As these lectures are intended to commemorate the late Lord Radcliffe, who was the first Chancellor of this University, it is particularly fitting that I should take as my starting-point for an analysis of the current state of monetary theory the Report of the Committee on the Working of the Monetary System1 of which Lord Radcliffe was the Chairman and (to my knowledge) also the principal author. Since there cannot be many of the present generation of students who have read the Report or are familiar with the circumstances which gave rise to it, it is best to begin with the historical background. The cheap money era which began with the Great Depression and the abandonment of the Gold Standard meant that monetary policy was in abeyance from 1932, right through the war period and the post-war period following until the return of a Conservative Government in November 1951.
During the war the Bank Rate remained at 2 per cent and the rates of gilt-edged were equally stabilized at low levels through the open market operations of the Bank which were extended to all maturities. The Government financed the war largely through the issue of Treasury Bills and to a lesser extent through the issue of short- and mediumterm bonds. But the Government also saw to it that the banking system redeposited its surplus of investible funds with the Treasury, thereby limiting the amount of credit that could be extended to the private sector. This system was maintained after the war, when, thanks to the return of a Labour Government, strongly under the influence of Keynesian principles, the Chancellor of the Exchequer relied on fiscal policy to maintain full employment and to avoid an excessive pressure of demand. Interest rates were kept at a minimum -- the interest paid on Treasury deposits receipts (as distinct from Treasury Bills) was reduced by Hugh Dalton from 2 per cent to one-half of one per cent whilst long-term issues were made (up to 1947) at 2 to 2½ Per cent. This was during a period when the rate of inflation fluctuated around 4 to 5 per cent.
But throughout these years, and particularly after 1947, there was growing agitation for the reactivation of monetary policy, which, it was claimed, provided a far more flexible instrument of economic control than fiscal policy. The first tentative changes introduced by____________________