DECISION-MAKING IN BRITISH MONETARY POLICY, WITH IMPLICATIONS FOR THE UNITED STATES†

THE COORDINATION of fiscal and monetary policy in Great Britain is formally accomplished by unifying responsibility for such decisions under one Government Minister, the Chancellor of the Exchequer. This dissertation begins by examining the relations between the Executive branch of the Government (as represented by the Chancellor) and the central bank, the Bank of England, in the light of the nationalization of the Bank. The nationalization statute, the Bank of England Act (1946), removed the Bank from the private sector of the economy and placed it firmly in the public sector. The Crown, which in fact meant the Chancellor, was given the power to appoint Bank officials. The Treasury Minister was also given the right to issue "directions" to the Bank authorities. Directions were to be obeyed; no appeal to higher officials was possible. Thus, the Bank of England was to be subordinated to the Government. The Parliamentary Debates on the Bank of England Bill serve to confirm this view; control of the Bank was thought to be essential if the Labour Party was to carry out its economic program. Monetary policy was to be decided by the fiscal authorities. Were the aims of the Act carried out in practice? Was the Bank placed under the thumb of the Treasury? Treasury-Bank of England relations during 1945-51 were examined in some detail as was some evidence available for the Fifties in an attempt to answer these questions. It was concluded that the spirit of :the Act survived during the administrations of Labour Chancellors Dalton and Cripps (1946-50). But during the Gaitskell year in the Treasury (1950-51) and the Governments of the Tories (1951)-59), the second Governor of the postwar Bank, Mr. Cameron Cobbold, began a quiet but successful war of independence. The Governor reinterpreted the Bank of England Act to conform with his preconceptions of the proper relationship between a central bank and a Government. According to Cobbold, a subservient central bank was heresy; the Bank of England could be no less than an equal partner of the Treasury in the formulation of economic policy. Cobbold's views on central bank independence are rejected on two grounds. First, monetary authorities, as any public officials in a democracy, must be responsible to the electorate. An independent central bank is a paradox in a democracy. Second, successful economic policy requires that the tools available to mold the national economy be used in conjunction with each other; monetary and fiscal policy cannot be allowed to work at cross-purposes. Placing the responsibility and the weapons of stabilization policy under one head as was the intent of the Bank of England Act must be accomplished. Accordingly, a number of proposals are examined, and two are favored. The first, suggested by ex-Chancellor Gaitskell would make the Bank into a Treasury Department. There are some thoughtful objections to this plan, however, and a substitute one is put forth. The Bank's Governor would be made a political appointee, a Parliamentary Secretary, responsible to the Chancellor, so as to assure political responsibility. The Deputy-Governor would be made a Permanent Secretary so as to ensure continuity and technical competence. No longer will the