E. 8. Central Banking [a] , [1]

Two Preliminary Points

1. National control of central banking [2] may be regarded not primarily as an end in itself, but as the only effective means of putting a definite policy into operation. A private institution would probably be unwilling to be responsible for the policy. The public requires security that everything shall be done which can be done to carry such a policy through; and, in case there were real difficulties, the government and its economic experts must know at the earliest opportunity the nature of these difficulties, in order to take action, perhaps through its other agencies to combat them. The new bank is not simply to do under State auspices what the Bank of England has formerly done itself.

2. The policy is definite and can be stated in advance. Moreover some success could be secured independently of the general achievement of socialisation in all departments. [3] This seems to me to be tactically important. Control of central banking would no doubt lead on logically to even necessitate other forms of control. But some fruits would be reaped outright. This would encourage public opinion. Real danger is that of socialisation begun in ways (e.g. nationalisation of mines, railways etc.) which show no tangible benefits pending universal socialisation, and the whole policy may become discredited and universal socialisation put off till doomsday. [4]

Objective of Central Banking Policy

Provision of stable medium of exchange. [5]

How is stability to be defined? Hard and fast definition not desirable. Basic assumption that real income of the community is increasing and will continue to increase. [6] This gives limits for definition. General level of prices not to rise, nor to fall by more than the productivity per head is increasing. Money wages would in no case have to fall. If prices were stable money wages might rise by an amount not exceeding (1) the increase in real productivity per head, and (2) such an increase in "relative" wages (i.e. wage earners' share in product) as may be considered feasible. If prices fell by the amount (1), money wages could only rise by the amount (2).

The precise rate at which expansion in the quantity of circulating medium is to be increased within the limits of this definition had best be determined by trial and error and with reference to the general situation as it developes.

Points which will arise in pursuit of our objective

1. Should we adhere to an international monetary standard (e.g. gold)? Stabilization of the value of gold (called glibly "proper working of gold standard") implies more drastic control and more widespread interference than most people realise at present. It is very unlikely that a sufficient measure of international agreement can be secured for a long time. All measures of national planning will break down if confronted by severe monetary fluctuation. Risk too great to take, if success is to be achieved in other parts of policy. We must keep our destiny in our own hands. The most we should offer in the way of tying [b] ourselves to the international standard is stabilization in terms of gold subject to periodic revision. If reasonable notice was given of upward or downward revaluation of the currency, the inconveniences of having no par of exchange would be sufficiently met. These revaluations would be the duty of the central bank.

2. The increase of money required for stabilization may exceed the increase of short capital required for industry. At present the increase of money is bound up with the increase of short capital. It is probable that the central bank should have linked [c] to it institutions concerned with the provision of long capital. Otherwise there might be a plethora of short funds, with awkward results. At present short capital is found by the credit creation of banks: and it is probable that part of our supply of long capital should be created in this way.

There may be something in currency cranks' views about the need for consumers' credit. It might be desirable to pump some of the requisite amount of money into circulation by a planned budgetary deficit.

3. Proper monetary policy may be endangered by a tendency of capital to leave the country, if rates of interest tended, as a result of this policy, to stand lower [7] here than elsewhere. I dont believe that the export of capital, if desired by individuals, can be checked by anything less than the kind of rigid control of the whole economic system exercised by U.S.S.R. I suggest that the immediate policy should be to make home investment desired by individuals. The need to check the outflow of short funds is another reason for not adhering to an international money standard. Long term home investment could be encouraged by guaranteed issues at subsidised rates. These should not be the immediate concern of the central bank, which will [8] confine itself to monetary policy in the narrow sense, but of an institution [d] in close co-operation with the central bank (see also 2 above).

4. Stabilization of money would not solve the unemployment problem, but is a pre-requisite to [e] its solution, and would produce some good effects immediately. The existence of a central bank committed to and operating a stabilization [f] policy would immensely facilitate the work of such control - institutions for regulating the flow of employment as might be simultaneously or subsequently set up.

The way in which the task of a stabilizing central bank [g] must impinge on other problems of central control as shown in these 4 paragraphs seems to involve nationalisation of the central bank.

The objective is to provide a stable medium of exchange. The nationalisation of the Bank of England is, probably, the only effective means of securing this. The objective is on the one hand necessary to the success of socialism in other departments, and on the other must appeal to almost all shades of opinion among those interested in monetary reform. [9]

  1. 1. Outline of a paper read at the New Fabian Research Bureau (NFRB) and Society for Socialist Inquiry and Propaganda Week-end Conference on the Socialisation of Banking on Saturday 30 January 1932 at 4.30 p.m. This and other outlines are dated 27 January, and seem to have been distributed beforehand to the participants in the conference.

    This conference was part of the NFRB's and the Labour Party's efforts to determine what institutional structures would be necessary to control the banking and financial systems in the event of a future Labour government. Other speakers were E. A. Radice on "Banking and Industry", H. V. Berry on "The Short Term Money Market" and E. H. Davenport on "The Capital Market" (see the invitation form and the minutes in FS, J2/3/118-119 and J/14/1/1-7). For a detailed account of the framework in which these debates took place see E. Durbin, New Jerusalems. The Labour Party and the Economics of Democratic Socialism (1985), in particular chapter 8.

    Harrod later took part in further efforts in this direction by collaborating in the elaboration of a "Proposal on the Control of a Financial Panic" (see note 3 to letter 272 ), in speaking on "Money and Prices" at the NFRB Conference on Some Aspects of Socialist Planning (4-5 November 1933; minutes in FS J 14/2/1-4), in submitting a memorandum on the "Possible Scope of the Costings Group's Work" (here as essay 14 ) and in commenting upon a draft of Meade's memorandum on "The Exchange Policy of a Socialist Government" (see letter 357 ). On Harrod's position of a Liberal supporting the Labour Party see note 1 to essay 7 , in particular [jump to page] .

    2. National control of the Bank of England was advocated by most member of the Labour Party, and many non-socialists also accepted this idea. On 4 October 1932, the Labour Party's annual conference adopted as its official policy the nationalization of the Bank of England and of joint stock banks. There is no evidence as to Harrod's position at this point regarding the nationalization of joint stock banks: however, in an untitled paper written in mid-1933 Harrod maintained that state control of the banking system would only be necessary in the unlikely event of the joint stock banks failing to co-operate with the proposed policy (here as essay 12 , [jump to page] ). Similarily, in December 1933 he suggested to Cannan how the joint stock banks could be induced to co-operate with an expansionary credit policy by means of issues of Treasury Bills and relying on their maintaining a fixed proportion of money to deposits (see letter 334 and, for a restatement of a similar argument, Harrod's article in The Times on "Meeting a Trade Recession": Harrod 1938:11 ). The implication is that at that point Harrod implicitly rejected the argument that unless controlled by state authority joint stock banks would fail to supply the industry with the required amount of capital--as suggested, for instance, by Radice in his paper on "Banking and Industry", read right after Harrod's speech (minutes, in FS J/4/2-3).

    3. On the choice of industry for socialization see Harrod's comments to Meade's "Outline of Economic Policy for a labour Government", letter 447 to Meade of 22 April 1935.

    4. Harrod's Ms draft (see source note a ) runs as follows: "Real danger that if socialization is begun in ways (e.g. nationalization of mines, railways, etc.) which show no tangible benefits pending universal socialisation, whole policy may become discredited and universal socialisation put off till doomsday."

    5. Stabilization of domestic prices was eventually adopted as official party policy by the Labour 1932 annual conference.

    6. The assumption of a basis of continuous growth of real income, that later played such an important part in Harrod's dynamics, seems to have been shared by the NFRB member who took part in the debates on pricing policy, Meade and Durbin in particular; see, for a more detailed discussion, D. Besomi, The Making of Harrod's Dynamics (1999), pp. 39-40.

    7. In the Ms draft, Harrod specified: «much lower».

    8. In the Ms draft, Harrod used «should».

    9. According to the conference minutes, Harrod's speech seems to have strictly adhered to the outline prepared and distributed beforehand. The debate developed as follows:

    • G. D. H. COLE replying, said that he thought that the objective should be providing sufficient credit for the needs of industry rather than maintaining stable prices. Stable prices conditions would appear to be a better term. With regard to the international question it would be possible to stabilise the exchanges for short periods by fixing the buying price for gold subject to alternation as conditions changed. He thought that the control of the export of capital was not really so difficult as Harrod suggested, and that this control would be more easily enforced as industries became socialised.

      Perhaps an equally vital question was the form which the socialisation of the Bank of England would take. Cole was against the representative system suggested in "Labour and the Nation". The Board must consist of technically qualified full time officials. There might possibly be in addition a representative Council which would have the right of appeal against the decisions of the management, but Government control should only be exercised on matters of broad policy. The Board would be loosely responsible to some special government department (not the Treasury), and the bank would be part of the industrial rather than the budgetary mechanism of the State.

    (Labour and the Nation, the final draft of which was written by R. H. Tawney, was adopted by the 1928 Labour Party's conference as the official policy statement. For further details see for instance E. Durbin, New Jerusalems, pp. 60-61.)

    • E. G. CLARK urged that monetary policy should have as its primary object the stability of the price level (possibly on the consumptive price level) for three reasons (1) the psychological advantage of rising wages with increasing production, (2) the avoidance of the big increase in real rentier incomes as production increases, (3) the necessity of having some clear objective standard.

      D. BARBER said that the possibility of steadily rising prices must not be overlooked. This might prove to be the best way of taxing the increased rentier class that would exist in the first stages of socialist development. He thought the difficulties regarding the export of capital were much exaggerated.

      G. SWARTZ, dissenting from all previous speakers pleaded in favour of the gold standard, and strenuously opposed modern inflation tendencies.

      A. T. K. GRANT emphasised the need for giving forward exchange rates, and suggested that the Bank of England might well do this even if its buying price of gold was subject to alteration from time to time.

      E. F. WISE approached the problem of price policy from the political side. It was essential that rises in wages should occur and that we should adopt a policy which would ensure that election promises of higher wages could be carried out. On the question of the Board he agreed broadly with Cole, but emphasised the danger of control by a banking bureaucracy which the Council would continuously have to watch.

      After a number of other contributions notably from Lord Marley who suggested the possibility of indefinite inflation, Harrod summed up, and the discussion ended at 7.15 p m. [Minutes, New Fabian Research Bureau Week-end Conference on the Socialisation of Banking, FS J/4/1-2].

      1. a. Of this document two versions survive: an AD, three pages, in FS J2/1-3, written in an abbreviated style (articles are often missing, and subjects and verbs are sometimes left out), and a TD, two pages, in FS J/14/8-9 and J/2/3/120-121, dated 27 January 1932, being a transcription of the manuscript. The typescript re-introduces the missing articles and other missing parts of the sentences, but also introduces a few mistakes or changes of emphasis. Here the Ts is reproduced, as it was distributed to the participants in the conference (see note 1 ); mistranscriptions are indicated in notes, where relevant.

        b. Ms and Ts: «tieing».

        c. Ms draft: «linked».

        d. Ms draft: «institution or institutions».

        e. Ms draft: «of».

        f. Ms drafts: «stabilizing».

        g. Ts: «task of stabilization control-bank» (the Ms draft is used here).

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