TheBankofEngland“obsessed”withoverseastradingof‘free’sterling,
andapproximately$300millionoffreesterlingwastradedduringoneyearyearinNewYork
alone.36Further,currencyblackmarketsunderminetheefficacyofcapitalcontrols,which
typicallyplayacrucialroleinfinancialrepression.Theexistenceofsizablecurrencyblack
marketscouldconceivablynegatetheeffectivenessoffinancialrepression,particularlyfor
economicactorsthathaveaccesstosuchmarkets.Thesefreemarketsarenotmentionedby
theauthors.
33
Forfurtherdiscussionofa‘worldinterestrate’see(Barro&Salaimartin,1990;Blanchard&Summers,1984;
Chinn&Frankel,2005;Koedijk,Kool,&Kroes,1994;Lucas,1990;Yi,Blankenau,&Kose,2001)
34
Seeforexample(Frey&Waldenström,2004)
35
(TheEconomist,22May,1948)
36
(Cairncross,1985,pp.258,263)
Asecondwayinwhichtheauthor'scalculationsmayproveconservativerelatestotheir
useofofficialinflationdatasources.37Forexample,theinflationstatisticsreflectedinRichards
(2002)showconsistentlylowerlevelsofinflationthanotherestimatesforthesameperiodthat
areshownlaterinthispaper.Theauthorsdomakenoteofthisissue,butforreasonsthatare
uncleartheydonotutilizearguablymorerealisticinflationfigures.
Thereis,however,aperhapsmorefundamentalissueinReinhart’sandSbrancia’s
secondmethodthatisnotdiscussedbytheauthors.38Itistruethatagovernment,followinga
declineinthepricesofitsbonds,canretiredebtatanadvantageouscosttothegovernment.
However,theinterestexpenseincurredbythatgovernmentonsubsequentdebtissuancemay
increaseasthepriceinvestorsarewillingtopayonanynewlyissueddebtisdeterminedbythe
currentyieldonalreadyissuedbonds.Bondyieldsareinverselyrelatedtobondprices:
𝑐𝑢𝑟𝑟𝑒𝑛𝑡𝑦𝑖𝑒𝑙𝑑 = 𝑎𝑛𝑛𝑢𝑎𝑙𝑐𝑜𝑢𝑝𝑜𝑛
𝑚𝑎𝑟𝑘𝑒𝑡𝑝𝑟𝑖𝑐𝑒
Inotherwords,forfixedcoupongovernmentbonds,asbondpricesdeclineyieldsincrease,and
higheryieldsequatetohighernominalinterestexpensebornbytheissuinggovernmentonany
newlyissuedgovernmentdebt.Insum,anyeconomicgainagovernmentrealizesbyretiring
anyofitsbondsthathavedeclinedinvaluemaybeoffsetorexceededbyhigherinterestcosts
associatedwithnewdebtissuance.Asimplehypotheticalillustrationoftheabovepointis
presentedinTable1,whichshowstheimpactofdebtretirementandnewsovereignbond
issuanceonagovernmentbalancesheet.
37
38
(C.M.Reinhart&Sbrancia,2011,p.28)
(C.M.Reinhart&Sbrancia,2011,pp.30-31)
Table1:IllustrationofIntertemporalChangesinPublicDebtInterestExpenseDuetoCapital
Gains(Losses)
HypotheticalTreasuryBondIssuanceandTreasuryBalanceSheet
TreasuryBondIssuance
1950
1951
1952
1953
1954
Bond(1)principal
£100
Couponpayment(fixed)
£2.50
£2.50
£2.50
Couponyield(fixed)
2.50%
MarketpriceofBond(1)
£100
£100
£75.00
CurrentYield
2.50%
2.50%
3.33%
Bond(2)-principal
£100
Couponpayment(fixed)
£3.33
£3.33
Couponyield(fixed)
3.33%
MarketpriceofBond(2)
£100
£100
CurrentYield
3.33%
3.33%
TreasuryBalanceSheet
1950
1951
1952
1953
1954
BeginningofYearCash
£0.00
£100.00 £97.50
£10.00
£10.00
AnnualSurplus/Deficit
£0.00
£0.00
-£10.00 -£100.00 £0.00
Interestexpense
£0.00
£2.50
£2.50
£3.33
DebtIssued-Deficit-Interest=Cash
£100.00 £97.50
£85.00
£10.00
£6.67
BondRepurchases
£75.00
£0.00
£0.00
Gain(Loss)onBondRepurchase(onetime)
£25.00
Gain(Loss)oninterestrefinancing(reoccurring) -£0.83
Cash-BondRepurchases
£100.00 £97.50
£10.00
£10.00
£6.67
Theaboveillustrationdemonstrateshowabeneficialone-timecapitalgainrealizedbya
governmentthroughadeclineinthemarketvalueofitsbondscanbepartially,ifnotwholly,
offsetbymodestlyhigherreoccurringinterestexpensethegovernmentwillincuron
subsequentdebtissuance.Thereasonforthisisthatadeclineinbondpricesresultsinhigher
yieldsonoutstandingdebt,anditistheseexpostyieldsthatguidethepricingofnewlyissued
debt.
Last,theauthorsacknowledgethatinthereductionofpost-SecondWorldWardebts
that“otherfactors,suchasrealgrowth,mayhavebeenrelevantaswell.”39AsnotedinChapter
2,popularnarrativesaswellasacademicanalysisbyBuiter(1985)andothersonhowpostSecondWorldWardebtswerereducedthrougheconomicgrowthareincompleteatbest,and
possiblymisleading.However,ReinhartandSbranciadonotattempttocompareorquantify
therelativecontributionofrealgrowthandfinancialrepression.Suchacomparisoncouldbe
helpfulforunderstandingtherelativeimpactofeachonpost-SecondWorldWardebt
reduction.
3.3Alternativesmeasuresoffinancialrepression
Thissectionpresentsanalternativecalculationofgovernmentsavingsfromfinancial
repressionforBritainduringthepost-SecondWorldWarperiod.Thisalternativecalculationcan
becharacterizedasahybridofthepreviouslydescribedmethodsdevelopedbyGiovanniniand
deMeloandReinhartandSbranciaandaddressessomeoftheissuesidentifiedearlier.
Specifically,thealternativecalculationpresentedbelowdoesawaywiththecommercialrateof
interestusedbyGiovanninianddeMeloandinsteadutilizesafreemarketrate.40
Inadditionto‘free’sterling,thereisevidenceofamarketfor‘free’Britishsovereign
debt.InAmerica,NewYork-tradedUKbearerbondswereyielding7%,whichwasmorethan
39
(Sbrancia,2011,p.35)
AnothersupplementaryapproachtotheReinhartandSbranciamethodnotperformedherethatcouldbeuseful
wouldbetoallowforalowerthresholdofwhatconstitutesadebtliquidationyear,suchaswheneverrealinterest
ratesarebelowmarketrates.
40
doubletheapproximately3%yieldthatBritish2.5%couponConsolswerepayinginLondon
duringthistime(Table2).41
Table2:PricesandYieldsofLong-TermBritishGovernmentSecurities,1935-1961
Year
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
Annual
Avg. Yield% High
Yield
86.500 2.89% 94.3750 2.65%
85.000 2.94% 87.2400 2.87%
76.250 2.28% 84.8125 2.95%
74.000 3.38% 79.3750 3.16%
67.250 3.72% 71.1250 3.51%
73.500 3.40% 77.0000 3.25%
79.875 3.13% 82.8750 3.02%
82.500 3.03% 83.6250 2.99%
80.625 3.10% 83.2500 3.00%
79.625 3.14% 82.2500 3.04%
85.625 2.92% 92.8125 2.69%
96.188 2.60% 99.6250 2.51%
90.500 2.76% 99.1250 2.52%
77.875 3.21% 83.3750 3.01%
75.750 3.30% 81.9375 3.05%
70.375 3.55% 74.6875 3.35%
66.000 3.79% 71.5000 3.50%
59.125 4.23% 62.0000 4.03%
61.240 4.08% 65.2500 3.83%
66.500 3.76% 69.7500 3.58%
60.000 4.17% 66.5000 3.76%
52.750 4.74% 56.7500 4.41%
50.250 4.98% 55.6875 4.49%
50.250 4.98% 52.8125 4.73%
51.875 4.82% 53.6250 4.66%
46.375 5.40% 49.7500 5.02%
40.375 6.20% 44.0000 5.70%
Low
80.000
82.250
73.125
64.000
61.000
68.125
76.750
81.000
78.250
78.688
91.563
81.125
80.000
74.500
65.128
68.125
60.125
55.000
58.375
58.375
54.875
49.875
45.000
46.750
48.625
43.875
36.250
YieldRangeofAllIssues30-yearsor
Longer
Yield
3.13%
3.04%
3.42%
3.91%
4.10%
3.67%
3.26%
3.09%
3.19%
3.18%
3.06%
3.08%
3.12%
3.36%
3.84%
3.67%
4.16%
4.55%
4.28%
4.28%
4.56%
5.01%
5.56%
5.35%
5.14%
5.71%
6.90%
Low
2.88%
2.96%
3.37%
3.56%
3.65%
3.25%
3.03%
3.03%
3.14%
3.07%
2.74%
2.53%
3.00%
3.13%
3.56%
3.53%
4.06%
4.27%
3.89%
3.81%
4.39%
4.90%
5.41%
4.89%
4.99%
5.68%
6.45%
High
3.13%
3.17%
3.43%
3.62%
3.77%
3.44%
3.19%
3.18%
3.23%
3.18%
2.91%
2.67%
3.05%
3.19%
3.81%
3.73%
4.44%
4.61%
4.27%
4.15%
4.50%
5.08%
5.62%
5.20%
5.40%
6.07%
6.85%
MaxCurrentYield
ofPremiumIssues
3.48%
3.54%
3.64%
3.87%
3.62%
3.58%
3.62%
3.62%
3.62%
3.62%
3.44%
3.69%
3.65%
3.94%
3.90%
41
('FreeSterlinginEurope',TheEconomist,22May,1948)Atpresentonlyasinglefreeyielddatapointhasbeen
located.
42
Source:Homer(1963) TheNewYork‘free’yieldcanbeemployedtocalculategovernmentsavingsfrom
financialrepressionthroughaslightlymodifiedversionofGiovanninianddeMelo’smethod:
(1)
FRS=(im–id)*PD
wheregovernmentsavingsfromfinancialrepression(FRS)iscalculatedbysubtractingthe
artificiallylowdomesticinterestrate(id)fromthefreemarketinterestrate(im),andthen
multiplyingbygovernmentpublicdebt(PD).Theresultsofsuchacalculationfortheyears
1945-1951arepresentedinTable3.
42
(Homer,1963,p.16)
Table3:UKFinancialRepressionSavingsEstimate,ConstantFreeMarketInterestRate,194660
UKNet
Freemarket
PublicDebt
interest
(£bs)
rate*
23.64
7.00%
25.63
7.00%
25.62
7.00%
25.17
7.00%
25.80
7.00%
25.92
7.00%
25.89
7.00%
26.05
7.00%
26.58
7.00%
26.93
7.00%
27.04
7.00%
27.01
7.00%
27.23
7.00%
27.38
7.00%
27.73
7.00%
Year
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
Avg.Yieldof
Long-Term
UKDebt
2.60%
2.76%
3.21%
3.30%
3.55%
3.79%
4.23%
4.08%
3.76%
4.17%
4.74%
4.98%
4.98%
4.82%
5.40%
Financial
Repression
Savings(£bs)
1.04
1.09
0.97
0.93
0.89
0.83
0.72
0.76
0.86
0.76
0.61
0.55
0.55
0.60
0.44
Financial
RepressionSavings
%ofGDP
10.9%
10.1%
8.1%
7.3%
6.7%
5.6%
4.5%
4.4%
4.8%
3.9%
2.9%
2.5%
2.4%
2.5%
1.7%
*Note:Atpresentonlyasinglefreeyielddatapointhasbeensourced('FreeSterlinginEurope',TheEconomist22
May,1948)
Sources:HMTreasury,TheEconomist,Homer(1963),IMF,UKONS
TheresultsindicatethattheeffectsofUKfinancialrepressionwerelikelylargest(asa
percentageofGDP)intheyearsimmediatelyfollowingtheSecondWorldWar,butthensteadily
diminished.In1948,savingsattributabletofinancialrepressionwereover8%ofGDP,or
significantlylargerthanGiovanninianddeMelo’slargestfindingof5.8%ofGDPforMexico.
However,astimeprogressestheaverageyieldoflong-termUKdebtnearlydoubleswhilethe
netpublicdebtonlyincreasesfrom£23.6billionin1946to£27.7billionin1960,orby17%.
However,theaboveestimationassumesnochangeovertimeinthe7%freemarketyieldonUK
debtsourcedfromthe1948TheEconomistarticle.Theresultsfromadjustingthefreemarket
yieldproportionallytotheadjustmentinofficialmarketyieldsarefoundinTable4.
Table4:UKFinancialRepressionSavingsEstimate,AdjustedFreeMarketInterestRate,194660
UKNet
Freemarket
PublicDebt
interest
(£bs)
rate*
23.64
5.50%
25.63
5.86%
25.62
7.00%
25.17
7.20%
25.80
7.74%
25.92
8.26%
25.89
9.22%
26.05
8.90%
26.58
8.20%
26.93
9.09%
27.04
10.34%
27.01
10.86%
27.23
10.86%
27.38
10.51%
27.73
11.78%
Year
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
Avg.Yieldof
Long-Term
UKDebt
2.60%
2.76%
3.21%
3.30%
3.55%
3.79%
4.23%
4.08%
3.76%
4.17%
4.74%
4.98%
4.98%
4.82%
5.40%
Financial
Repression
Savings(£bs)
0.69
0.79
0.97
0.98
1.08
1.16
1.29
1.25
1.18
1.33
1.51
1.59
1.60
1.56
1.77
Financial
RepressionSavings
%ofGDP
7.2%
7.4%
8.1%
7.7%
8.1%
7.8%
8.1%
7.3%
6.5%
6.8%
7.2%
7.2%
6.9%
6.4%
6.8%
*Note:Adjustedproportionallybasedonchangesintheyieldoflong-termBritishgovernmentdebt.Atpresent
onlyasinglefreeyielddatapointhasbeensourced('FreeSterlinginEurope',TheEconomist22May,1948)
Sources:HMTreasury,TheEconomist,Homer(1963),IMF,UKONS
Oneuntestedmethodforcalculatingfinancialrepressionsavingsthatisbeyondthe
scopeofthispaperinvolvesthecreationofsyntheticmarketyield.Asnotedearlier,thelackof
amarketinterestratewouldaddressonethemostsignificantissueswiththeGiovanniniandde
Melomethod,whichisthedeterminationofasuitablefreemarketrateofinterest(if)to
comparewiththefinanciallyrepressedrateofinterest(id).‘Free’currencyexchangeratedata
couldbeusedtoconstructasyntheticmarketyieldforbondsbyemployingamodifiedversion
oftheuncoveredinterestrateparityequation:
(2)(1 + 𝑖£ ) =
78
98
(1 + 𝑖: )
whereFtisthecurrent‘free’exchangerate(whichsubstitutesintheclassicversionofthe
equationfortheexpectedfuturespotexchangerate,giventhatfreecurrencywasoftentrading
atadevaluedfreeratethatanticipatedfutureofficialdevaluations),Stisthecurrentfixed
officialexchangerateattimet,i£istheinterestrateinthethefreecurrencyissuingcountry,
andifisthesyntheticmarketyield.
Furtherstudyisnecessarytodeterminethefeasibilityoftheaboveapproach,but
researchsuggestsastatisticallysignificant,negativelylaggedinfluenceofcurrenciesondebt.43
Further,Flandreau&Oosterlinck(2011)imputedcurrencyvaluesfromgovernmentdebtyields,
anditcouldbeworthexploringwhethersuchatransformationcanbereversedtocalculatea
syntheticmarketyield.44
3.4TheFinancialRepressionIndex
BothGiovanninianddeMeloandReinhartandSbranciausetheresultsfromtheir
quantitativemethodstocomparethedegreeoffinancialrepressionacrossdifferentcountries.
However,withregardstotheReinhartandSbranciamethod,Taylor(2011)notesthatthe
actualreason(s)behindnegativerealyieldsongovernmentdebtarenotalwaysclear.For
example,inMay2012theGermangovernmentsuccessfullyfloatedtwo-yearbondswithazero
coupon,andin2015theSwissgovernmentissuednewdebtwithanegativenominalyield.
TheseeventsoccurredinspiteofthefactthatpositiveinflationexistedinbothGermanyand
Switzerlandatthetimeofdebtissuance,andfutureexpectationsofinflationwerealsopositive.
InvestorsappeartobepayingtheGermanandSwissgovernmentinrealandnominalterms,
respectively,fortheopportunitytolendmoneytothegovernment.IftheReinhartandSbrancia
methodwereemployedinthesecasestheresultswouldsuggestthatbothGermanyand
43
44
(Dreher,Herz,&Karb,2006)
(Flandreau&Oosterlinck,2011)
Switzerlandwereengagedinfinancialrepression.However,thenotionthatfinancialrepression
ineithercountryisresponsiblefortheobservednegativeyieldsisdubious.Instead,aflightto
highercreditqualityinresponsetotheEuropeansovereigndebtcrisesisthelikelyexplanation
behindtheGermanandSwissrates.
Insum,‘bottom’s-up’approachestoidentifyingfinancialrepressioncanproduce
incompleteormisleadingresults.Furtherinsightscanbegainedbycomparingcountriesacross
qualitativemeasuresoffinancialrepressionsuchasacompositeindicator(compositeindex),
whichallowsforcross-countrycomparisonsoffinancialrepressionoveraseriesofstandardized
measuresanddifferenttimeperiods.Samplevariablesthatcouldbeutilizedforthe
constructionofanindextakenfromexistingdatasourcessuchastheIMF,BIS,WorldBank,and
OECDaresummarizedinAppendix1.45
45
Unfortunately,forthetimeperiodunderstudyinthisthesismuchofthedatarequiredtocreateafinancial
repressioncompositeindexwaseithernevercollectedorhasnotyetbeenlocated.
4Britishfinancialrepression
Thissectionofthepaperaddressesthedisagreementintheliteratureoverwhatrole
financialrepressionmayhaveplayedinsustainingBritain’srecord-settinglevelsofpublicdebt
followingtheSecondWorldWar.Largelymissingisadetailedhistoricalaccountofthepolicies
andpracticesthatmayormaynothavefacilitatedfinancialrepressionincountriessuchas
Britain.Inotherwords,doesthehistoricalrecordsupportorcontradictReinhartandSbrancia’s
quantitativeargumentoffinancialrepression?Theshortanswertotheabovequestionisthat
yes,Britaindidinfactenactnumerouspoliciesandlegislationthatcanbecharacterizedas
financialrepression.Further,thesepoliciesplayedausefulroleinsustainingBritishsovereign
debt.However,itisfartoosimplistictorefertofinancialrepressionisasimplebinary,yesor
no,fashion.Differentdegreesandtypesoffinancialrepressionexist.
Theremainderofthispaperdescribesthenuanced,multi-facetednatureofBritish
financialrepressionbyfirstexploringtheoriginsofBritishfinancialrepression,thenexamining
thevariousaspectsofBritishfinancialrepression,andconcludeswiththeimpactfinancial
repressionhadonselectareasoftheBritisheconomy.
4.1TheoriginsofBritishfinancialrepression
ThegrowingthreatposedbyanevermoreassertiveNaziGermanyledtheBritishto
rearminthelatter-halfofthe1930s.Whilethisbroughtfullemploymentitalsotriggered
concernsoverinflationandimbalancesinBritain’snationalaccounts.46Itwasduringthistime
thatJohnMaynardKeynes’theoriesonwartimeandpost-warfinance,whichwouldprove
highlyinfluentialtoBritishfinancialrepression,tookshape.InAprilandJuly1939Keyneswrote
severalarticlesintheTimesoutliningadualpolicyoflowinterestratesandcapitalcontrols,
whichwentontobepartiallyadoptedinApril1941.47Keynesalsoadvocatedfordeferred
46
(Skidelsky,2000,p.20)
th
th
Keynes’ideaswerefirstpublicizedviatwoeditorialsintheTimesonthe14 and15 November1939.Abooklet
versiontitledHowtoPayfortheWarfollowedon27Februaryin1940.However,anearlierlectureonthistopic
wasgivenbyKeynesatCambridge’sMarshallSocietyon20October,1939titled‘WarPotentialandWarFinance’
47
deposits,whichweretobeblockedandhaveanopen-endedreleasedatetobedeterminedat
thediscretionoftheTreasury.48Originallycalled‘compulsorysavings’,theprogramwaslater
rebrandedas‘deferredpay’formarketingpurposes.49Theplancalledforthegovernmenttoset
long-terminterestratesat2.5%,whichrepresenteda17%reductionontheapproximately3%
yieldsoflonger-termBritishdebtinstrumentsatthattime.50
LordKeynesprofessedhimselftobeaproponentofinterestratecapsinhisGeneral
Theory51,andina12January,1937TimeseditorialKeynesstated“wemustavoid[dear
money]…aswewouldhell-fire”.52Thedoctrineof‘permanentlycheapmoney’wouldgoonto
reignoverBritishmonetarypolicyuntil1951.KeynesadvocatedthattheBritishChancellorof
theExchequershouldannouncethathewouldborrowatnomorethan2.5%socreditorshave
zerodoubtthatthesearethebesttermsavailableforlong-datedBritishdebt.Keyneshad‘an
appreciationthatthesocialandpoliticalclimatewouldnotpermitarepeatoftherentierfriendlypolicyofFirstWorldWar’,althoughKeyneslaterrevisedupwardshissuggested
interestrateto3%.53TobeeffectiveKeynesfelttheChancellor’sstatementwouldneedtobe
buttressedbycontroloverdomesticcapitalissuesandanembargoonforeignlending,meaning
capitalcontrolswouldneedtobeinstituted.54Lowinterestrates,oneofthehallmarksof
financialrepression,werefacilitatedbytheBankofEngland(whereKeyneswasaCourt
member),whichkepttheshort-termTreasurybillrateat1%from1939-1945.
Itisherewiththeselate-1930sproposalsthatweseeKeyneslayingsome,butnotall,of
thetheoreticalandpolicyfoundationsforpost-warBritishfinancialrepression.However,
(Skidelsky,2000,p.43).Coincidentally,theLabourpartyalsopublishedatthistimeanidenticallytitledbookon
warfinance(Durbin,1939).ThereasonKeynes’ideasultimatelywonoutwasbecause,asSkidelskyputit,hehad
the“onlytheoryonofferwhichpromisedbothguns,butterandlowinterestrates”(Skidelsky,2000,p.20).
48
(Keynes,1940,p.47)
49
(Skidelsky,2000,p.59)
50
(Keynes,1940,p.44)
51
(Keynes,1936,p.351)
52
(Skidelsky,2000,p.22)
53
(Kynaston,1999,p.464)
54
(Skidelsky,2000,pp.24-25)
Keynes’crucialcontributionstoBritishfinancialrepressiongoentirelyunacknowledgedby
Keynes’biographersandothereconomichistorians.55
EvidenceofBritishfinancialrepressionpriortothe1940salsoexists.AfterBritain
abandonedthegoldstandardforasecondandfinaltimein1931,aprohibitiononloansto
overseasborrowerswasimposed.In1933thepurchaseofforeignsecuritieswasalso
prohibited,althoughdirectinvestmentsabroadweretreatedmoreleniently.56Itisunclearwhat
roleifanyKeyneshadonshapingthesepolicies.Onedifferencebetweenthisperiodandwith
thefollowingdecadeappearstobetherelianceoftheBankofEnglandandWhitehallonthe
useofmoralsuasion,asopposedtoregulationsorlaw,toexecute1930spolicychanges.This
approachmayhavealsoplayedatleastsomeroleintherelativelyspeedyreversalofsome
policies,suchastherelaxationofloanrestrictionstoCommonwealthborrowersin1933.These
examplesillustratehowfinancialrepressioncantakebothexplicitandimplicitform.
AsearlyasSeptember1941Britishofficialswerecontemplatingthepost-warfinancial
andeconomicorder.57InDecember1941,ontheothersideoftheAtlantic,TreasurySecretary
MorgenthauaskedHarryDexterWhitetobeginworkonwhatwastobecometheBretton
Woodsagreement.58ItwasduringthistimethatgroundworkwaslaidinbothBritainandthe
U.S.forthepost-warinternationalframeworkthatwouldprovesoconducivetofinancial
repression.Stringentcapitalcontrols,imposedatthebeginningoftheSecondWorldWarin
September1939,providedthenecessaryconditionforthecreationoftheSterlingArea,which
wouldplayasupportingroleinenforcinginternationalfinancialrepression.59Underthenew
rulesallpurchasesofforeignexchangerequiredpriorapprovalofBritishofficials,andcountries
thatdidnotparticipateinthewarceasedtobeapartoftheSterlingBloc(e.g.,Sweden).The
outbreakofwarledBritaintoimposeexchangecontrolonpaymentsoutsidetheSterlingBloc,
whilerelativelyfreemovementofcapital,coordinatedbytheBankofEngland,waspermitted
55
(R.F.Harrod,1951;Skidelsky,2000)
(CairncrossandEichengreen,1983,p.22)
57
(Fforde,1992,p.36)
58
(Skidelsky,2000,pp.256-263)
59
(Capie,2010,p.146)
56
within.60TheregulationsandrulesgoverningtheSterlingAreawerecomplex;varyingdegrees
offreedomexistedonthetransferabilityofcurrency,dependentuponlocationandpurpose.
Importrestrictionsalsoexistedsothat“whiletheremightbefreedomtomakeapayment,
therewasnotalwaysfreedomtomakeapurchase”.61Duringthewara‘DollarPool’was
establishedamongSterlingAreacountriesthatwouldremaininplaceafterhostilitiesended.Its
purposewastoconserveU.S.dollarsamongstSterlingAreamembersbyimposinglicensing
restrictionsondollarimports,andmemberswererequiredtodepositexcessdollarsandgoldat
theBankofEngland.62
Keynes,inadditiontoprovidingtheintellectualfoundationsformuchofBritishfinancial
repression,wouldalsogoontoplayaleadingroleinimplementingfinancialrepressionpolicies
duringandafterthewarfrominsideTreasury.However,itisimportanttonotethatnotall
facetsofpost-warBritishfinancialrepressionwereprescribedbyKeynes.Further,Keyneswas
notaloneinadvocatingforBritishfinancialrepression.Forexample,theBankofEnglandwasat
leastwillingtogoalongwith,ifnotplaytheroleofaccomplice,inthemaintenanceoflow
interestrates.
WhileothereconomichistorianshaveindirectlycoveredvariousaspectsofBritish
financialrepressionwithoutlabellingitassuch,ReinhartandSbrancia(2011)arethefirstto
explicitlymakethecasethatfinancialrepressionwaspracticedinpost-SecondWorldWar
Britainandotheradvancedcountries.Oneofthefirstquestionswhichemergesafterreviewing
Reinhart’sandSbrancia’sresearchthatpromptedTaylor’scritiqueiswhatpoliciesand
outcomesshouldconstitutesufficientevidence,orproof,offinancialrepression?Inother
words,isfinancialrepressionakintotheU.S.SupremeCourt’sdefinitionofpornography,which
basicallyamountsto‘weknowitwhenweseeit’?Orcanthe‘financialrepression’labelbe
assignedinamorerigorous,systematicfashion?Debtliquidationdoesnotrequirefinancial
60
(Cairncross&Eichengreen,1983,p.24).
(Capie,2010,p.146;CatherineRuthSchenk,1994)
62
(Cairncross&Eichengreen,1983,p.25)
61
repressionasitcanbeduesolelytotheeffectsofinflationinexcessofnominalinterestrates.
Inotherwords,demonstratingthatdebtliquidationoccurredinanygivenyear,oroveran
extendedperiodduetonegativerealinterestrates,isinsufficientproofoffinancial
repression.63
ReinhartandSbranciasupporttheirquantitativeevidencebyidentifyingseveral
financialrepressionmeasuresineachsamplecountry.64FortheUK,theyhighlightthefollowing
threeDomesticFinancialRegulationsmeasures:
1. TheGoldmarketclosedinearlySecondWorldWar,reopenedonlyin1954.65
2. TheBankofEnglandstoppedpublishingtheMinimumLendingRatein1981.
3. In1986,thegovernmentwithdrewitsguidanceonmortgagelending.
ThefollowingtwomeasuresarelistedforCapitalAccount-ExchangeRestrictionsintheUK:
1. AllrestrictionsonoutwardForeignDirectInvestmentabolished,andoutwardportfolio
investmentliberalized.
2. ExchangeControlActof1947suspendedinOctober1979;allremainingbarriersto
inwardandoutwardflowsofcapitalremoved.
Theabovemeasuresareperhapssomeofthemoresignificantfinancialrepression
policiesinBritainfollowingtheSecondWorldWar.However,theauthorsdonotmakeany
referencetotherelativeimportanceofthesepolices,orexplainwhythesewerehighlighted
overotherpoliciesthatcouldconstitutefinancialrepression.Further,theyoverlookanumber
ofotherBritishfinancialrepressionpolicies.Forexample,ChancellorDaltondirected
63
Sbrancia(2011)developsaconceptualframeworkutilizinginflationexpectationestimatestodistinguish
betweendebtliquidationrelatedtounanticipatedinflationandfinancialrepression.
64
(C.M.Reinhart&Sbrancia,2011,p.17)
65
(BankforInternationalSettlements.,1941)
governmentdepartmentstosupportTreasurydebtauctionsbymakingpurchasesthathelped
financegovernmentdebtatlowratesofinterest.66
Britishfinancialrepressionduringthisperiod,intheformoflegislationand
directives/policies,aresummarizedinTable5andTable6,respectively.Intotal,elevenpieces
oflegislationandsixteenpolices/directivesthatsupportedBritishfinancialrepressionwere
foundeitherinarchivalevidenceortheliterature.Theselegislativeandpolicyactshighlightthe
intricateandcomprehensivenatureofBritishfinancialrepressionduringthisperiod.
66
(Cairncross,1985,pp.432-433;Worswick&Ady,1952,pp.196-198).
Table5:UKFinancialRepressionLegislation,1936–1998
Legislation
Tripartite
Agreement
Repealed/
Reduced
1973
DateEnacted
1936
CapitalIssues
Committee
1936
Late-1950s Formalgovernmentapplicationprocessforcontrollingcapital
flowstoforeignanddomesticapplicants;only£31million
67
exportedannuallyfrom1932-36 ;alsoreviewedalldomestic
issuesover£50,000,andtheBankofEnglandreviewed
68
anythingover£100,000 DeferredPay
April1941
post-WWII Originallycalled‘compulsorysavings’,depositsweretobe
blockedandhaveanopen-endedreleasedate,tobe
determinedatthewhimoftheTreasury.Aninterestrateof
only2.5%ayear,whichwas17%cutontheroughly3%yielded
bylonger-terminstrumentsatthattime.
Capital
Controls
Sept.1939
Treasury
Deposit
Receipt
(TDRs)
WWII
post-WWII Permissionfromauthoritiesrequiredpriortomakinganyforex
purchases;restrictionsonforeignexchangeonpaymentsmade
outsidetheSterlingArea.Limitsonsterlingbanknotestravellers
cantakeoutoftheUKof£20and£10,respectively,and“no
sterlingcanbesentoutoftheUnitedKingdomwithout
69
permission”. post-WWII NewsecuritywhichallowedtheTreasurytobypasstheLondon
moneymarketandborrowdirectlyfrombanksthroughthe
issuanceofnon-marketableTDRs
Closureof
LondonGold
Market
WWII
1945
67
Description
Beginningwiththe1936Tripartiteagreementbetweenthe
U.K.,FranceandtheU.S.andsubsequentbilateraland
multilateralagreementsthoughSecondWorldWarandthe
1944BrettonWoodsagreement,exchangerateswere
managedsothatforeignexchangecouldonlybelegally
convertedatofficialexchange
ClosureofLondongoldmarket,tradingandownershipofgold,
andrestrictionsonimports/exportsofgold
(Ingham,1984,pp.195-197;Wilson,1995,p.183)
(Morgan&Thomas,1962,p.210;Wilson,1995,p.189)
69
C261,LetterfromBankofEnglandtoManageroftheFederalReserveBankofNewYork,NewYorkFederal
ReserveBankArchive,17October,1946
68
Legislation
Bankof
EnglandAct
DateEnacted
Aug.1946
Repealed/
Reduced
1998
Exchange
ControlAct
1947
Oct.1979
Minimum
LendingRate
TaxIncrease
onDividends
post-WWII
post-WWII
N/A
Increaseinthedividendstaxfrom5%to12.5%madeBritain’s
sovereigndebtamoreattractiveinvestmentvis-à-visequities
Mortgage
Lending
Guidance
post-WWII
1986
GovernmentguidanceonUKmortgagelending
1981
Description
BankofEnglandnationalizedbytheUKgovernment;clause4(3)
gavetheBank,withTreasuryapproval,explicitpowertogovern
theproportionofcommercialbankassets
Restrictedsomeexternalloansaswellasinwardcapitalflows;
repealin1979ledtotheremovalofallremainingbarrierson
inwardandoutwardcapitalflows
PublishedbytheBankofEngland
Table6:UKFinancialRepressionPoliciesandDirectives,1931–1973
Policy
LowInterest
Rates(‘Cheap
Money’)
DateEnacted
1931
Repealed/
Reduced
1951
Foreignloan
embargo
1932
1934forSterlingbloc
Withdrawalof
largesterling
notes
1943
post-WWII
BankAdvances
Restrictions
IssuingHouses
Association
1945,1947,1949
post-WWII
1945
post-WWII
BankLending
Restrictions
Mid-1950s
post-WWII
Special
Deposits
Mid-1950s
post-WWII
70
Description
Exceptforabrieffluctuationatthebeginning
ofthewar,BankRatewasmaintainedat2%;
short-termTreasurybillrateat1%from19391945
Thebanonforeignloanspartiallyremovedfor
othercountriesinFeb.1938butthen
70
reinstatedinDec.1938 Retirementofallnotesof£10anupto
“provideanadditionalhandicapforthosewho
maycontemplatebreachesofExchange
71
Control” Restrictionsonbankadvanceswereissued
threetimesbytheCapitalIssuesCommittee
72
(CIC) Organizationof52Britishmerchantbanks
whichfacilitatedthemonitoringandcontrol
73
oflending Enactmentofthefirstquantitativelimitson
74
loansfrombanks. “a(relativelysmall)callfor‘specialdeposits’
75
madebyCIC C261,‘BritishandCanadianConversionPolicies.Appendix:BritishTreasuryControloverthePriceofGilt-Edged
Securities,1932-39’,CorrespondencebetweenL.M.PumphreytoMr.House,NewYorkFederalReserveBank
Archive,23October,1941
71
FromC261p.1,‘WithdrawalofLargeBankNotes:TheBritishExperience’,NewYorkFederalReserveBank
Archive,4December,1944:“Therealpurposesweretomakemoredifficulttheillegaloperationofnotesmugglers
desirousofevadingexchangecontrolregulations,ofblackmarketoperators,andoftaxevaders—allofwhom
predominantlyuselargedenominationnotesinordertocoveruptheirtracks”.BankofEnglandnotesin
circulationduringthistimeconsistedof£1,£5,£10,£20,£50,£100,£200,£500and£1000.
72
(Capie,Collins,&InstituteofEconomicAffairs.,1992,p.68)
73
(Wilson,1995,p.189)
74
(Capieetal.,1992,p.68)
75
(Capieetal.,1992,p.68)
DateEnacted
1964
StampDutyon
Transfersof
Financial
Securities
Restrictionson
Lendingin
Foreign
Currency
post-WWII
1963
Cutsecuritiestransfertaxfrom2%to1%to
encourageinternationalfinancialactivityin
77
theCityofLondon post-WWII
Oct.1963
Chancellorannouncesthatforeigncurrency
78
loans‘allowedalmostwithoutrestriction’ Taxeson
Bearer
Securities
post-WWII
1963
Reducedfrom6%ofnominalvalueto3%and
2%ofthemarketvalueforresidentsandnon79
residents,respectively Registered
SecuritiesTax
DollarPool
post-WWII
1963
80
Ratereducedfrom2%to1% WWII
post-WWII
Bank
advances-togovernment
debtratio
Restrictionson
forward
exchange
(forexoptions)
WWII
post-WWII
WWII
post-WWII
76
Repealed/
Reduced
Description
post-SecondWorldWar BankofEnglandestablishedloanpriorities
whichgavepreferencetoexportsand
76
discouragedspeculation Policy
ExportLending
Requiredthatmembersdeposittheirexcess
U.S.dollarsandgoldatBankofEngland
Reductioninbankadvances-to-government
debtratiosothatbankscouldholdmore
governmentdebt
RestrictionsonUKBanksdealinginforward
exchangeincluded:i)a“genuinecommercial
contractisinexistence”;ii)“itisnotaswap”
butan“outrightpurchaseorsaleof
exchange”;iii)“thematuritydatemustnotbe
morethanfourmonthsahead”.Some
exceptionswereallowedbytheBankof
England“whensuchapracticeisanormaland
81
necessaryfacilityofthetradeinquestion”. (Capieetal.,1992,p.68)
(Quennouëlle-Corre&Cassis,2011,p.225)
78
(Quennouëlle-Corre&Cassis,2011,p.225)
79
(Quennouëlle-Corre&Cassis,2011,p.226)
80
(Quennouëlle-Corre&Cassis,2011,p.226)
81
C260.3p.1,NewYorkFederalReserveBankArchive,9October,1945
77
Policy
FixedExchange
Rates
DateEnacted
1936
Repealed/
Reduced
1973
Description
Beginningwiththe1936Tripartiteagreement
betweentheU.K.,FranceandtheU.S.and
subsequentbilateralandmultilateral
agreementsthoughSecondWorldWarand
the1944BrettonWoodsagreement,
exchangeratesweremanagedsothatforeign
exchangecouldonlybelegallyconvertedat
officialexchange.
RegardingtheefficacyofthepolicieshighlightedbyReinhartandSbrancia,evenwith
exchangerestrictionsBritainexperiencedsignificantcapitaloutflowstotheSterlingArea,which
callsintoquestionjusthoweffectivecapitalrestrictionswereduringthistime.Dow(1964)
claimsthat20%ofcapitaloutflowswereduetotheloosenessofcontrols.82Therearealso
frequentreportsinarchivaldocumentsofgoldtradeoccurringdespiteofrestrictionsinthe
Londonmarket.Forexample,inaletterdated30January,1947fromMr.WernerKnokeatthe
NewYorkFederalReserveBank(NYFRB)tohiscounterpartandfrequentcorrespondentatthe
BankofEngland,Mr.GeorgeBolton,KnokeinquiresabouttheLondongoldtransactionsthat
are:
“carriedonaverysubstantialscalewearetold,forinstancebySamuelMontagu,who
purchasesthegoldallovertheworld,shippingitdirectlyorviaLondonforsalein
marketslikeChina,theNearEast,etc.?”83
SamuelMontaguwastheproprietorforSamuelMontagu&Co,whichwasoneofthesix
‘AuthorisedDealers’ingoldotherthantheBankofEngland.84Inareplydated13February,
1947,BoltoninformsKnokethat“beforethewarLondonwasaninternationalcentreforgold
arbitrageandwearethereforeundergreatpressuretoallowLondonfirmstoparticipateinthe
82
(Dow&NationalInstituteofEconomicandSocialResearch.,1964,p.24;CatherineR.Schenk,2010)Forfurther
discussionontheeffectsandeffectivenessofcapitalcontrolssee(Dulles,1929,pp.226-227;Edwards,1999;B.J.
Eichengreen,1998;Montiel&Reinhart,1999)
83
C261,NewYorkFederalReserveBankArchive,30January,1947
84
TheotherauthorizedLondonbullionbanksatthistimewereJohnsonMatthey&Co.Ltd,Mocatta&Goldsmid,
Pixley&Abbell,N.M.Rothschild&Sons,andSharps&Wilkins.C261p.2,NewYorkFederalReserveBankArchive,
10February,1947
business”.85HegoesontosaythatthereareexceptionstotheUKrulesagainstgoldownership,
including:
“anypersonnotresidentintheUnitedKingdomorthosepartsoftheSterlingArea
whichprohibittheholdingofgoldbyresidents,mayowngoldintheUnitedKingdom”
andclaimthatanytradeinthevarious“freemarkets”ofgoldatpremiumtotheofficial
“doesnotnecessarilydamagethemajorcurrencies”.86
WhiletheUKofficiallyposedrestrictionsontheexportofgold,importationwas
encouragedasitservedtoenhanceLondon’sstatusasafinancialcapitalandincreasedthe
likelihoodthatitmaybeofferedforsale(orotherwisemadeavailable)toagold-strappedBank
ofEngland.Boltonalsospeaksofthe“handsomeprofit”thatcanbeearnedinthegold
arbitragetrade,wheregoldispurchasedat$43perounce,claimingthat:
“noirreparableharmresultsfromthesaleoftherelativelysmallgoldproductionof
LatinAmericainthevarious‘freemarkets’atasubstantialpremium.Itfeedsahoarding
demandcausesaminorwaveofdisturbanceandmanyconsequentialreactionsbut,
whileitunderliestheweaknessofcertainpapercurrencies.”87
However,thistrademayhavealsoincreasedtheopportunityforspeculationandprofiteering
atblackmarketrates.Inamemodated2July,1947,theNYFRBconfrontedtheBankofEngland
abouthow“FranckofSamuelMontaguandGoldsmidofMocatta&Goldsmidseemedthemost
activefactorsinthepremiumgoldmarket”.Bolton,inhisreplytoKnoke,saidhe“wouldtryto
keeptheminline”.88
ThisaboveexchangebetweenBoltonandKnokeonthesubjectoffreemarketgold
tradeisoneofseveralfoundinboththeNYFRBandBankofEnglandarchivalrecordsonthis
subject.Whilethecorrespondencegenerallyimpliesacloserelationshipbetweenofficials,
85
C261p.2,NewYorkFederalReserveBankArchive,10February,1947
C261p.1,NewYorkFederalReserveBankArchive,10February,1947
87
C261p.2,NewYorkFederalReserveBankArchive,10February,1947
88
C261p.2,PeterLangrecordoftelephoneconversationwithMr.Bolton,BankofEngland,NewYorkFederal
ReserveBankArchive,2July,1947
86
differencesofbothopinionandfactsfrequentlyemerge.Forexample,Knoketakesissuewith
Bolton’sclaimthatgoldissellinginNewYorkat$43anounce,stating“wehavenotsunksolow
astohave(black)marketatthiscountryat$43!!!”89PeraNYFRBmemo,aclaimmadebyLord
CattooftheBankofEnglandthatBritain“disapprovesofthesalesofgoldontheblackmarkets
inGreece”isdoubtedinsidetheFederalReserve.NYFRBheadSproulconveystoKnokethat“it
hasalwaysbeenmyunderstandingthatinGreecetheBritishhadbeentheonesanxiousto
makesovereignsavailableforsalethere”.90
Atothertimes,typicallyontheeveofacrisis,apalpabletensionemergesbetweenthe
BankofEnglandandNYFRB.Forexample,on17June,1947,shortlybeforethesterling
convertibilitycrisis,Knokespokewithan“audiblydisturbed”Boltonwhocomplainedthatthe
NYFRBwasbeing“unnecessarilylegalistic”ona“questionconcerningthewholeconstitutional
positionbetweentheBritishTreasuryandBankofEngland”withregardtoarequestbythe
BankofEnglandforanuncollateralizedloan.ThepriorcustomattheNYFRBhadbeentosecure
loanswithgoldonhandinthebasementsafe,andtheBritishgovernmenthadpreviously
informedtheNYFRBthatallgoldonhandwasthepropertyofthegovernment,nottheBankof
England.91
Knokealsoemphasizesthe“seriousmonetaryconsequencesifdealingsingoldat
unofficialandvaryingpricesshouldbecomewidespread”.92Freemarketsingoldandcurrencies
wereaseriousconcernonbothsidesoftheNorthAtlantic,andthereappearstobeaquidpro
quo,whereMr.BoltonoftheBankofEnglandwould“appreciatekeepinghiminformedofany
unusualdevelopmentsinthesterlingmarkethere(NewYork)”,andviceversaontheFederal
Reserve’sinterestinLondonfreegoldactivity.Overall,amplearchivalevidenceindicatesthat
significantgoldtradewasoccurringinLondon,andthatthistradewouldhaveundercutthe
impactofBritishfinancialrepression.Londonplayedacriticalroleinmanagingtheglobalgold
89
C261p.2,NewYorkFederalReserveBankArchive,18February,1947
C261p.1,LetterfromSproultoKnoke,NewYorkFederalReserveBankArchive,6March,1947
91
C261p.1,NewYorkFederalReserveBankArchive,17June,1947
92
C261p.2,NewYorkFederalReserveBankArchive,18February,1947
90
market,throughlocally-headquarteredSouthAfricanmininginterests,aswellthroughthe
relationshipwiththeSouthAfricangovernmentthatpurchasedalllocallyminedgoldatparity.93
However,incontrasttoBritain’sfocusonfreesterlingtradeinNewYork,theAmericanswere
theoneswhowereprimarilyconcernedaboutfreetradeingold.TheNYFRBwantedBritain’s
helpto“smashthepremiumbetweenfreemarkettransactionsbetweengoldandthedollar”,
buttheFedalsorecognizedthat“itmightbemuchmoredifficulttosmashthepremiumin
transactionsbetweengoldandthepoundsterling”.94PertheBrettonWoodsagreements,the
U.S.dollarwastheonecurrencytiedatafixedratetothevalueofgold.BoltonandtheBankof
England’spartialassurancesnotwithstanding,anytradeingoldatapremiumover$35per
ounceofficialparitywasclearlyofsignificantconcerntotheU.S.governmentasitsuggested
thattheU.S.dollarwasovervalued,fanningunwantedspeculationofofficialdevaluation.
AsnotedbyCairncross(1985),capitalexportstotheSterlingAreawerenotfullyblocked
until1972.95AsCairncross’analysishighlights,evenwiththeintroductionofthe1947Exchange
ControlActtherewerecapitaloutflowsof£643million,orastaggering8%ofGDP.96Reinhart
andSbranciaaresilentontheactualeffectofsuchcontrols.
Financialrepressioniscomprisedofmanyinterrelatedcomponentsandcannotbefully
appreciatedorunderstoodthroughjustthemeasurementofdebtliquidationandthelistingof
ahandfulofpoliciesofuncertaineffect.Insum,whileReinhartandSbranciaaretheonly
authorstodatetoattempttoquantifytheeffectsondebtofBritishfinancialrepressioninthe
post-SecondWorldWarperiod,theirargumentthatBritainengagedinfinancialrepressionis
nosufficientlysupported.Questionsremainoverwhetherfinancialrepressionwasaconscious
policychoice,andwhatifanyalternativestofinancialrepressiondidcountriessuchasBritain
possess.AndwithrespecttotheroleofBritishbanks,wasmoralsuasionsufficienttoenlist
firmsintoaidinggovernment?Orwiththechangingpoliticalclimateandthedepartureafter
93
C261p.4,NewYorkFederalReserveBankArchive,10February,1947
C261p.2,LetterfromJ.BurkKnappoftheFedBoardofGovernorstoWernerKnoke,NewYorkFederalReserve
BankArchive,4March,1947
95
(Cairncross,1985,p.119)
96
(Cairncross,1985,pp.153-154)
94
twenty-fouryearsofthepowerfulcentralbankpersonalityofMontaguNorman,didcorralling
theCitynowrequiretheimpositionofnewformalizededicts?
Theremainderofthepaperisstructuredaroundseveralofthecoreareasofthe
economywhichplayaroleindebtsustainabilityandfinancialrepression,includinginterest
rates,capitalcontrols,andinstitutionssuchastheBankofEnglandandtheBritishbanking
system.
4.2Interestrates
Lownominalandnegativerealinterestratesaregenerallyconsideredtobeahallmark
offinancialrepression.However,thequestionofwhatpreciselyconstitutea‘low’interestrate
isunclear.97Whilethereisconsiderableroomforargumentoverwhatisandisnotanartificially
lowinterestratethereislessdebateonthepoliciesandforcesthatmightcontributetolow
ratesofinterestpaidbygovernmentsonpublicdebt.
Inthe1940stheUKgovernmentsoughtandsecuredwhatitatleastconsideredtobe
lowratesofinterestonpublicdebt.Knownas‘cheapmoney’,lowinterestrateshadbeen
advocatedbyKeynesasearlyas1937andwasadoptedasacornerstoneofwartimecredit
policy.98Britain’sfundingstrategyduringandafterthewarhasbeencharacterizedas‘heavy
governmentborrowingatafixedrateofinterest’.99Exceptforabrieffluctuationatthe
beginningofthewar,theBankofEngland’sBankRatewasmaintainedat2%through1951.100
Thelongendoftheyieldcurvewasmanagedtowardsthegoalofrunning‘a3percentwar’.101
97
Foradiscussionofthe‘worldinterestrate’conceptsee(Barro&Salaimartin,1990;Blanchard&Summers,1984;
Chinn&Frankel,2005;Koedijketal.,1994;Lucas,1990;Yietal.,2001)
98
(Skidelsky,2000,pp.22,88)Keynespushedfor“permanentlycheapmoney”,saying“wemustavoid(dear
money)…aswewouldhell-fire”TheTimes,12January,1937
99
(Cairncross,1985)
100
(Fforde,1992,p.92;R.S.Sayers,1981)BankRatehadbeenloweredtothe2%levelin1931.
101
(R.S.Sayers,1956)
TheFirstandSecondWorldWarswerefinancedatfiveandthreepercentratesof
interest,respectively,andtheSecondWorldWar’slowerrate“preventedathreefoldincrease
intheinternalNationalDebt”fromFirstWorldWarlevelswhileleavingtheinterestburdenin
1945comparabletowhatitwasin1919.102WorswickandAdy(1952)explainthislowrateof
interestinfinancialrepressiontermsbystating“solongastheexpenditureoftheprivatesector
waslimitedbyrationingandothercontrols,incomerecipientswouldhavelittleelsetodowith
alargepartoftheirearningsbuttolendittotheGovernment”.103Debtserviceexpense-to-GDP
wasroughly8%and6%followingFirstandSecondWorldWars,respectively.104
Forcesthatcaused“the‘natural’rateofinteresttoberelativelyhigh”inBritainincluded
inflationarypressures,alownaturalsavingsrate,andtheneedforcapitalexpenditures.105
InternaldocumentsfromtheBankofEnglandsupporttheviewofscholarsonthegoaloflow
interestrates.Forexample,aBankofEnglandsurveymarkedconfidentialandtitled
‘DevelopmentsintheControlofCreditintheUnitedKingdom’sharedwiththeNYFRBon25
September,1952describeshow:
“lowandstablelevelsofshort-terminterestrates,withconsequentlyeasycredit
conditions,haditsoriginintheneedsofwarfinanceandwascontinued,andeven
increased,inthepost-warperiodwiththedualobjectofkeepingdownthecostofthat
nationaldebtandofmaintainingfullemploymentbyfacilitatingborrowingbyindustry
andpublicbodiesalike.”(italicsdenoteemphasisadded)106
Post-warChancelloroftheExchequerHughDalton,whohasbeencharacterized
simultaneouslyastheenemyofrentierandthefriendofthespeculator,wasnotcontentwith
thealreadyhistoricallylowratesofinterest.107Daltonsoughtapolicyofevencheapermoney
fromlate-1945through1947,openlystatinghisobjectiveto“bringdownthelong-termrateof
102
(Worswick&Ady,1952,pp.191-192)
(Worswick&Ady,1952,pp.191-192)
104
(Buiter1985,p.17Figure2)
105
CV61p.2,Mr.KlopstocktoMr.Sproul,‘TheCheaper–MoneyPolicyinBritain–ALessonfortheUnitedStates”’,
NewYorkFederalReserveBankArchive,7September,1948
106
C261Ap.1,NewYorkFederalReserveBankArchive,25September,1952
107
(Paish,1947,1950)
103
interest”.108InJuly1947DaltontoldtheHouseofCommonsthat“cheapmoneyisto
continue”.109OnefinancialinstrumentthatplayedakeyroleinDalton’sefforttodeliverlower
interestrateswastheTreasuryDepositReceipt(TDRs),anewwartimeinventionthatallowed
theTreasurytobypasstheLondonmoneymarketandborrowdirectlyfrombanks.110TDRswere
veryunpopularwithbankersastheywerenon-marketableinstruments,meaningtheycould
notbesoldontheopenmarketbutinsteadonlyexchangedforalosswiththeBankof
England’sdiscountwindow.AsnotedbyWorswickandAdy,"bankerswouldhavewelcomeda
reductioninthevolumeofgovernmentindebtedness,especiallyofTDRs."111
RatesonTDRswereoriginally1-1/8percent,aratethatDaltoninSeptember1945
slasheddownbynearlyinhalftojust5/8ofapercent.112AtthesametimeDaltonalsocutthe
rateonT-Billsbyasimilaramountto1/2apercent.Thesetwochangesreducedthenominal
interestburdenonfloatingdebtbyapproximatelyhalf.Daltonthenmovedtocutlonger-term
ratesthroughanumberofconversionsandthefloatationofseveralissuesatarateof2.5%,
includingtheTreasuryStock1975securities,whichthereaftercametobenon-affectionately
referredtoinbankingcirclesas‘Daltons’.113
TheintellectualinspirationbehindtheDaltons,includingtheoriginalsuggestionofthe
2.5%rate,appearstobeKeynes.InhisGeneralTheoryKeynesstatedthatthatagovernment
couldachieveitsinterestratetargetsifitletthemarketdeterminethetermstructure.114
KeynesoriginallyadvocatedthattheChancellorshouldannouncethatinnocircumstancewill
108
C261Dp.2,NYFRBResearchMemorandumtitled‘NotesontheNationalizationoftheBankofEngland’,New
YorkFederalReserveBankArchive,19October,1952
109
CV61p.6,Mr.KlopstocktoMr.Sproul,‘TheCheaper–MoneyPolicyinBritain–ALessonfortheUnited
States”’,NewYorkFederalReserveBankArchive,7September,1948
110
(Howson,1988;Worswick&Ady,1952,pp.212-213)
111
WorswickandAdy(1952,p.198,214)
112
(Worswick&Ady,1952)TheauthorsprovidetwodifferentratesforTDRsonpp.198and214of5/8and7/8,
respectively
113
(Worswick&Ady,1952,p.199)
114
(Booth,1989,p.157)InTheGeneralTheoryKeynesalsostates“Theremedyfortheboomisnotahigherrateof
interestbutalowerrateofinterest!Forthatmayenabletheso-calledboomtolast.Therightremedyforthesocalledtradecycleisnottobefoundinabolishingboomsandthuskeepinguspermanentlyinasemi-slump;butin
abolishingslumpsandthuskeepingusinapermanentboom.”(Keynes,1936,p.322)
heborrowatmorethan2.5%solendershavezerodoubtsthatthesearethebestterms
availableforlong-datedbonds.SkidelskysummarizesKeynes’positiononhowtoachievethis
interestrateasfollows:
“Inordertoenforcethisratethemarketshouldbegiven‘anincreasedamountof
liquidity’topreventthe‘congestionofcredit’,whichKeyneshadwarnedin1938.Tobe
effectivethesetechniqueswouldneedtobebuttressedbythefollowingthree
elements:1)Controlofdomesticcapitalissues,2)Prioritizingtheuseofphysical
resources(rationing),and3)anembargoonforeignlending(capitalcontrols).”115
Keynes,however,laterexpressedthat3%wastheappropriaterateatwhichthegovernment
shouldborrowtoensuredemandandhepersonallyopposedtheissuanceofDaltons.116Asthe
Daltonswerefloatedonthemarketthevalueoflonger-datedgiltissuesbegantosoften.Bythe
timeCrippsreplacedDaltoninNovember1947yieldsonConsolshadclimbedbackupto3%,
andwouldclimbfurtherto3.5%during1949.117Archivaldocumentsstatethatthisclimbin
yieldswas“permitted”bytheUKTreasury,whichhad“rigged”theTreasurybondmarket
throughtheuseofpublicdepartmentstopurchaseUKpublicdebt.118
Theuseofinterestratepolicy,throughchangesintheBankofEngland’sBankRate,was
almostnon-existentduringthetwentyyearsprecedingtheToriesreturntopowerin1951.
Previously,BankRatehadbeenraisedattimeswhenBritain’sreservesweredeclining.Upon
thementioningofthisideaasapossiblemeansofaddressingthe1949devaluationcrisis,
Daltonstated“IsayMontaguNormanwalksagain.Ithoughtwehadburiedallthisstuffabout
BankRate”.119KeynesagreedwithDalton,addingthatthe“socialandpoliticalclimatewould
notpermitarepeatoftherentier-friendlypolicyoftheFirstWorldWar”.120Skidelskydescribes
115
(Skidelsky,2000,pp.24-25)
(Booth,1989,p.157)
117
(Worswick&Ady,1952,p.202)Anincreaseinbondyieldsreflectsadeclinethemarketvalueofthebonds.
118
CV61p.1,Mr.KlopstocktoMr.Sproul,‘TheCheaper–MoneyPolicyinBritain–ALessonfortheUnitedStates”’,
NewYorkFederalReserveBankArchive,7September,1948
119
(Cairncross,1985,p.176)DouglasJay,EconomicSecretarytotheTreasury,isalsoquotedtothesameeffect.
Daltoncouldn’tseethepointofhigherinterestratesbecausecapitalexpenses“isnotnowdeterminedbywhat
peoplewantbutbywhatthegovernmentpermits”.
120
(Skidelsky,2000,p.69)
116
Keynes’“hatredoftherentier”,which“wasproofagainsteconomicarguments,becauseat
bottomitwastheological,notscientific.Thebondholderishismindwasnothingbutthe
medievalusurer,orShylock,someonewhosoughttomakeaprofitoutoflendingmoney.”121
November1951sawthefirstsustainedincreaseintheBankRate,whichwasincreased
from2%to2-1/2%.WhatfollowedwasafairlydramaticincreaseinyieldsacrossUK
governmentdebt,particularlyshort-datedissues,aswellasprivatesectorsecurities(Table7).
TheeffectsoftheincreaseonBankRatewereseenmostdramaticallyontheshort-endofthe
governmentyieldcurve,withyieldsonUKshort-dateddebtmorethandoublingfrom1.70%to
3.48%fromOctober1951toJuly1952.Yieldsonmedium-termandthelonger-termwarloan
didnotseenearlyaslargeajump,increasingby21%and18%,respectively,whichwas
approximatelyin-linewiththeriseseeninprivatesectorsecurities.
121
(Skidelsky,2000,p.69)
Table7:AverageYieldofUKSecurities,1950-52
1950Avg.
1951YTDAvg.
Oct.1951
Nov.
Dec.
Jan.1952
Feb.
Mar.
April
May
June
July
1952YTDAvg.
%ΔOct1951
toJuly1952
GovernmentDebtSecurities
Short Medium
3-1/2%
dated
dated
WarLoan
2.03%
2.99%
3.77%
1.84
3.59
3.98
1.70
3.66
4.06
1.97
3.78
4.18
2.29
4.08
4.35
2.36
4.14
4.37
2.41
4.17
4.42
2.92
4.31
4.54
3.15
4.24
4.50
3.26
4.27
4.56
3.51
4.45
4.75
3.48
4.42
4.78
3.01%
4.29%
4.56%
105%
21%
18%
IndustrialSecurities
Ordinary
Debentures
Shares
4.07%
5.48%
4.28
5.35
4.33
5.26
4.50
5.76
4.70
5.90
4.71
6.35
4.77
6.43
4.92
6.64
4.84
6.37
4.85
6.95
4.94
7.28
4.96
6.78
4.86%
15%
6.69%
29%
Source:CV261Ap.4,NewYorkFederalReserveBankArchive,25September1952
The‘Daltons’episodeandotherevidenceappearstohavedemonstrated,toatleast
somedegree,theexistenceofa‘marketfloor’.Inotherwords,iftheBritishgovernment
offereddebtatanominalinterestratedeemedtoolowbymarketparticipants,thenthe
marketwasfreetosell-offBritishdebtinsufficientquantitiestocompelauthoritiestooffera
higheryieldonnewbondissues.Forexample,thearchivalrecordsgoontostatethat:
“Soonafterthedeclineofgilt-edgedpricesearlyin1947,themarketbecamethin,
nervous,andanemic.Anylargeofferingthatinpreviousyearscouldhavebeeneasily
absorbedcauseddigestivetroublesandjumpyreactions”.122
122
CV61p.4,Mr.KlopstocktoMr.Sproul,‘TheCheaper–MoneyPolicyinBritain–ALessonfortheUnited
States”’,NewYorkFederalReserveBankArchive,7September,1948
InOctober1947Daltonremarkedthat“theestablishmentofaneffective3percentgilt-edge
yieldisnomorethanatemporarylapsefromthe2½percentobjective”.However,Dalton
wouldbeprovenwrong.123
Theeffectsofmarketforcesonpublicdebtmarketsalsoexistedinthe1960s.ANYFRB
studyhighlightshow“themarginbetween(UK)TreasuryBillratesandothershort-termratesis
greaterherethanintheUnitedStates”(Table8).Thisfactsuggeststhatiffinancialrepression
wasimpactinginterestratesinbothcountriestheimpactwaslessdramaticintheUKbythe
early1960s.124
Table8:ComparisonofUKandU.S.InterestRates,September1964
Instrument
UnitedKingdom UnitedStates
TreasuryBills
5.50%
4.00%
LocalAuthorityDeposits(UK)/FinancePaper(U.S.)
6.50%
4.25%
FinanceHouseDeposits(UK)/CDs(U.S.)
7.00%
4.38%
Source:CV61Ap.8,NewYorkFederalReserveBankArchive,18October1965
TheNYFRBstudygoesontocommentthatintheUKthe“marketinlocalauthoritytemporary
moneyhasprovidedforeigners,aswellasdomesticholders,withanattractivealternativeto
theTreasurybill”,andthat“thelocalauthoritiesarecompetingforinstitutionalandprivate
fundsnotonlyagainsttheGovernment(withitshighercreditrating),butalsoagainstthe
financehousesandeachother”.125ThoselookingtoputcashtoworkearninginterestinLondon
had“manymoreattractiveoutlets”thanintheU.S.126Bythelate-1950stheLondonEurodollar
marketgenerallyofferedbankstheabilitytoearninterestat4%.127ThefactthatratesintheUK
privatesectorremainedcompetitiveandabovepublicsectorratesofinterestonoffer,andthe
123
CV61p.6,Mr.KlopstocktoMr.Sproul,‘TheCheaper–MoneyPolicyinBritain–ALessonfortheUnited
States”’,NewYorkFederalReserveBankArchive,7September,1948
124
CV61Ap.8,NewYorkFederalReserveBankArchive,18October1965
125
CV61App.11,8.NewYorkFederalReserveBankArchive,18October1965
126
CV61Ap.16,NewYorkFederalReserveBankArchive,18October1965
127
CV61Ap.17,NewYorkFederalReserveBankArchive,18October1965
lackofcompressionbetweenthedifferentUKinstrumentscomparedtotheU.S.marketplace,
underminesclaimsthattheUKinterestratesoperatedunderaregimeofstrictfinancial
repression.
Insum,thesefindingsaresomewhatatoddswiththeportrayalofpost-warBritish
financialrepressionasaregimewithabsolutecontroloverinterestrates,oranerawhere
investorshadfewinvestmentoptions.Indeed,therewasasignificantspreadinyieldsacrossa
varietyofdifferentdebtsecuritiesavailableforinvestmentpurposes.Thisevidencehighlights
theimportanceofdistinguishingbetweendifferenttypesanddegreesoffinancialrepression.In
otherwords,whilemoralsuasionandqualitativetechniquesmayhaveencouragedbanksto
holdlonger-termBritishdebt,othereconomicactorsintheUKhadavarietyofinvestment
optionsoutsidelow-yieldinggovernmentsecurities.
4.3Capitalandexchangecontrols
Alongsidelowinterestrates,capitalcontrolsaretypicallyconsideredacornerstoneof
financialrepression.128AsnotedbyinternalarchivaldiscussionsbetweentheBankofEngland
andFederalReserve,“thewarhasdiminishedconfidenceinpapercurrencies”andcontrols
wereseenasonemeansto“avoidtherealdangerofabreakdownorcollapseofsocial
institutionsandpoliticalstructure”.129Thestringentcontrolsimposedatthebeginningof
SecondWorldWarlaidthegroundworkfortheSterlingArea.130
Anexampleofonepolicydesignedtocontrolthemovementofcapitalwasthe
requirementthatpermissionfromauthoritiesbeobtainedpriortomakinganyforex
128
See(Aizenman,Gavin,&Hausmann;Alesina,Grilli,&Milesi-Ferrett,1993;Alexander,Enoch,Baliño,&
InternationalMonetaryFund.,1995;Wyplosz,1986,2001)Inrecenttimesithasbeensuggestedthatlowinterest
ratesaretheonlyrequirementoffinancialrepressionasothermechanisms,suchasquantitativeeasing,have
replacedtheneedforstringentcapitalcontrols.
129
C261p.1,LetterfromSproultoKnoke,NewYorkFederalReserveBankArchive,6March,1947
130
(Capie,2010,p.146;DeVegh&ScudderStevens&Clark.,1939)ForafurtherdescriptionoftheSterlingArea
see(R.Harrod&PrincetonUniversity.DepartmentofEconomicsandSociology.InternationalFinanceSection.,
1952)
purchases.131Keynesarguedagainstclosingdownthestockexchangestatingthat,withforeign
exchangecontrolsandaprohibitiononnewsecuritiesissuance,allsavingswouldbeaccessible
bytheTreasury,thereby“makingcheapborrowingeasy”forthegovernment.132Indeed,in
1913domesticindustryonlycomprised8%ofissuesquotedontheLondonStockExchange.
However,thefigurewouldrisetoandremainover90%fromthelate1940sonwardascapital
exports“remain(ed)inthedoldrums”.133AnotherelementofBritishcapitalcontrolswerethe
restrictionsonforeignexchangeonpaymentsmadeoutsidetheSterlingArea,whichwere
imposedattheoutbreakofwarandmaintainedwellintopeacetime.
FollowingtheconclusionofthewarKeynesfeltthat“nothingismorecertainthanthat
themovementofcapitalfundsmustberegulated”.134TheBankofEnglandinitiallysoughtto
tracehowsomuchsterlinghadwoundupinforeignmarketssuchasNewYork,andcomplex
ruleswereestablishedonhowandbywhomsterlingcouldbeexchangedfordollars.135The
ExchangeControlActwaspassedin1947,whichhadtheeffectofrestrictingsomeexternal
loansaswellasinwardcapitalflows.136ThisactwasnotrepealeduntilOctober1979.137
However,persistentcapitalleakageswereanongoingconcernforpolicymakersinspiteof
controls.ByApril1940Keynesestimatedleakagesof£100Msincethestartofthewar.U.S.
dollars,whichtheTreasurywasseekingtoraise,wereleakingthroughLondon’sallowancefor
non-residentstosellBritishsecuritiesfordollars.ThiscausedKeynesto‘goonthewarpath’to
enforcecapitalcontrols;othersintheTreasurywerenotinfavourofactionduetoconcern
aboutthelossesofforeignbalancesheldinLondon.138
131
(Cairncross&Eichengreen,1983,p.24)
(Skidelsky,2000,p.79)
133
(Wilson,1995,p.188)
134
(Skidelsky,2000,p.205)TheBankofEnglandalsofavouredcapitalcontrols(p.210)
135
C261p.1,BankofEnglandlettertoNYFRB’sMr.Knoke,NewYorkFederalReserveBankArchive,7December,
1945
136
(Cairncross&Eichengreen,1983,p.22)
137
(C.M.Reinhart&Sbrancia,2011,p.17)
138
(Skidelsky,2000,pp.75-76)
132
Asnotedearlierinthepaperduringthediscussionofthefreegoldmarket,thereis
somequestionastotheoveralleffectivenessofcapitalcontrols.Further,incertainareasthe
exportofcapitalwasnotprohibitedatall.Forexample,Sophisticatedmarketsfor‘free’sterling
blossomedinNewYorkandSwitzerland.Inaddition,capitalexportswereallowedwithinthe
SterlingAreaupuntil1972atwhichpointexchangecontrolwasapplied.139Dow(1964)
estimatesthat20%ofcapitaloutflowswereduetothe‘looseness’ofcontrols(leakages).140The
regulationsandrulesgoverningtheSterlingAreaandthemovementofcapitalwere,put
simply,complex.Varyingdegreesoftransferabilityofcurrencyanddifferentformsofsterling,
manyofwhichhaduniqueexchangeratesandseparaterulesabouthowthecurrencycouldbe
used,madeforaconfusingregulatoryenvironment.141AsnotedbytheFederalReserveBoard
ofGovernors,sterling’sstatusvariedfromplacetoplace,serving“asahardcurrencyforthe
BelgiansbutasoftcurrencyfortheIndians”.142
TheBritishgoldmarketwasclosedintheearlystagesofSecondWorldWaranddidnot
officiallyreopenuntil1954.143Regulationgovernedtheexportofgold,andBritishcitizens
residingpermanentlyinBritainwereprohibitedfromowninggoldnotmadeintojewellery.
However,Britishcitizensresidingpermanentlyinacountrywhichdoespermitpersonalgold
ownership(e.g.,France)couldowngold.DuringthisperiodseveralLondongolddealers
establishedsubsidiariesinCanada,Beirut,HongKongandSouthAfricawhiletheLondon
marketwasclosed.144Whatisnotentirelyclearfromareviewoftheliteratureandarchival
materialsiswhateffectinpracticetheclosureoftheLondongoldmarketactuallyhadonflows.
Inotherwords,iftheBritishbullionbanks–Rothschild,MocattaandGoldsmid,etal–werestill
largelyabletooperate,astheNYFRBclaimed,didtheclosureoftheLondongoldmarkethelp
139
(Cairncross,1985,p.119)
(Dow&NationalInstituteofEconomicandSocialResearch.,1964,p.24)
141
(Pick,1953)Someofthemanynamesgiventothedifferentversionsofsterlinginclude:cheap,free,overseas,
external,blackmarket,Handpayments,etc.
142
C261p.2,LetterfromJ.BurkKnappoftheFedBoardofGovernorstoWernerKnoke,NewYorkFederalReserve
BankArchive,4March,1947
143
(C.M.Reinhart&Sbrancia,2011)
144
(Green,1968,p.115)Seealso(Green,1973,1981)
140
achievetheBritishobjectiveofminimizingthedrainofgoldreserves?Theseandrelated
questionsmaywarrantfurtherresearch.145
Britainwasnotaloneinestablishinggreatercontrolovercapitalandforeignexchange.
FollowingtheSecondWorldWaranelaboratesetoffinancialrestrictions,interestratecaps,
andcapitalcontrolsremainedineffectinadvancedeconomiesuntilthe1970s-1980s,atwhich
pointwidespreadfinancialliberalizationwaspursuedacrossmuchofthenon-communist
world.TheUKhadahigherdegreeofcontrolsinplaceonitscurrentaccountfrom1950-1980
(Figure1).Britain’sdegreeofcapitalaccountopennessfluctuatedbothaboveandbelowthe
sampleaverageduringthistime(Figure2).146
145
Unfortunately,awarehousefiredestroyedmuchofthearchivalmaterialthatwasheldbyRothschildaboutthe
Londongoldmarketduringthisperiod,soitisnotclearwhatarchivalmaterialsmayexist.
146
(Obstfeld&Taylor,2004,pp.160-171;D.Quinn,1997;D.P.Quinn&Toyoda,2008)
Figure1:Current-accountopenness,1950-2004
(100=moreopen)
120
100
80
60
40
20
0
Sample
UK
Figure2:Capital-accountopenness,1950-2004
(100=moreopen)
120
100
80
60
40
20
0
Sample
UK
Note:samplecountriesincludes:Australia,Austria,Belgium,Denmark,Ireland,Italy,Finland,Germany,Greece,
France,Japan,NewZealand,Netherlands,Portugal,Spain,Sweden,andSwitzerland.
Sources:Quinn(1997),QuinnandToyoda(2008)
4.4Bankingsystem
“Thecommercialbankingsystemistobefitted,asanintegralpart,intowhatpromises
tobeagreaterdegreeofcentralorganizationoftheBritisheconomythanhasever
existedinthepast”.
-Anonymous,NewYorkFederalReserveBankArchive147
BeforeexploringtheparticularsoftheroleplayedbyBritishbankinginpost-Second
WorldWarfinancialrepressionitusefultodiscussthehistoryandstructureoftheBritish
financialsystem.Onthewhole,theBritishbankingandfinancialsystemhasproven
comparativelystable.148Whilenotimmunefromproblems(e.g.,the1890Baring’scrisis)the
buoyancyofBritishbankscomparesfavourablywithothercountriesduringperiodsof
economicdistress.Forexamples,inthe1930sU.S.banksfailedenmasse(thousands)whilefar
fewerBritishbanksfailed(bothinabsolutetotalnumberandasapercentageofthenumberof
banksinexistenceatthetime).149
SincetheBaringscrisis,theBankofEnglandhadacceptedfinancialresponsibilityforthe
principalmerchantbanks.TheBankwaswillingtobuymerchantbankacceptancesinthe
marketwithoutformallimit.PrincipalmerchantbanksheldaccountsattheBankandwere
membersoftheAcceptingHousesCommittee(AHC),formedin1914.AllAHCmemberswerea
liabilityoftheBankofEngland,whichassistedmerchantbanksin1939(asin1931and1914)
whenstandstillsoccurred.OnefurtherreasonfortherelativestabilityofBritishbanksduring
thisperiodwasduetothestructureoftheBritishfinancialsystem,particularlytheclearlinesof
demarcationbetweeninstitutionsthatcouldengageindifferentfinancialfunctions.
Restrictionskeptdiscount,merchantandclearingbanksoutofeachother’slinesofbusiness.150
Ittookthe1933U.S.Glass-SteagallAct,whichrequiredthatseparatecompaniesperformthe
147
CV61Ap.3,NewYorkFederalReserveBankArchive,1946
(Fforde,1992,p.749)
149
(Bemanke&James,1991,pp.51-55;Grossman,1994;Wicker,2001)
150
(Capie&CityUniversity.CentreforBankingandInternationalFinance.CentrefortheStudyofMonetary
History.,1987;D.T.Llewellyn,1985;DavidT.Llewellyn,1985,p.10)Seealso(Fforde1992,p.758)
148
functionofmanagingdeposits,investmentbanking,andinsurance,tocreatewhatalready
informallyexistedinBritain.
DidthegreaterrelativefinancialstabilityenjoyedbytheBritishbankingsystemgohandin-handwithhavinganoligopolisticbankingindustry?TheBritishbanking‘cartel’,asithasbeen
sometimesreferred,formedinthelate19thcenturyandhasfurtherconsolidatedthroughthe
presentday.151WhiletheBankofEnglandsteppedintoarrangemergers(e.g.,Governor
Norman’scoordinationofthemergerbetweentheRoyalBankofScotlandandWilliams
DeaconsBank),mergersandfurtherindustryconsolidationbyLondon’sBigFivecleaningbanks
waseschewedbytheBankofEnglandgiventheoligopolisticnatureofBritishbanking.152The
BankofEnglandcertainlytooktheviewthatlowcompetition,whilereducingefficiency,ledto
higherstability.
TheBankofEnglandalsofounditeasiertodealwitharelativelysmallnumberofbanks,
whichmayhaveplayedanimportantroleinthestate’sabilitytoinfluencethecompositionof
bankbalancesheets.Indeed,anarchivaldocumentfromanNYFRBstudyshowshowamuch
greatershareofUKTreasuryBillsareheldbytheUKbankingsystemascomparedtotheUnited
Statesbankingsystem.153ThestudygoesontodiscusshowbythistimeUKTreasurybills“now
fulfilthefunctiononceperformedbycommercialbills”asameansforBritishbankstoconvert
liquidassetsintocash,underscoringtheimportanceintheshiftfromprivateinstrumentsof
credittopubliccreditinbankoperationsandtheLondonbillmarket.However,therewas
arguablyatrade-offbetweenstabilityandlowerefficiency,whichcanbeseenintherelatively
highcash/depositandliquidityratiosof8%and28-30%,respectively.154
151
(Strange&RoyalInstituteofInternationalAffairs.,1971,p.162)
(Capie,2010,p.327)TheBigFiveLondonClearingbanksduringthistimewere:Midlands,Barclays,Lloyds,
NationalProvincialandWestminster.
153
ThiswastrueinspiteofthefactthattheUKandU.S.Treasurybills“fundamentallyalike”instructureCV61Ap.
1,18October1965,NewYorkFederalReserveBankArchive
154
(Capieetal.,1992,p.69)
152
The‘specialrelationship’betweentheBankofEnglandandLondon’sclearingbanks
allowedtheirprofitsandlossestobekeptfromthepublic(aswellastheBankofEngland).155As
notedbyFforde(1992):
“Thespecialrelationshipwiththebankwasfarmorethanthatofsupervisorand
supervised.Itisunlikelythatthosewordswereeverused.Itwasmorelikearelationship
betweenpartners,eachpossessingsomedegreeofcontrolovertheother.Itwasall
veryinformal.”156
Britishbanksweregivenaspecialdegreeoflatitudebytheirregulator,theBankofEngland,in
theformofpracticessuchasthemaintenanceofhiddenreserves.157Thehiddenreservesof
Britishbankscloudthequestionofwhatpreciselywerebankprofitsduringthisperiod,and
somequestionableclaimsarefoundintheliteratureregardingBritishbankprofitability.For
example,WorswickandAdy(1952)describebonddealingsforbanksas“highlyprofitable”.158
However,theydonotprovidesufficientdetailsonhowtheeffectsofinflationmayhaveeroded
therealvaluethebondsheldbyBritishbanks.
Flexiblearrangementsondisclosureandliquidity,alongwithrestrictionsoncompetition
andsomewhatguaranteedmarketshare,couldhelpexplainwhybanksacquiescedtothe
substantialreductionseeninthevalueoftheirpublicdebtholdings.Forexample,inthepostwarperiodthedepositreserveratioforUKbankswasrelaxedfrom10%ofdepositsrequiredto
bekeptinnotesandcoininreservetojust8%.159Britishbanksdidnotcloselyadheretothe
definedminimumrequirementthat30%ofBritishbankliabilitiesbeheldin‘liquid’assetssuch
asTreasurybills,commercialbills,andTreasurydepositreceipts.160Furtherexaminationofrates
ondepositsatBritishbankscouldbeuseful.AsnotedbyReinhartandReinhart(1999),“banks
passthereserverequirementscomponentofthefinancialrepressiontaxontodepositorsvia
155
(R.S.Sayers,1976,pp.552-560)
(Fforde1992)
157
(Capie,2010,pp.445,591;Capieetal.,1992,pp.68-69)
158
(Worswick&Ady,1952,p.215)
159
C261Ap.1,NewYorkFederalReserveBankArchive,25September,1952
160
C261Ap.1,NewYorkFederalReserveBankArchive,25September,1952
156
lowerdepositratesand/ornon-governmentborrowersviahigherlendingrates.Thismix
betweenthetwodependsuponwhichhasaccesstomorealternatives”.161
SignificantchangecametotheBankofEnglandinthemid-1940s.First,in1944,after
servingfor24years,GovernorMontaguNormansteppeddownatage72.TheninAugust1946,
theeraofbankregulationreferredtoasthe"theworldofthe'Governor'seyebrows”,cameto
anendwhenthe‘OldLadyofThreadneedleStreet’wasnationalizedundertheBankofEngland
Act.162AsnotedbyFforde(1992),theBank’s:
“relationswithWhitehallandtheCitywereclearenoughinbroadoutline,but
ofteninformal,unmodified,anduncertainonthemargins.Maintenanceofthe
authorityoftheBank,togetherwithcontroloverthedirectioninwhichitmoved,
thereforedependedunusuallyonthesupremacyoftheGovernor.”163
Thisinformalarrangementchangedwhencontroversialclauses4(3)and4(4)ofthe
nationalizationactwereadopted,whichformalizedtheBank’srelationshipwithTreasury.
WherepreviouslytheBankhademployedmoralsuasion,clause4(3)gavetheBank,withthe
approvaloftheTreasury,explicitpowertogoverntheproportionofcommercialbankassets.164
TheformalizationofthispowerandtheadditionoftheTreasuryinthedecisionmaking
frameworkonthemixofassetsbankswouldholdcanbeviewedasasignificantadvancement
offinancialrepression.Oneofthecoreelementsoffinancialrepressionistheabilityfor
governmenttomandatethecompositionoffirmbalancesheetstoensurethegovernmentdebt
isheld,andclause4(3)and4(4)formalizedthegovernment’sauthorityinthisregard.These
sectionsallowedtheTreasuryto:
161
(C.Reinhart&Reinhart,1999)
(Capie,2010,p.590)
163
(Fforde,1992)
164
(Fforde,1992,p.7)
162
“requestinformationfromandmakerecommendationstobankers,andmay,ifso
authorizedbytheTreasury,issuedirectionstoanybankerforthepurposeofsecuring
thateffectisgiventoanysuchrequestorrecommendation.”165
Indeed,statementsfromboththeMidlandsandWestminsterbankchairmencondemnedthe
adoptionofclause4(3)andrepresentoneoftheonlyinstancesfoundintheliteratureofan
objectiontoBritishfinancialrepressionpoliciesbybankers.166However,itwasstatedthat
“certainsafeguardstobankersandcustomersareprovidedfor”,suchasthe“rightofbankers
tomakepriorrepresentationswiththeBankofEnglandandtheTreasurybeforethe‘directions’
areissuedtothem”.167AnoteintheNewYorkFederalReservearchivesrecordsaquote
summarizingDalton’sviewonthenewpowerhierarchybetweenBritishbanksandthe
government:“inthelastresort…asamatterofprinciple,iftherebeaseriouscaseofconflictor
challenge,theBankofEnglandmustbemasterandtheleaderoftheclearingbanks”.168As
notedbyWorswickandAdy,“thusthebankingsystemwasausefulinstrumentinthehandsof
adeterminedChancellor.”169
WhatultimatelywastheimpactofthenewBankofEnglandcontrolclausesand
nationalization?Therearereferencestothegovernment’sshareoftheoverallbusiness
handledbybanksincreasingsignificantlyfollowingthewar.170Itisunclearhowmuchthe
establishmentofthisclauseimpactedbankassets.171Theliteratureonlyaddressestheprocess
whichledtotheAct’spassage,andWorwisckandAdystate“noinstanceofitsusehasbeen
publicized”.172Incontrast,archivalevidencepointstosignificantinfluencebytheUKTreasury
onbankbalancesheets.Forexample,thepreviouslycited1952BankofEnglandstudyoncredit
controlstatesthatthebanks:
165
C261Dpp.19,NYFRBResearchMemorandumtitled‘NotesontheNationalizationoftheBankofEngland’,New
YorkFederalReserveBankArchive,19October,1952
166
(Fforde,1992,p.7)
167
C261Dpp.19,NYFRBResearchMemorandumtitled‘NotesontheNationalizationoftheBankofEngland’,New
YorkFederalReserveBankArchive,19October,1952
168
CV61Ap.3,NewYorkFederalReserveBankArchive,1946
169
(Worswick&Ady,1952,p.217)
170
(InstituteofBankers.,1949)
171
(Fforde,1992)SeeCh.1(pp.1-30)
172
(Worswick&Ady,1952,p.218)
“madeeveryefforttocomplywiththerequestsofsuccessiveChancellorsofthe
Exchequerthatcreditshould,asinwar-time,begrantedonlyforessentialpurposes,
whichinthepost-warperiod,weretobejudgedinthelightofthecriterialaiddown
fromtimetotimefortheguidanceoftheCapitalIssuesCommittee.Thus,thoughthe
weaponsofquantitativecontrolofbankcreditcouldnotbeused,abroadqualitative
controlwasmaintained.”173
Thisqualitativecontrolonbanklendingwassupplementedwiththereintroductionof
quantitativemeasuresinNovember1951,namelythefirstsustainedincreaseinBankRatein
nearly20years(from2%to2-1/2%).174Thereturntoquantitativemeasureswasinpartdriven
bythefactthatthe“efficacy”ofqualitativemeansofcontrollingbankbalancesheets“was
limited,inspiteofthecooperativeattitudesofthebanks”.175
Fromtheliteraturethereisalsoadiscussionofpressureonbankstosupport
governmentbonds.Forexample,newdiscounthousesappeartohavebeenforcedtotakeona
newroleofholdinggovernmentdebt.176TheaforementionedTreasuryDepositReceipts(TDRs)
werealsounpopularamongbankers.177UKbankswererequiredtomaintainacertainratioof
liquidassetsthatincludedTreasurybills,whichcontrastedwithU.S.banksthatonlyhadto
keepcashanddeposits(butnotgovernmentdebt)withtheFederalReserve.178
Howmuchofthisrepresentedachangefromthepastisnotentirelyclear.Forsome
timepriortonationalizationtheBankofEnglandwasdescribedbysomeas“littlemorethana
handmaidenoftheTreasury”.179DuringtheSecondWorldWarBritishbankstookonall
173
C261Ap.2,NewYorkFederalReserveBankArchive,25September,1952
C261Ap.2,NewYorkFederalReserveBankArchive,25September,1952
175
C261Ap.2,NewYorkFederalReserveBankArchive,25September,1952.Thememorandumgoesontonote
that“thegenerouscompensationtobegiventoprivateownersofpresent(BankofEngland)stock,havealsodone
muchtodampenoppositionoftheBill”.
176
(Worswick&Ady,1952,p.215)"Itwasmadeclearthataslongastheywerepreparedtoactasgenuinejobbers
-thatis,tobuytocapacityonfallingmarkets-theauthoritieswouldsupporttheirliquidity."
177
(R.S.Sayers,1953)
178
Source:CV61Ap.20,NewYorkFederalReserveBankArchive,18October1965
179
Source:CV61p.1,ResearchMemorandumonthe‘ProsandConsofBankofEnglandNationalization’,NewYork
FederalReserveBankArchive,22December1945
174
governmentdebtnotpurchasedbythepublic.Britishbanks’advanceratio(the%ofassets
allottedtoloansandoverdrafts)droppedfromthepeacetimelevelof50%to15%,indicatinga
largeshiftawayfromprivatesectorloansinfavourofgovernmentdebt.Theadvanceratiodid
notreturntothepeacetimelevelasquicklyasithadafterFirstWorldWar,takinguntilthe
1960sfortheratiotoreturnto40%.180Ashiftbybanksawayfromprivatesectorloansin
favourofgovernmentdebtisacommonfeaturefinancialrepressionpolicy.Thebankscould
discounttheirT-billswiththeBankofEnglandforanycashthatwasneeded,andbywar’send
Britain’smoneysupplyhaddoubled.181
AfterthewarBritishbankswereswimminginliquiditywithlargedepositbasesand
liquidassets,andthecomparativelyhighlevelofliquiditypossessedbythebankspersistedwell
intothe1950s.182TheDaltonpolicyof‘cheapmoney’initiallyledtoariseinthevalueofstocks
andgilts.183However,bondpricesdiddeclinelaterbyasignificantmarginfollowingthe
introductionofthe2.5%‘Daltons’.Theclearingbanksinparticularwererequiredtokeepon
theirbalancesheetsalargepercentageofgovernmentsecuritiesduetothe“subjugationof
bankbehaviourtotheperceivedgreaterneedsofgovernmentfinance”.184Afterthewar,banks
weretryingtorebuildtheiradvances-governmentdebtratio.Atthesametimeauthoritieswere
tryingtosellmoredebtandcapandorslowgrowthinbankadvances.185Forexample,archival
documentsdescribeaUKgovernment“fundingoperation”inNovember1951,supportedby
thebanksand“importantoverseasholdersofTreasuryBills”,whereby£1billioninUKTreasury
Billswereexchangedfor1-3/4%SerialFundingStockmaturingin1952,1953,and1954.186The
effectofthisfundingoperationwasto“sharply”reducetheliquidassetsoftheclearingbanks
sothat“shouldtheneedarise”thebanksclearingbanks“wouldberelativelysusceptibleto
pressure”bytheBankofEnglandonthecompositionoftheirbalancesheet.
180
th
(Capieetal.,1992,p.64)Ratioofadvancestototalassetsatcommercialbanksinthelate19 centurywere
60%,50%intheinterwarperiod,and16%in1944.
181
(Fforde,1992,p.7)
182
(Capieetal.,1992,p.64)
183
(Worswick&Ady,1952,p.194)
184
(Capieetal.,1992,pp.67-68)
185
(Capie,2010,pp.80-81)
186
C261Ap.5,NewYorkFederalReserveBankArchive,25September,1952
ThereisalargeacademicliteratureonLondon’sbanks.However,thereisverylittleto
nodiscussionofthepoliciesorsentimentsoftenassociatedwithfinancialrepressioninthe
bankingliteraturecoveringthisperiod.Forexample,Burk’s(1989)historyofMorganGrenfell,a
leadingAnglo-Americanmerchantbank,focusesonpersonalitiesandtransactions,butdoesnot
referencefinancialrepression.187ThesameistrueofSayers’(1968)studyofGillets,which
includestheyears1945-51.188Whilethisabsenceoffinancialrepressionfromtheliteraturemay
inpartbeduetothefactthatmanyofthehistoriesonBritishbankswere‘official’,theprivate
diariesofBritishmerchantbankerSiegmundWarburgalsodonotmentionfinancial
repression.189OnenotableexceptiontothesilencefrombankersoccurredinJanuary1947,
whenthechairmenoftheBigFiveclearingbanksurgedintheirannuallettersanendto
Dalton’spolicyof‘cheapmoney’.190However,thegeneralabsenceofdiscordraisesquestions.
BritishbankswouldholdlargequantitiesofBritishbondswellintothepost-warperiod(Table
9),andintheUK“amuchhigherproportionofthetotaloutstanding[Treasurybills]isinthe
handsofthebankingsystem(includingdiscounthouses)thanitisintheUnitedStates”.191
Table9:InstitutionalComparisonofUKandU.S.TreasuryBillHoldings,30September1964
Sector
UnitedKingdom UnitedStates
Commercialbanksanddiscounthouses
50%
27%
Foreignholders
42%
19%
Otherholders
8%
54%
Total
100%
100%
Source:CV61Ap.10,NewYorkFederalReserveBankArchive,18October1965
187
(Burk,1989)
(R.S.Sayers,1968)
189
(Ferguson,2010)
190
(Worswick&Ady,1952,p.201)Anotherexampleofprotestwastheearliernotedcommentsbythechairmenof
MidlandsandWestminstercondemningclause4(3)intheBankofEnglandAct(Fforde,1992,p.27).
191
CV61Ap.10,NewYorkFederalReserveBankArchive,18October1965
188
Asnotedearlier,therealvalueofBritishbondsexperiencedasteadyandsubstantial
declinefollowingSecondWorldWar.Onewouldexpectthatthepost-SecondWorldWar
liquidationofthevalueofBritishdebtofperhapsunprecedentedproportionstogenerateat
leastamentioninpassingfrombankers,whichinturnwouldbepickedupinthehistorical
literature.Howcanthisapparentparadoxbeexplained?ItishardtoimaginethatBritishbanks
werenotawareofthefactthattherealvalueoftheirBritishdebtholdingswasbeingeroded.
Thereareatleastfourpossibilitiesthatcouldexplaintheparadoxbehindtheexistence
ofBritishfinancialrepressionandtheabsenceofmentionintheliteratureandandby
financiers:a)historicalresearchtodatehassimplyoverlookedthisaspectofBritishfinancial
history;b)Britishbanksfoundawaytomitigatetheeffectsoffinancialrepression;c)afinancial
repressionbargain,sotospeak,existedbetweenthebanksandtheauthorities;d)financial
repression’seffectsweresmallenough,andstretchedoutoversufficienttime,toescape
protest.Itistemptingtospeculatethatthelattertwoexplanationsarecorrectbasedwhatlater
happenedtoBritishbanking.Themerchantbankswereconsideredtobethecrèmedelacrème
oftheLondonbanks.However,onceLondon’sfinancialderegulatory‘BigBang’occurredmost
ofLondon’smerchantbanksceasedtoexistasindependentgoingconcernsoverthenext
severalyears.OftheoriginalmerchantsbanksonlyRothschildhasremainedanindependent
entity.192Merchantbankshadbeenshelteredandsimplyfoundtheywerenolonger
competitiveinaglobalizedfinancialmarket.
4.5Directedlending
Directedlendingisacommonfeatureoffinancialrepression,andBritishgovernment
departmentssuchastheNationalDebtCommissionersandthePostOfficeSavingsBankwere
directedtosupportTreasurybondauctionsandtheoverallgovernmentbondmarket.Other
agenciesthatsupportedgovernmentdebtmarketsincludedthetrusteesavingsbanks,the
192
KleinwortwasboughtbyDresdner.S.G.WarburgwaspurchasedbySwissBankCorp.(nowCreditSuisse).
MorganGrenfellwasboughtbyDeutscheBank.Schroeder'swaspurchasedbyCitibank.Hambroswassoldto
SociétéGénéralein1998.Baringsfailedin1995.
socialinsurancefunds,theExchangeEqualizationAccountandtheIssuesDepartmentofthe
BankofEngland.193Thesedepartmentswereoftenusedtosupportconversionsthrough
advancebuyingofthesecuritytobeconverted,therebyhelpingtoensureasuccessful
conversion.
Daltonorchestrateddirectedlendingoperationswiththegoalofmanaginginterest
rates.Lowinterestrateswereeffectedbyswappinghigherinterestratelong-termtermdebt
withlowerinterestrateshort-termdebt,aswellbyunderwritingnewlower-interestrate
issues.194BothWorswickandAdy(1952)andCairncross(1985)brieflydiscusstheseoperations.
However,Cairncrossdescribedthemas“rumour”,whileWorswickandAdyrefertothe
departmentsasthe“Treasury’screatures”thatwere“takinguptheslackonthoseissueswhich
thepublicwouldnottake”.195Whiletheseoperationswereoriginallyconcealedfromthepublic
archivaldocumentsrevealtheextentoftheseoperations.196ANewYorkFederalReservereport
citesanotherreportbyaMr.Bloomfieldtitled“InterestRatePolicyinGreatBritain-1945-48”
thatdescribestheeffectsofBritishdirectedlendingasfollows:
“2½percentConsolsundertheimpactofvigorousbuyingbythepublicdepartments
hadrisenbyNovember1946towithinapointofparity,thehighestlevelin44years,
andthemarkethadbeensufficiently‘rigged’topermittheissueatpartofa2½per
centTreasurystockredeemableafter1975attheTreasury’sdiscretion”(the
‘Daltons’).197
Comparingnon-bankprivatesectorinstitutionsintheU.S.andUK,weseethatin1963thatU.S.
non-bankprivatesectorinstitutionsheldamuchlargerportionoftheirshort-termassetsin
TreasuryBillsthanintheUK(
193
(Worswick&Ady,1952,p.197)
(Worswick&Ady,1952,p.197)
195
(Cairncross,1985,pp.432-433;Worswick&Ady,1952,pp.196-198,215)
196
(Worswick&Ady,1952,pp.197,202)WorswickandAdyalsostatedthatitispossibletomakeaback-door
calculationbymonitoringcreditcreation,particularlytheincreaseofdeposits.Theyalsonotethattheactivitiesof
thedepartmentsdeclinedundertheCrippsChancellorship.
197
CV61p.1,Mr.KlopstocktoMr.Sproul,‘TheCheaper–MoneyPolicyinBritain–ALessonfortheUnitedStates”’,
NewYorkFederalReserveBankArchive,7September,1948
194
Table10).
Table10:PrivateSectorInstitutionalComparisonofUKandU.S.TreasuryBillHoldings,%of
TotalShort-termAssetsheldinTreasuryBills,1963
Sector
Insurancecompanies
Corporatepensionfunds
Mutualbanks
Savingsbanks
UnitedKingdom UnitedStates
2%
10%
1%
40%
0%
18%
0%
12%
Source:CV61Ap.8,NewYorkFederalReserveBankArchive,18October1965
U.S.companiesweregenerallyconsideredtobemuchmore‘liquid’thantheirUKcounterparts,
withcurrentassetsof40%and22%,respectively.UKprivatesectorsinsurancecompanies,
whenaskedbytheRadcliffeCommitteetoexplainthispreferenceforlonger-termsecurities,
stated:
“Wedonotwanttohavesecuritiesthatturnovertoorapidlyortoofrequently,suchas
billsorshort-datedinvestments;wewouldratherhavesomethingwhichisgoingtobe
thereforareasonableperiodoftime,forpurelyadministrativereasons”.198
HowshouldweinterpretthepreferenceonthepartofBritishinsuranceandpension
organizationsfornotholdingUKTreasurybills,eventhoughastheNYFRBstudyputsit“itmight
havepaidthemtodoso”?TheNYFRBascribesapartialexplanationto“habit”onthepartof
Britishinsuranceandpensionschemes.Perhapsthisandthepreviousexplanationevidencedin
theabovequotefromtheinsurancesectordoexplaininpartthepeculiarpreferencefor
preferringtoearnaloweryield.However,giventheactiveroleofgovernmentinthe
managementofUKeconomicaffairsinthepost-warperiod,questionsaboundoverwhether
somedegreeofmoralsuasiononthepartoftheauthoritiescouldplayaroleinthese
preferences.
198
CommitteeontheWorkingoftheMonetarySystem(RadcliffeCommittee),Question7092.UKNational
Archives,1957-59
OthersignificantdifferencescanbeseenbetweentheUKandU.S.Treasurybillholdings
inothersectorsoftheeconomy(Table11andTable12).UKnon-financialcorporationsheld
just8%oftheUKTreasurybillmarketcomparedtothe18%heldbyequivalentU.S.firms.
However,UKlocalauthoritiesheldjust0.1%oftheUKTreasurybillmarketandsowouldnot
appear,atleastasof1964,tohavebeenapartytodirectedlendingschemes.
Table11:UK%ofTotalTreasuryBillMarketHeldbySector,30September1964
Sector
£smillions %ofT-billmarket
Localauthorities
£3
0.1%
Insurance
3
-
Trusteesavings
2
-
Privatesectorpensionfunds
-
0.1%
Othernon-bankfinancialinstitutions
3
0.2%
Non-corporatebodies(PublicTrustee)
5
0.1%
Non-financialcorporations
4
7.7%
Total
£229
8.3%
Source:CV61Ap.12,NewYorkFederalReserveBankArchive,18October1965
Table12:U.S.%ofTotalTreasuryBillMarketHeldbySector,30September1964
Sector
£smillions %ofT-billmarket
Stateandlocalgovernments
£1,940
12%
Insurance
200
1%
Mutualsavingsbanks
120
1%
Savings&loans
240
1%
Corporatepensiontrustfunds
290
2%
Non-financialcorporations
2,830
18%
Misc.(includingnon-banksecuritydealers)
3,017
19%
Total
£229
54%
Source:CV61Ap.12,NewYorkFederalReserveBankArchive,18October1965
The1964NYFRBstudyremarksonhowtheinstitutionalholdingsofUK(andU.S.)Treasurybills
hasremainedconsistent“overthelastfouryears,eventhoughtherehasbeenanincreasein
alternativeoutlets(forearninginterest)outsidethepublicsector”,particularlythetime
certificateofdeposit.199
4.6Inflation
Financialrepressioncanbeeffectivewithoutinflationbysimplyreducingthelevelof
nominalinterestexpenseonpublicdebt.200However,inflationoftenaccompaniesfinancial
repression,anditneednotbesignificanttohaveamaterialimpactondebtsustainabilityover
anextendedperiodoftime.Further,smalldifferencesintherateofinflationcanhavea
significantimpactovertimeonthevalueofpublicdebt,aswellasdeterminingthenumberof
yearsorperiodswhichcanbelabelledasperiodsof‘debtliquidation’.
OtherthantheWorldWarsandtheirimmediateaftermath,thefirsthalfofthe20th
centuryinBritainwasmarkedbyverylittleinflation.201AstheSecondWorldWarcommenced
Keynesarguedagainstwhathecalledthe‘old-fashionedlaissez-fairesolutionofinflation’asa
meansofpayingforthewar.202InasectionofHowtoPayfortheWarcoveringinflationduring
theperiodsurroundingfirstgreatconflictofthe20thcentury,Keyneswrote:
“Butwhataridiculoussystemwithwagesandpriceschasingoneanother
upwardsinthismanner!Noonebenefitedexcepttheprofiteer.Theseedsof
muchsubsequenttroubleweresown.AndweendedupwithaNationalDebt
vastlygreaterintermsofmoneythanwasnecessaryandveryilldistributed
throughthecommunity.”203
MuchofKeynes’pre-andearly-warpolicyeffortswerespentadvocatingagainstthe
government’suseofinflationasameansoffinancingthewar.204WhetherornotKeynes
199
CV61Ap.17,NewYorkFederalReserveBankArchive,18October1965
(C.M.Reinhart&Sbrancia,2011)
201
(Capieetal.,1992,p.63)Infactmuchoftheinterwarperiodwasmarkedbydeflation.
202
(Keynes,1940,p.70;Skidelsky,2000,p.63)Keynes:“Anindividualbysavingmorecannotprotecthimselffrom
theconsequencesofinflationifothersdonotfollowhisexample.”
203
(Keynes,1940,p.73)Also,inthechaptertitled‘CantheRichPayfortheWar?’,Keynesarguesthattherich
wouldbetherelativebeneficiariesofinflation.(p.21)
204
(Skidelsky,2000,p.55)
200
intendedtoremainstaunchlyanti-inflationaryafterthewarisunclearashewasoftencriticized
duringthisperiodfor‘makinguptheoryonthehoof’.205
Somewhatsurprisingly,deflationwasreportedbysometobeasgreataconcernas
inflationbothduringthewarandthepost-warperiod.206However,aswithmanyotherwars
inflationclimbedduringtheSecondWorldWar,withretailpricesincreasingonaverageby6.3%
annually.207Thereissomedisputeintheliteratureonthelevelofinflationduringthewar(and
afterward)withCairncross’estimating50%inflationduringtheSecondWorldWar.208Inflation
intheSecondWorldWarwasapproximatelyhalfthatoftheFirst,withWoodward(1991)
claimingthatthis“relativesuccess”wasachievedthrough“muchlessdependenceon
borrowingandmoreconcertedefforttoreduceconsumptionthroughincreasedtaxation”.209
Rationingwasdeemedcrucialtomakingpricecontrolseffective.210Avarietyofmeasureswere
employedtomanagedemand,prices,costs,andoverallinflationpressure,includingprice
controls,subsidies,standardizationschemes,andqualitycontrols.Suchmeasurescould
perhapsbeconsideredaselementsthatsupportedfinancialrepression,buttheygenerallyfall
outsideofthedefinitionoffinancialrepression.
Anotherhallmarkoffinancialrepressionisarelativelyhighsavingsrateinspiteoflow
interestratesandorinflationduetofew(ifany)investmentorspendingalternatives.211
Averageweeklywagesfrom1940-1945increasedbyarateof5%peryear,laggingslightly
behindpriceincreases.Woodward(1991)speculatesthattradeunions,whichhadastrong
wagebargainingpositionduetolowunemployment,exercisedwagerestraintduetoboth
sympathiesforthewareffortandtheirinclusioninwaradministration.Paradoxically,the
205
(Skidelsky,2000,p.23)
(Dow&NationalInstituteofEconomicandSocialResearch.,1964,p.10)TheWhitePaperonEmployment
Policy(Cmd.6527,1944)warnedofdeflation.
207
(Cairncross,1985;Crafts,Woodward,&Duckham,1991,p.189;Mitchell,1975)Wholesalepricesduringthis
periodroseby8.8%annually.
208
(Cairncross,1985,pp.14-15)
209
(Craftsetal.,1991,p.190)
210
(Capie,Pradhan,Wood,&CityUniversity.CentrefortheStudyofMonetary,1986;Capie&Wood,2002)
211
(McKinnon,1973;Shaw,1973)
206
savingsratealsogrewduringthisinflationaryperiodofdecliningrealwagesto15%.212
However,thisisrevealedtobelesssurprisinggivenrationingandotherrestrictionson
purchasesbothduringandafterthewar.213
Woodward(1991)claimsthatpost-SecondWorldWar(1945-1950)inflationaveraged
4.3%peryear,rangingbetween3-7%annually.214Realwageswereunchangedthrough1951
butrealearningsincreasedby10%.215In1948,30%ofconsumptionwasrationed;by1950only
11%.In194783%ofUKrawmaterialswereundersomedegreeofofficialcontrol;by1950the
figurehaddeclinedto47%.216Woodwardalsostatesthatforthisperiod“atnotimewastherea
returntotheexcessof1919-20”,whenannualinflationranat21.5%and24.8%,respectively.217
However,otherresearchsuggeststhatactualpost-warinflationwassignificantlyhigherthan
nationallyreportedfiguresusedbyWoodwardandRichard(2002),particularlyifoneaddsthe
early1950sintotheanalysiswheninflationapproachedpost-FirstWorldWarlevels.218
Cairncross(1985)notesthattheofficialCost-of-Livingindex,basedonpre-FirstWorld
Warestimates,was“farfrombeingatruemeasureofthechangeinthevalueofmoney”.219
Woodwardalsostated“intheearlypost-waryearscontrolsweredeliberatelyusedtocontain
demandpressuresandtopreventthepricesofanumberofkeycommoditiesfromrising
rapidly.However,from1947onwardsthecontrolsweregraduallyrelaxed,andhadmoreorless
disappearedwiththechangeingovernmentin1951”.220Whileitistruethatpriceanddemand
controlswerelargelyremovedbytheearly1950s,Woodwardsaysnothingoffinancialcontrols,
suchasthoseonforeignexchangeconversionandotherrestrictions,whichmayhaveplayeda
212
(Cairncross,1985,pp.13-14)
(Zweiniger-Bargielowska,2000)
214
Thesefiguresarein-linewithRichards(2002)morerecentnumbers.
215
(Cairncross,1985,p.18)
216
(Cairncross,1985,p.23)
217
(Richards,2002,p.15)
218
(Díaz,Lüders,&Wagner,2003;Feinstein,1972;Friedman&Schwartz,1982;Price,1988;Wiles,1952)
219
(Cairncross,1985,p.39)
220
(Craftsetal.,1991,p.191)
213
significantroleinsuppressinginflationduringthistime.221ThegrowingconflictontheKorean
peninsulain1950-51islargelycreditedwiththespikeininflationduringthisperiod.Thecostof
rubbertripled,woolandcottondoubled,andnumerousothercommoditieswentupinpriceby
50%.222ThevariousinflationseriesfoundintheliteraturearepresentedinFigure10andTable
21.
Figure3:UKInflation(RetailPrices),AnnualPercentageChange,1941-1960
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
-5.0%
-10.0%
Richards
Diaz,etal
Bain&Price
Friedman&Schwartz
SampleAverage
Sources:Diaz,LudersandWagner(2005)Richards(2002),FriedmanandSchwartz(1982),PriceandBain(1988)
Thesmallestandlargestvarianceintherangeofvaluesforanygivenyearduringthis
periodare1.6%and10.5%fortheyears1946and1949,respectively.Overall,giventhewide
variationininflationestimatesforthisperioditmaybemoreaccuratetoutilizearangeof
inflationestimatesforcalculatingdebtliquidation.
221
(Craftsetal.,1991,p.191)WoodwardarguesthepostwarLabourGovernmentuseditcloserelationshipwith
thetradeunionmovementtoexercisewagerestraint;1948wastheyearofthefirstvoluntaryincomepolicy,
whichinsuredwageincreaseswerekeptwellbelowinflation.
222
(Dow&NationalInstituteofEconomicandSocialResearch.,1964,p.55)
Table13:UKInflation(RetailPrices),AnnualPercentageChange,1945-1951
Year
Richards
1945
3.2%
1946
3.5%
1947
7.4%
1948
6.6%
1949
2.6%
1950
2.8%
1951
9.5%
Annual
Average
5.1%
Diaz
3.0%
3.6%
9.1%
7.8%
13.1%
0.3%
15.9%
Bain&
Price
5.1%
5.1%
8.2%
10.8%
5.1%
5.6%
16.6%
7.5%
8.1%
Friedman&
Schwartz
0.5%
3.8%
8.5%
12.3%
5.2%
1.7%
12.9%
Sample
Average
2.9%
4.0%
8.3%
9.4%
6.5%
2.6%
13.7%
6.4%
6.8%
RangeHighLow*
4.6%
1.6%
1.7%
5.7%
10.5%
5.3%
7.1%
5.2%
*Note:thedifferencebetweenthehighestandlowestestimateeachyear.
Sources:Diaz,LudersandWagner(2005)Richards(2002),FriedmanandSchwartz(1982),PriceandBain(1988)
5Conclusion
Thispaperhasshownthatopportunitiesexistforimprovingbothourquantitativeand
qualitativeunderstandingoffinancialrepressionthroughanin-depthexaminationofBritish
mid-20thcenturyfinancialrepression.Furtherresearchisnecessaryonwhowerethewinners
andlosersoflowinterestrates.WorswickandAdy(1952)statethatlowinterestratesintheUK
mayhavecauseda"redistributionfromthesmallertothelargerrentier”.223However,littleto
noquantitativeevidenceispresentedtosupportthisclaim.Thereisalsothequestionofthe
knock-oneffectsoflowinterestratesontheBritisheconomyandfinancialsystem.Duringthe
post-waryears“anundulylargeproportionofworldtradehadcometobefinancedinLondon
inordertotakeadvantageofthelowinterestrates”.224Buthowmuchdidthisinflowoffunds
fortradefinancefurtherdestabilizethefragilebalanceinBritain,withitshigh-debtand
overvaluedcurrency?
Furtherresearchisalsonecessarytounderstandthetrade-offsbetweenthenegative
consequencesoffinancialrepression,suchasitsimpactoneconomicgrowth,anditspotentially
positivefeatures,suchasbuttressingthefinancialsystem.Inadditiontopromotingfinancial
stability,financialrepressioncanhelpachievedebtsustainability.Contrarytowhatitsname
implies,financialrepressionmayonoccasionbeanappropriatepolicy.Itmaythereforebe
appropriatetodetermineamoreneutralnameforfinancialrepression,whichisoftenusedas
pejorativeforscoringrhetoricalpointsinpolicydebates.
223
224
(Worswick&Ady,1952,pp.204-205)
C261Ap.5,NewYorkFederalReserveBankArchive,25September,1952
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