Discussion Paper: ‘Money in Britain, 1959–69’

Any discussion of the growth of monetary arid financial institutions can focus on at least four different, but not necessarily independent, aspects. These are: 1. The efficiency of financial institutions’ operations: This is primarily a technical question, a sort of production function problem involving laws of returns. 2. Equity considerations: For example, is the growth and evolution of financial institutions related to price discrimination against certain borrowers or submarket borrowers? Do bankers make overly large profits for performing a public service for which they have a semi-monopolistic franchise? 3. Monetary effects on the real domestic sector and the international sector. For example, how does the growth of financial institutions affect aggregate output levels? The Radcliffe Report suggests two possible mechanisms through which monetary changes operate on the real sector. These are (a) the interest incentive effect which recognizes that changes in the rate of discount will change the present value of any given income stream and therefore alter the demand price for capital goods, and (b) the general liquidity effect, or what I would call the availability of finance effect. The Radcliffe Report, in my opinion, tends to downplay the importance of the quantity of bank money in this latter effect by rolling it into the portmanteau concept of the ‘whole liquidity position of the economy’. This view seems, at times, almost to disregard the fact that borrowers must have bank money if they are to make their demand-price calculations of investment projects operational in the capital goods markets. Since the ability of businessmen significantly to increase their demand for investment goods by arranging for increased clearings of debts outside the banking system is, in the short period, extremely limited, any increase in the availability of bank money to markets where there is an ‘unsatisfied fringe of borrowers’ will result in a significant increase in the demand for goods. 4. Resource allocation: The differential growth and evolution of financial institutions will affect the allocation of resources not only between employment and unemployment, but also between the consumption and investment sectors, and among industries in each sector.