Keeping tabs on money is tricky for Britons, too
Bank of England officials have a certain sympathy for the recent money-measurement and other problems of the Federal Reserve System in the United States.Skip to next paragraph
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''I know exactly how it feels,'' one such official said. The British central bank has also faced similar measurement difficulties, although earlier.
The story goes back to May 3, 1979, when the Conservative government was swept into power with a fundamental aim, among others, of slashing inflation with a ''monetarist'' economic policy. By reducing the rate at which the nation's money supply was expanded, it was thought, inflation would die down without too much suffering.
The inflation objective has certainly been achieved - with the help of an exceptionally tight fiscal policy. In April retail prices were up at a 4 percent annual rate, compared with 10.3 percent when the Conservatives assumed power.
The path has not been smooth, however. Retail prices were up an average of 8. 3 percent under the Labour government in 1978; rose 13.4 percent in 1979; and soared 18 percent in 1980 (touching 29 percent at one point). One reason for this surge in inflation was the doubling of the value-added tax, to 15 percent, to slow consumer spending and increase tax revenues. Another key factor was that Prime Minister Margaret Thatcher honored a campaign pledge to accept the recommendations of a commission for a huge pay raise - 27 percent in the 1979-80 wage year - for civil servants and others in the public sector. The Labour Party had made a similar promise. But the wage move raised costs and thence prices. Average earnings rose 15.5 percent in 1979 and 20.7 percent in 1980. (By last year, earnings were up only 8 percent, and are up even less this year.) Energy costs were also soaring.
Further, the Bank of England had trouble controlling the money supply - just as the Fed did after it moved to a more ''monetarist'' monetary position in October 1979.
''Monetary developments moved around in ways not predicted,'' a British official recalls.
At the start, monetary targets were set only in terms of a wide measure of money known as Sterling M-3. The target range for fiscal 1980-81 was 7 to 11 percent. It actually grew 19.7 percent. In 1981-82, the target was 6 to 10 percent but actual Sterling M-3 growth was 13.3 percent.
Mrs. Thatcher was reportedly upset, wondering whether there were some Keynesian economists - those believing that interest rates are much more significant than money growth - in the bank staff sabotaging her plans. A few prominent American monetarist economists were invited to London to offer advice. Recalled an official: ''1980 was an uncomfortable year for the Bank of England.''
But Bank of England officials maintain there was no attempt to subvert Thatcherism. They have always believed in a firm monetary policy. But they admit that the new government did have more faith than they did in the steadiness over time of ''velocity'' - the turnover of money. And what has actually happened is that velocity has slumped more than usual in this past recession - just as in the United States. So a given amount of money resulted in less output of goods and services - again as in the US. And there were innovations in the financial markets causing havoc in the various measures of money - as in the US last year.