The Central Banks: The International and European Directions

In the United States and the United Kingdom attention in the immediate post- World War II years was focused on the effects on unemployment resulting from the elimination of wartime spending on the military. Prospects were envisioned of a return to the perceived problems of the 1930s, in the U.S. case, and to the interwar period more generally, in the U.K. case. The perceptions included the stagnation of private sector spending, as may follow from what Keynes called the declining marginal propensity to consume, and socialist's views of the evolution of market economies toward unemployment.

In the United States, the reactions took the prospect of subordinating the Federal Reserve to the Treasury with the view to ensuring low interest rates on the government's debt and an underwriting of debt refinancing. It resulted in a first case of the phenomenon which later became known as "chasing interest rates" ( Frazer 1988, 212-213, 237-238, 297-298, 448-449, 545, 567, 652-653, 746, 809). The unintended effects of the policy of trying to peg rates at a low level were fairly sustained open-market purchases of government securities along lines taken up in Chapter 3. As also discussed there, this results in the expansion of the reserves of commercial banks and hence accelerated growth in bank credit and the money stock with predictable effects. The problem became inflation and not the feared return to a depression.

In the United Kingdom, the immediate reaction to the perceptions of the past and to the end of World War II were the nationalization of the Bank of England and the wave of the nationalization of industry that Clement Atlee's labor government brought about. The effects of subordinating the central bank to the Treasury, were more permanent in the U.K. than in the specific U.S. case just cited.

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