In 1957, the British government formed a committee “to inquire into the working of the monetary and credit system, and to make recommendations.” In August 1959, this committee issued a report called the Radcliffe Report after the committee chairman, Lord Radcliffe, that played down the importance of keeping the growth of the money stock within strict limits. The report became a symbol of the kind of government views of monetary policy that let inflation accelerate and develop a momentum of its own in the 1970s. According to Glyn Davies (1994), “No official report has ever in British history (nor I believe elsewhere) shown such skepticism regarding monetary policy in the sense of trying to control the economy by controlling the quantity of money” (400).
The report was sprinkled with such exaggerated statements suggesting that banknotes are a relatively unimportant part of the money supply and that the supply of banknotes should respond passively to the needs of trade.
The report cited two main factors that impaired the operational significance of regulated money stock growth. The first factor was the importance of monetary substitutes that were always ready to come forth and fill gaps in the money supply. Obvious examples of money substitutes, or near-monies, were savings accounts and
government bonds. The report stressed that it was an individual’s liquidity position, rather than money holdings, that shaped that individual’s spending decisions. An individual with modest money holdings might nevertheless be in a very liquid position financially.
The second factor hampering the effectiveness of regulated money stock growth was the velocity of circulation. An increase in velocity has the same economic impact as a money stock increase, and changes in velocity can offset changes in money stock growth. The flavor of the report’s findings is captured in the following passages:
If, it is argued, the central bank has both the will and the means to control the supply of money . . . all will be well. Our view is different. It is the whole liquidity position that is relevant to spending decisions. . . . The decision to spend thus depends upon the liquidity in the broad sense, not upon immediate access to money. . . . Spending is not limited to the amount of money in circulation. (400, author’s emphasis)
In a highly developed financial system the theoretical difficulties of identifying “the supply of money” cannot be lightly swept aside. Even when they are disregarded, all the haziness of the connection between the supply of money and the level of total demand remains: the haziness that lies in the impossibility of limiting the velocity of circulation (Davies, 1994, 401).
The findings of the Radcliffe Report essentially threw out the control of the money stock in the arsenal of weapons against inflation, a weapon that was sorely needed in the 1970s. The views expressed in the report became economic orthodoxy in the 1960s, and treated as the accepted view in economics textbooks. As inflation mounted in the 1970s, the views of the Radcliffe Report came under increasing criticism, and by the 1980s the quantity theory of money had largely supplanted the views of the Radcliffe Report. The quantity theory of money emphasizes the connection between the quantity of money and inflation.
References Davies, Glyn. 1994. A History of Money.
United Kingdom. 1959. Report of the Committee on the Workings of the Monetary System, Cmnd. 827.
