Background to the Introduction of Monetary Targets in the UK

Abstract

The movement towards the use of announced, quantitative targets for the growth of the money supply in the UK started in the mid-1960s. During the 1950s and early 1960s, the UK economy grew at a rate which was sufficient to keep unemployment at a very low level. Economic policy was aimed largely at ‘managing demand’ so as to achieve such a level of activity. The constraint on the government’s demand management was the maintenance of the value of the exchange rate at $2.80 to the £. When economic growth became too rapid, and the balance of payments deteriorated, economic policy would become more restrictive in order to moderate demand, correct the balance of payments position and hence moderate pressure on the exchange rate. In the period of correction, any balance of payments deficit was met largely by running down the official foreign exchange reserves.