A Brief History Of The Bank Of England’s Endogenous Money Policies: An Ode To Roy Harrod

After the demise of the Bretton Woods system and the rise of Thatcher, the British began to care less and less about their balance of payments position. This is because they came to find — rather accidentally, it should be added — that capital inflows into the City of London were usually (but not always) sufficient to maintain the value of the sterling. And so, the era of stop-start economic policy came to an end. Since then the structure of the Bank of England has come to more so resemble that of the Federal Reserve in the post-war era; right up to their recent endorsement of endogenous money theory this year.

Harrod is also quick to note that the Bank of England stands behind the market for government debt at all times and effectively sets the interest rate on this debt through its operations. This is as true today as it was in Harrod’s time but is not spoken about very often. Harrod’s presentation is top-class in this regard in that he highlights that the rules put in place for bidding in the primary market for government debt operated seamlessly with central bank operations to set the effective interest rate on government debt. He writes,

Discount Houses are under an implicit obligation to take up Treasury Bills at issue each Friday. If the rise in interest rates has not achieved an attraction of outside funds into the market, nor deterred borrowing [by the government], the Discount Houses may be in a difficulty. The Government cannot trim down at short notice the amount of Treasury Bills it asks the market to take up. In such circumstances the Discount Houses will be unable to balance their books without resort to the Bank of England. If they go to the front door, they will lose money [i.e. they will be penalised, as we saw above]. They may have to put up with this for a week or two. But if the market remains inelastic and the Discount Houses have to go and borrow at the Bank week after week, the situation becomes intolerable. The Bank may seek to ease it by allowing borrowing at the ‘back door’. To the extent that it does this, or indeed to the extent that there is borrowing at all, the purpose of the original squeeze will be frustrated. The Bank will have reduced the money supply by Open Market operations and have had to replenish it again by ‘back door’ lending. (p56)

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