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.

''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.

Reading about the Fed system's problems with selecting between such measures as M-1 and M-2, a bank official spoke of having a feeling of deja vum.

In Britain, the narrower measure of money, M-1, was growing more slowly than targeted at the same time that M-3 was growing too fast. M-3 was growing fast partly because the so-called ''corset'' restrictions on commercial banks' deposits were removed in June 1980, causing a large reflow of funds into M-3. The issue becomes complex and controversial.

''Acres and acres of paper have been covered by that argument,'' noted Dr. G. Brian Henry, director of research at the National Institute of Economic and Social Research. ''Monetary policy has been confusing if not unsuccessful.''

Oddly, the fact that actual money growth exceeded the leading Sterling M-3 target may well have been a good thing. The nation might have suffered an even worse recession and more unemployment if the target had been met, said government officials.

As a result of these monetary problems, Bank of England and Treasury economists have become what someone has called ''mellowed monetarists.'' In the Federal Reserve System in the United States, a similar money measurement and behavior problem has produced what are termed ''pragmatic monetarists.''

In both instances, the central bankers are looking at a wider variety of statistics in determining monetary policy. In Britain, they look at several measures of money, at private sector liquidity, and at such other factors as the exchange rate, nominal interest rates, price expectations, and so on.

''This experience helped Mrs. Thatcher realize you have to be pragmatic,'' it was noted by a high official. She continues to pursue her goals with a steadiness of purpose and resolve. But she has become ''somewhat more flexible'' in the mechanics and means of achieving her objectives.

Last year the Bank of England was able to get money growth to fall within its target range of 8 to 12 percent. ''We almost held a party to celebrate,'' an official joked. ''It was our most successful year.''

Since the last measuring period, in February, the broad measure of money, Sterling M-3, has been growing at an annual rate of about 20 percent - far above the current 7 to 11 percent target.

Thus the Treasury and the Bank of England have a similar problem to that of the Fed in the US: Can they bring down the rapid growth rate of money (M-1 in the US) without interrupting the youthful recoveries in both nations?

There's another similarity between the two English-speaking nations: Both governments are committed to what is sometimes called ''monetary gradualism.'' In other words, both hope to keep inflation down and even reduce it further by reducing the growth of money by perhaps 1 percent each year. In fact Mrs. Thatcher, in her more ambitious moments, will talk about knocking inflation down to zero percent - a possibility considered unlikely and unwise by most British economists. But she might try. She is not nicknamed ''the Iron Lady'' for nothing.


You've read  of  free articles. Subscribe to continue.
QR Code to Keeping tabs on money is tricky for Britons, too
Read this article in
QR Code to Subscription page
Start your subscription today