Monetary policy and price stability in British post-war debate: restatement of evidence from economists’ papers presented to the Radcliffe Committee^*

Abstract

The article reconstructs the opinions expressed by academic economists in front of the Radcliffe Committee, whose Report was a document of considerable importance for the post-war theory of monetary policy. The Committee provided one of the first official occasions to discuss the nexus between inflation and unemployment in Britain and the role of monetary policy in achieving price stability. Analyzing the Report, the Memoranda and the Minutes of evidence put forth in front of the Committee, the article documents the innovative aspects of the Radcliffe doctrine on monetary issues and its complex connections with Keynesian and Post-Keynesian monetary theory.

Keywords:

• Radcliffe Committee
• monetary policy
• wages
• inflation
• unemployment

Acknowledgements

This research is part of a wider project on Unconventional monetary policy ante litteram. The Radcliffe Committee and the debate on liquidity and the long-term interest as a monetary policy instrument, financed by an ESHET ECB Grant. Carlo Cristiano was responsible for writing sections 2 and 3; Paolo Paesani for sections 4 and 5. Sections 1 and 6 are a joint contribution by the two authors. The authors wish to thank Cristina Marcuzzo, Annalisa Rosselli, Ivo Maes, Hans-Michael Trautwein and three anonymous referees for their useful comments on earlier drafts of the article. The usual disclaimers apply.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Sections 5 and 6 of the Report offer a summary of the “background against which” the Committee started their enquiry, in which “the problem that was pressing itself most urgently was that of controlling inflation”.

2 Cairncross (1999) credits himself as the author of the introductory chapter of the Report as well as of the parts on the capital market, external relations, and statistics, while it fell on Sayers to write the key theoretical parts. See also Cairncross (1991). Sayers (1960) and Cairncross (1960, 1996a) bear witness to the fact that the two authors of the Report shared a common view on the theory presented in the Report as well as on the historical background that led to the appointment of the Radcliffe Committee, which they both described as a period of excess liquidity.

3 We were not able to mention W. M. Allen, chief economist at the Bank of England, as it was not possible to isolate his views as author of the memoranda submitted by the Bank, nor indeed during the various meetings in which the staff of the Bank gave oral evidence.

4 For a survey of demand-pull vs. cost-push theories of post-war inflation in Britain and the USA, see Ball and Doyle (1974). See also Bronfenbrenner and Holzmann (1963).

5 This fact, together with the compromise nature of the Radcliffe Report, contributes to explaining the cold reception it met with in subsequent years. For a critical analysis of the Radcliffe report, focusing on its policy recommendations, see also Gurley (1960) and Kaldor (1960) among others. An echo of these criticisms is apparent in Cairncross’ (1960) defence of the Radcliffe doctrine.

6 On term structure control, see Keynes (1936, p. 206). On Keynes’s participation to the National Debt Enquiry, see Peden (2004, Ch. 11 ) and Section 5 below.

7 One of them, Henry Phelps-Brown, was at the LSE, which shows that the LSE front was not so monolithic as reliance solely on the experts’ evidence to the Radcliffe Committee might suggest (on this see Cristiano and Paesani 2018b, Section 3).

8 On the relation between inflation and unemployment, our reconstruction of the economists’ contributions to the Radcliffe Committee does not clash with other reconstructions and classifications to be found in the literature on the period. Forder (2013, 2014) has argued that the economists, in general, barely saw any relation between inflation and unemployment, even if they accepted that inflation could be tamed by adopting demand-restricting measures. However, they feared that these measures would result in unemployment rising sharply and investment falling, with negative repercussions on productivity. Schwarzer (2014) argues that the idea of demand-induced investments as the main driver of productivity was typical of the “Keynesian view” as opposed to the “Paishian view” (on this see also Lipsey 2016, p. 418). As emerges in Sections 3 and 4, the Keynesian front was far less united than the opposite “Paishian” school, both on inflation and on monetary transmission.

9 As determined “on the one hand upon the composition of the spender’s assets and on his borrowing power and on the other hand upon the methods, moods, and resources of financial institutions and other firms, which are prepared (on terms) to finance other people’s spending” (Report, § 389).

10 See Dow in Memoranda (Vol. 3, p. 82, §§ 46–47) and Allen (2014, Ch. 8–10).

11 The written evidence was published as Committee on the Working of the Monetary System (1960b; henceforth, Memoranda). Oral testimonies were published as Committee on the Working of the Monetary System (1960c; henceforth, Minutes).

12 Roger Makins, the Treasury Joint Permanent Secretary, introduced Hall as the Economic Adviser to the Government and Director of the Economic Section of the Treasury and the leading expert on “monetary policy and the control of the economic situation” (Minutes, Q. 974).

13 This condition of political irrelevance was not to last forever, because incomes policy entered the government agenda during the 1960s (see Brittan 1964, Cairncross 1996b, Backhouse and Forder 2013), but it continued until the end of the proceedings of the Radcliffe Committee in 1959.

14 As Cairncross put it, “it is perhaps better to talk of the ambition of the authorities, than of the objectives of policy” (1960, p. 31; original emphasis).

15 Kaldor (1959, p. 292) argued that: “Amid the welter of conflicting views on inflation, it is reassuring to find a fair unanimity among economists on the key role of the rate of increase in money wages in the inflationary process”. On the opposite front, Paish (1962, p. 95) explained that: “Two theories are current to account for the recent excessive rise of money incomes. One is that it is primarily due to the success of the trade unions in forcing up wages and the other that it is due to a general excess of demand, which pulls up the price paid for labour in the same way that it pulls up other prices”. In this context, A. W. Phillips published his famous curve article (Phillips 1958) relating the rate of change in money wages to unemployment.

16 As well as the above-mentioned article by Lipsey (2016), see for instance, Forder (2014, p. 151) and Peden (2000, p. 428). Paish (1962) is a collection of Paish’s works on inflation in Britain in the 10 years after 1951.

17 Based on these presuppositions, Paish presented two articles to the Radcliffe Committee, one on “The Future of British Monetary Policy”, and “A Study of Britain’s Monetary and Fiscal Policies Since 1945, and Recommendations”, written together with Graham Hutton and L.W. Robson (Memoranda, vol. 3, pp. 182–193). The first memorandum indirectly rejected the Treasury view which, according to Sayers (1961), was later incorporated in the Report, because Paish considered the potentialities of monetary policy on the assumption that “price stability”, rather than full employment and reasonably stable prices, is its “main function” (Memoranda, vol. 3, p. 183, § 4).

18 See Memoranda vol. 3, p. 213, § 27; Robbins 1958, p. 172.

19 A similar point, once again with no explicit mention of Kahn, was made by Cairncross (1960, p. 35–36): “It is difficult to find corroboration … for the speculations of those economists who attribute to British monetary policy damaging effects on investment and growth”.

20 Brown had been considered an authority on inflation at least since the publication of Brown (1955). Kahn’s commitment to the study of inflation culminated in his participation in a group of independent experts appointed to study the problem of rising prices by the OEEC Secretary-General in June 1959 (see Fellner et al. 1961).

21 The problems raised for wage policy by full employment were studied not only in Britain but also elsewhere, as Turvey (1952) exemplifies with reference to the Swedish context.

22 On this see Brown (1958a).

23 During the 1950s, Kahn campaigned in favour of increasing productivity by means of investments, suggesting a cheap money policy as a means to this end (see Kahn’s contributions to the symposium on monetary policy published in the Bulletin of the Oxford University Institute of Statistics in 1952 and the two articles published in the Financial Times on 3–4 June 1954 under the title “The case for cheap money”). Consistently with this view, before the Radcliffe Committee, he lamented that “the fact that investment in the private sector has ceased to grow … is to be attributed partly to monetary restriction” (Minutes, Q. 10939). Even more than Brown (Memoranda, vol. 3, p. 50, § 14), Kahn insisted that monetary policy could only reduce price inflation at the cost of reducing investments, and therefore, slowing down productivity (Memoranda, Vol. 3, p. 143, § 41).

24 The relationship between unemployment and wage inflation occupied a considerable part of the symposium on wages that appeared in the June issue of the Scottish Journal of Political Economy in 1958. In his contribution to this symposium, J. R. Parkinson put at 3% the rate of unemployment that, “in U.K. conditions”, “might effectively reduce the annual wage increases to manageable proportions” (Parkinson 1958, p. 95), an estimate that was considered “rather optimistic” by Harry Johnson (1958, p. 152), who nonetheless shared with Parkinson a demand-pull perspective on inflation. From the opposite cost-push perspective, Brown (1958b) gave more or less the same estimate (6%) he had presented to the Radcliffe Committee, and Dow argued that to curb inflation by reducing aggregate demand “would entail considerable unemployment” (Dow 1958, p. 176), while Phelps-Brown (1958, p. 147) gave no estimate at all, arguing that no significant correlation existed between “the rate of change of money incomes and the level of unemployment”. In this context, Phillips’s estimate – as published in the November issue of Economica – of the rate of unemployment consistent with price stability at “a little under 2.5%” (1958, p. 299) was remarkably low (more on this in Cristiano and Paesani 2018b).

25 Similar considerations appear in the Memorandum by I. M. D. Little, R. R. Neild, and C. R. Ross (Memoranda, vol. 3, pp. 159–167). The memorandum, which Kahn endorsed, contemplates both possibilities without expressing any preference for one or the other.

26 In relation to this, Meade proposed the creation of a new stabilization fund, with full power of operation and independent of the government, “charged with the task of making variations in the level of the special stabilization levy at its discretion but only within the limits laid down by Parliament and only for the purpose of achieving some precisely defined objective, such as the maintenance of total demand for goods and services at the highest possible level compatible with the prevention of some precisely defined price index from rising above a precisely defined ceiling” (Meade 1958, p. 47).

27 Among those who expressed this view to the Radcliffe Committee were Peter Thorneycroft, E. V. Morgan, R. F. Henderson, F. W. Paish, and Wilfred King, who joined Oscar Hobson and Arthur Seldon in drawing up Not Unanimous. A rival verdict to the Radcliffe Report (Seldon 1960).

28 See Report, §§ 162–180.

29 On the mechanism connecting Treasury bills to the supply of bank credit, see Sayers (1955), which forms the basis of Robbins’ attack on this system in Robbins (1958, p. 175), and the Bank of England memoranda n. 4 and 5 in Memoranda, vol. 1, pp. 9–12.

30 See Memoranda, vol. 3, p. 52, §§ 11–12; pp. 66–67, §§10–12; p. 107, § 8; p. 150, § 50; p. 182; p. 191, § 25; 217, §73. It is worth noting that this is the same position adopted by the Governor of the bank of England, C. F. Cobbold, in a letter he wrote to Thorneycroft when the Radcliffe Committee was appointed (now reproduced as Appendix E in Allen 2014). As Howson (2011, pp. 796, 835) reconstructs, Thorneycroft would have preferred to have Robbins, whose anti-inflationary stance was well-known, on the Radcliffe Committee. In the end, following an indication coming from Cobbold, the Government appointed Sayers, a banking expert also at LSE, who was expected to share Robbins’s analysis of the role of Treasury bills in the expansion of money supply and inflation, a subject which Sayers had recently addressed (see Sayers 1955). In spite of these credentials, Robbins found the Report in contradiction with his own diagnosis, as he did not fail to remark in his maiden speech at the House of Lords.

31 Like Hicks, Day addressed the threat to stability posed by the low level of British reserves and the weak balance of payments. Day regarded this situation as not specifically confined to Britain but rather as a problem facing many countries, which the continued adoption of fixed exchange rates would eventually exacerbate, especially in the inflationary context which Day regarded as the most likely scenario for the years to come (see Memoranda, vol. 3, pp. 71–76.

32 Asked by Cairncross about the possibility of raising long rates independently of the short, and short rates independently of long, Hicks did not rule it out, at least in the short-run. “But – he added – I still feel that such movements set up expectations which have effects, so that, once the authorities turn their backs, things will begin to move back into a more or less orthodox form” (Minutes, Q. 10886).

33 Dow insisted greatly on this point in the reconstruction of the events that he submitted to the Radcliffe Committee (see Memoranda, vol. 3, pp. 80–82).

34 Part of this effort should go into publishing as much as physically possible of the intelligence available to the monetary authorities and to provide full and well-reasoned public explanation of policy. On this aspect, see the memorandum by Thomas Balogh (in Memoranda, Vol. 3, pp. 31–32, in particular).

35 See Memoranda, vol. 3, pp. 136–138. On Harry Johnson in front of the Radcliffe Committee, see also Moggridge (2008, pp. 181–184).

36 For this reason, Kahn, in line with others, recommended complementing conventional monetary policy (open market operations, Bank rate) with discretionary controls on capital issues, investment allowances and bank minimum liquidity ratios (Memoranda, vol. 3, pp. 143–144).

37 Robertson (1959), in line with the demand-pull position, remarked on the importance of controlling the money supply with a view to containing demand and inflationary pressure and on the difference between the Keynesian monetary transmission mechanism and that envisaged by the Radcliffe Report. Whereas Keynesian transmission mechanism implied that when the interest rate rises money demand falls and idle funds flow into the bond market, raising velocity, the Radcliffe vision implied that higher rates cause credit supply and money velocity to fall. Robertson regarded this latter vision as an extension of the Roosa effect, which to him “seems to be in flat conflict with the Keynesian theory. … But of course on the facts the Radcliffe voice may be right that normally the Roosa effect of a raised rate of interest outweighs the Keynesian effect” (1959, p. 721). On the difference between monetary transmission according to Keynes and the Radcliffe Committee, see also Rousseas (1998).

38 This is indirectly confirmed by Laidler (1989b, p. 1148), who argues that Keynesians proposed incomes policy to reconcile full employment and price stability, starting from the premise that inflation was “mainly a ‘cost-push’ phenomenon”. However, while Laidler (1989b), once again, singles out the Report as one of the two “most distinguished products” of “postwar British Keynesian economics” (the other being Dow 1964, see Laidler 1989b, p. 1147), Rousseas complains that the view of the Keynesian economists was not incorporated in the Report, where all the emphasis went on monetary policy rather than incomes policy. See Rousseas (1998, p. 120).

39 While Sayers (1958, 1960) was generally doubtful about the responsiveness of investment to changes in interest rates, Cairncross (1960, p. 19) maintained that, after the war, nationalization in the transport, construction and utilities sectors had contributed to reducing the elasticity of investment to interest rates and the effectiveness of Keynesian monetary transmission altogether.

40 See the National Debt Enquiry’s first report, reproduced in Peden (2004, Ch. 11, and pp. 337–338, in particular).

Additional information

Funding

This work was supported by European Society for the History of Economic Thought.