bain_y_howells__monetary_economics__policy_and_its_theoretical_basis

a way round it, and the authorities who revised the rule to block the loophole
and so on. However the monetary aggregates were to be restrained, direct, or
non-market, controls should play no part.
To reinforce the theoretical shift, there was also a partial change in the
institutional constraints. As we saw in Equation 3.18, the money supply will
change when the central bank uses exchanges between domestic currency and
foreign assets as it is obliged to in a fixed exchange rate regime. This can
severely hamper any attempt to target the domestic money supply and is one
widely recognised source of money supply endogeneity. By 1970, however,
the Bretton Woods fixed exchange rate system had begun to unravel and powerful
claims were being made for floating exchange rates. In future, monetary
authorities would have more freedom to target the domestic money stock.
1971-79: ‘Competition and Credit Control’
THE EVOLUTION OF MONETARY POLICY IN THE UK 317
By the end of the 1960s the authorities were becoming increasingly concerned
at the effect of the accumulation of controls on the structure and in particular
the competitiveness of the banking system. The objections to the battery of
‘requests’, ‘guidelines’, ‘ceilings’ and other forms of direct control were set
out by the Governor of the Bank of England in 1971 (Bank 1971a). The objections
were those which routinely apply to all non-price methods of rationing:
they encourage inefficiency, inequity and evasion.
Inefficiency arose, it was alleged, by diverting funds (priced below the
market clearing level) into projects (typically in exports and manufacturing)
which were favoured by government policy but whose return was less than
that on other projects (often connected with property development or consumer
goods). Inequities arose at many points. For example, the regulations
discriminated against those institutions to which they applied, in favour of
those to which they did not. Typically the burden of control fell most heavily
upon the clearing banks to the benefit of existing non-bank financial intermediaries
and of newly created secondary banks whose characteristics were
designed to keep them just outside the reach of the controls.
The growth of new markets and institutions exempt from the controls
yields a wealth of examples of regulation-induced innovation. 5 More importantly
here it was a demonstration of the classic black market effect of nonprice
regulation. As soon as controls frustrate both sides of the market (banks
and their clients) they create a market incentive for evasion. This in turn
requires new regulation, and expenditure upon the resources required for
enforcement. Furthermore, it also distorts the meaning of existing indicators
and deprives the authorities of valuable information. It was this experience of
seeing controls imposed at one point countered by circumventory innovations