An Overview of the Economy, 1960–85

  • John Grady
  • Martin Weale


Before discussing developments in British banking it is helpful to form an overview of the major movements in the British economy during the period. This chapter therefore begins by considering the path of output and fluctuations in inflation during the period. This is followed by a brief survey of movements in money and credit and a discussion of fluctuations in interest rates and asset prices. The purpose of this is to emphasise the factors which had important impact on the evolution of the banking sector, rather than to provide a complete analysis of the economy.


Interest Rate Gross Domestic Product High Interest Rate Bank Deposit Price Inflation 
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Notes and References

  1. 1.
    The initial effect of the devaluation on the trade balance was perverse. Import values rose, but it was a while before export values increased. Thus in 1968, for the first time, Britain had to seek credit from the International Monetary Fund.Google Scholar
  2. 2.
    Although this growth rate is close to the average for the 1960s, it takes place in a background of high unemployment and is slow for a period of economic recovery.Google Scholar
  3. 3.
    Money is principally a product of the banking system. Apart from the relatively small amount of banknotes in circulation, money consists of deposits with banks. Interbank deposits are netted out and the simple identity holds. After 1981 ‘banks’ include all the monetary sector.Google Scholar
  4. Bank lending includes not only overdrafts and advances but also purchases of securities such as gilt-edged stock. Non-deposit liabilities include debentures and share capital of the bank, less assets such as fixed capital; they are normally a relatively small item.Google Scholar
  5. 4.
    Although there have been occasions in which large changes in the money stock have been associated with changes in lending overseas (for example, 1977), normally changes in domestic lending dominate.Google Scholar
  6. 5.
    The contribution made by the public sector to monetary expansion can easily be overstated. See, for example, Cooper (1984, Chapter 6).Google Scholar
  7. 6.
    The IMF agreements of both 1968 and 1976 required control of domestic credit expansion. This is equal to the change in the money stock, less the deficit in the current account of the balance of payments.Google Scholar
  8. 7.
    £M3 represents holdings of sterling notes and coins, and sight and time deposits in the hands of the public, while M3 includes holdings of foreign currency as well.Google Scholar
  9. 8.
    Nominal GDP is the volume of output multiplied by the price level; if long-run forces generate a tendency to full employment, the volume of output is given, and thus control of nominal GDP ensures control of the price level.Google Scholar
  10. 9.
    The minimum lending rate was ‘formula related’ to the average yield on Treasury bills during the three preceding weeks, whereas the Bank Rate had been fixed administratively. But the minimum lending rate was in fact fixed administratively on occasions and the formula approach was abandoned in April 1978.Google Scholar
  11. 10.
    An early casualty was the Scottish Co-operative Wholesale Society’s Banking Department which had undertaken to lend at prefixed rates and faced losses of £29m as interest rates rose in 1973. More recently Clive Discount lost half their shareholders’ funds in 1979 with the jump in the minimum lending rate. Smith St Aubyn earned a reputation for playing the gilts market, rather than restricting themselves to the normal business of a discount house. They lost all their equity base in 1981, mainly as a result of losses on a large holding of 15 per cent Treasury Stock, 1985, whose price showed unusual volatility. Nevertheless, they were able to float a rights issue in order to rebuild their capital base.Google Scholar

Copyright information

© the Estate of the late John Grady, and Martin Weale 1986

Authors and Affiliations

  • John Grady
  • Martin Weale
    • 1
  1. 1.Department of Applied Economics and Clare CollegeCambridgeUK

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