Sovereign Debt Management and the Transformation from Keynesian to Neoliberal Monetary Governance in Britain

ABSTRACT

Private financial markets are central to the implementation of monetary governance. This necessary integration of public and private finance means the way states govern must evolve with developments in financial markets. This article examines how the rise of liability management underpinned a shift to market-based banking and transformed the operation of monetary policy in Britain. It assesses the period of reform between 1967 and 1981 and what this meant for monetary governance. Political economy literature depicts this period as a shift to depoliticised, deregulated governance with public authority giving way to market power. This paper challenges this perspective on the grounds that it misconstrues the problem policymakers faced. The shift from Keynesian to neoliberal monetary governance came in response to the change in banking practice with the rise of liability management and a parallel money market. This underpinned an explosion of credit creation that the old system of monetary policy, organised around the Base Rate and ‘primary’ discount market could not fix. As a result, the monetary authorities had to render this new financial environment governable. The period should therefore be reassessed in terms of the capacities the state attempted to construct to conduct monetary governance.

KEYWORDS:

• Liability management
• sovereign debt management
• monetary governance
• monetary policy

Acknowledgements

I would like to thank Samuel Knafo, Nick Taylor, Fabian Pape, Ben Clift, Chris Rogers and the anonymous reviewers for their very insightful advice and guidance.

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes on Contributor

Sahil Jai Dutta is lecturer at the Political Economy Research Centre, Goldsmiths College, University of London. His research focuses on British political economy, financialisation, sovereign debt management and public sector reform.

Notes

1 Alessandri and Haldane (2009) show how return on equity for UK banks jumped from around 5 to 25 per cent between 1966 and 1972, the period I refer to broadly as the credit revolution, with banks rapidly reducing their ratio of liquid assets to total assets. Moreover, having declined since the end of the second world war, UK banking assets as a percentage of GDP began to grow rapidly in the late 1960s, crossing over 100 per cent of GDP by 1975.

2 Konings (2011) has examined the importance of CDs to American financial development and Revell (1968) made one of the first and most important analyses of the rise of secondary banking and CDs in Britain.