BANKING: The Old Lady Shuts Her Purse

For 19 years, the Bank of England, London’s famed “Old Lady of Thread-needle Street,” has been a forgotten woman. She has had no control over Britain’s easy-money financial policy, has been merely the government handmaiden forced to keep the policy in operation. But last week, as the Conservative government announced its new financial measures (see FOREIGN NEWS), the Old Lady came back to power with a youthful bounce. She announced, with a nod of approval from Chancellor of the Exchequer Richard Butler, that she would again exercise control over Britain’s money supply.

In recent years, the bank has, in effect, been a machine for inflation. It has been forced to buy at low-pegged discount rates all the government short-term bills that the commercial banks and the discount market (finance houses which deal only in short-term bills) wanted to sell. Thus, the banks have been able to get ready cash for lending whenever they wanted. From now on, the Bank of England intends to shut her purse by 1) refusing to cash the bills before maturity, or 2) cashing them at a higher discount rate. In short, the new Tory government, recognizing the failure of direct controls, is finally putting to work indirect credit controls to strike at the real source of the inflation—the oversupply of money.

Shift of Power. The British measures are roughly similar to those which the U.S. Federal Reserve Board put into effect last March to squeeze the supply of U.S. bank credit. At that time, FRB abandoned its policy of buying all Government bonds at a pegged price (just as the Bank of England has now done with government notes), reasserted the power that had been chipped away by the U.S. Treasury.

Until sterling went off the gold standard in 1931, the Bank of England held sovereign sway over Britain’s economy. Whenever the nation seemed to be living beyond its means, the bank tightened the money supply, and cut down purchasing power by the same measures it instituted last week. But after sterling’s fall, the money power passed to the Treasury. The bank was compelled to buy all government securities at pegged rates from the market. In 1947, Sir Stafford Cripps relieved the bank of the obligation to buy long-term bonds at pegged prices. But until last week, the Old Lady still had to go on buying short-term bills.

High Hopes. What will be the effects of the new policy? Some London money men were inclined to belittle them, arguing that the tightening of credit was not drastic enough. They said that the “penalty” rate for cashing in notes, which was raised from 2% to 2½%, should have been boosted to 4%. But those who had seen the good effects of the credit-tightening in the U.S. had high hopes for the effectiveness of the new policy.

They hoped it would be pushed to the point where it would really hurt consumer-spending in Britain, stop the rise of prices & wages. Now that the Old Lady has her hand back on the purse strings, her admirers thought it would be difficult to shake her grip loose.