P25. Expanding the Credit Base

[Letter to The Economist, 10 September 1938, p. 498]

10 September 1938

To the Editor of The Economist

Sir,--In your interesting article of August 20th, [1] in which you discuss proposals that I have recently been making, [2] you distribute the emphasis in a way which goes far to emasculate them. Assuming that the primary move is an enlargement of the cash base, you correctly show from past experience that a corresponding increase of the clearing banks' investments cannot be expected to occur automatically, still less an appreciable fall in the gilt-edged yield. There are a number of variables which we should have to assume constant.

My proposal, on the contrary, is that we should take an increase of the clearing banks' investments as one primary and explicit objective, and adapt our action with regard to the cash base and Treasury Bill policy in the way best fitted to secure that objective. This is very different from expanding the cash base and then simply hoping for the best.

I visualise a conference between the Treasury, the Bank of England and the clearing banks. It would there be explained that, in view of the trade recession, it seemed expedient in the national interest that the clearing banks should increase their holding of investments by some amount between, say, £100 millions and £300 millions with the object of influencing the long-term capital market. The precise figures might well be determined in the course of the experiment. The clearing banks would then explain what expansion in the cash base and in the quantity of other liquid assets available for this purchase would enable them to go forward.

Nor need the discussion end there. Even in the sphere of investments, the clearing banks might, if consulting their own immediate interests only, be biassed too much in favour of liquidity. The further purpose being to reduce the long-term gilt-edged rate, and the ultimate purpose to stimulate new issues, the choice among suitable investments should be guided by that, having regard the way in which the market is normally influenced by the date of maturities and the net yields of stock, taking capital depreciation into account.

I do not think that this project need involve any sacrifice of legitimate banking independence. I take it that there must have been informal negotiations of some kind before Mr Chamberlain launched his great conversion scheme. [3] Each bank would be absolutely free at the conference to define the limits within which it deemed co-operation to be consistent with its shareholders' and depositors' interests. It is to be hoped that the co-operation that could be secured on this basis would be sufficient.

I am, etc.,

R. F. Harrod

Christ Church, Oxford

  1. 1. "Expanding the Credit Base", The Economist, 20 August 1938, pp. 371-73.

    2. Refers to a series of articles in, and letters to, The Times and The Economist, proposing to meet the trade recession by means of open market operation (Harrod 1938:9 , 1938:10 , 1938:11 , 1938:12 and 1938:14 , here reproduced as press items 20 , 21 , 22 , 23 , and 24 . For details on context see notes 1 to press item 21 and 1 to press item 22 ).

    3. See note 5 to press item 22 .


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