In 1971 the Bank of England introduced the most radical policy change to UK bank regulation since the end of the Second World War (Capie 2010). In 1973 the United Kingdom experienced its first banking crisis since the nineteenth century (Reinhart & Rogoff 2009). The timing of these two events was not a coincidence. The policy of Competition and Credit Control (C&CC) directly created the conditions for the secondary banking crisis of 1973–75. How this happened is the subject of this chapter.

Overview

C&CC was an attempt to rationalize the increasingly complex system of bank control in the City of London; to replace it with a uniform, market-based way of managing the level of credit expansion in the economy. It rested on two pillars: firstly, the abolition of the clearing bank “Cartel” and the removal of credit ceilings on these banks. This was the “competition” side of the policy. It was designed to allow the clearing banks to compete amongst themselves and with the secondary or “fringe” banks. This was intended to stimulate innovation, lower prices for end-consumers and also lead the more respectable clearing banks to out-compete the less-respectable (i.e. less respected by the Bank) secondary banks. This was supposed to make the banking sector both innovative and manageable. The second pillar of the policy was “credit control”. That is, fearing unconstrained credit expansion in the economy if they removed administrative control through ceilings, the Bank decided to keep control no longer through administrative means (“guidance” on ceilings) but through market means with the price mechanism (a reform of the interest-rate system). This was to be achieved by the Bank's new ability to call “special deposits” which would directly reduce the amount of bank credit in the economy.

However, due to deliberately expansionary fiscal policy (the “Barber Boom”) at the time of implementation, the government's unwillingness to accept higher interest rates when the credit conditions demanded it, and the sudden releasing of long repressed credit in the economy, C&CC unleashed a boom of credit. Low manufacturing and industrial demand for the new flood of credit meant that credit expansion was channelled into a property and personal finance boom, which encouraged unregulated secondary banks to lend in ever-riskier ways.