INTRODUCTION

In the years since the Second World War the role of money, and the use of monetary policy, has been peculiarly subject to the whims of intellectual fashion in economic thought, in Britain as elsewhere. At the outset the most commonly held view among British economists was that ‘money does not matter (much)’ for maintaining high employment, fostering economic growth or controlling inflation. By the 1970s, however, monetary policy had become a major issue in public policy debate; under Mrs Thatcher in the 1980s it became front page news. The ‘monetarist’ view that money matters a lot especially so far as inflation is concerned had come to dominate among economists and policy makers. The objectives of monetary policy have also changed, from facilitating government borrowing at low interest rates to supporting a fixed exchange rate and then to combating inflation with a floating exchange rate, to exchange-rate stability and back to price stability.

The monetary history to be described here runs from the nationalization of the Bank of England by the first majority Labour government in 1945–6 to the restoration, by another Labour government, of operational independence to the Bank in 1997–8. For the purposes of this chapter it is divided into four periods: (i) the immediate post-war policies of the 1945–51 Labour governments under Prime Minister Clement Attlee, when the Keynesian’ downgrading of monetary policy was still in the ascendant; (ii) the 1950s Conservative governments’ revival’ of monetary policy which, in spite of confused aims and uncertain methods, effectively reassigned it to the preservation of external balance with a fixed exchange rate; (iii) the 1970s and early 1980s, which saw new attempts at monetary control in competition and credit control’, the adoption of monetary targets (that is, announced targets for the rate of growth of the money supply somehow defined) and the medium-term financial strategy of Mrs Thatcher’s first government; and (iv) another reorientation of monetary policy after the abandonment of monetary targets, first towards exchange-rate stability and then back to price stability by means of inflation targeting.