In recent years , the bank has worked in close co-operation with the treasury. Its market policy reflected that close co-operation aimed so to control the volume of credit and currency that was roughly sufficient for the day to day exchange work to be done and thus kept internal commodity prices steady and if possible at a level that would give home merchants and manufacturers a competitive advantage in foreign markets. When credit showed signs of too great an expansion, the bank drew off some of the credit from the market by selling bills or securities for cash and when it was in short supply , created credit to redress the deficiency by buying bills or securities. There were various means by which the bank could achieve these ends but the principal one was in connection with the issue of treasury bills. Treasury bills are the chief way by which the government borrows the money required to meet the current short term needs. The issues are made by the bank of England and they are mainly held by the banks and the members of the money market. Something like four million and seven hundred thousand of these bills are so held. They are issued by tender each week , at a discount and are for the most part of three months duration. If it appeared advisable to the bank to restrict credit , the bank and treasury would offer a larger amount of new treasury bills than was necessary to pay off the maturing bills , if it appeared advisable to expand credit , a smaller amount of new bills than those maturing would be offered and then market discount rates would become easier. It should be noted that because of the deficiency of first class bill became a necessity to the banks and the money market generally as a short period rate to lowest possible level with the result that the current rate of discount for treasury bills tends to be rather significant. During the years when the bank rate was scarcely varied at all the treasury bill rates was scarcely varied at the treasury bill rate was indeed , more significant than the bank rate. During the wars of the second world war, bitter days though , monetary policy was at first more or less ignored as a means of controlling the national economy and while recently the bank rate has been used there have being few signs of open market operations being applied with the vigor that they were in the early 1920’s There are numerous facets to open market operations which cannot be described in detailed here but some of them will however be mentioned. Quite apart from influencing the supply of treasury bills the bank can buy or sell securities in the open market. If it sells securities prices are forced down –yields rise and so do interest rates. Equally the joint stock banks are caused to restrict their advances and their customers are compelled to discount their bills at the bank of England- at a high bank rate. For clarity these open market operations affecting the volume of credit can be summarized as follows-
( (1) Increase the supply of treasury bills- This results in the increase in short term interest rates and may result in some people being forced to discount bills at the bank of England.
(2) Raise the bank rate- The effect of this move is real enough but it tends to be psychological and conventional rather than the result of cause and effect. It is conventional for other short term interest rates to follow the bank rate. It is known that an increase in bank rates indicates a government intention to tighten credit. The bank rate itself cannot be truly effective unless people are compelled to discount bills with the bank of England for lack of facilities at lower rates elsewhere. Open market operations can make it effective in this way.
(3) Sell securities – This has the effect of raising longer term interest rates causing the commercial banks to restrict credit and forcing the discount market to go to the bank.
For the sake of credit expansion , the bank can act as follows-
(a) Reduce the supply of treasury bills.
(b) Reduce the bank rate
(c) Buy securities.
Operations to expand or contract credit are bound of course to have an effect upon international exchange rates but in the 1930’s these were more directly affected by the exchange equalization account.
Exchange Equalization Account- It was established by 1933 budget and actually came into operation in July that same 1933 with resources amounting to 160 million pounds sterling. These were subsequently considerably augmented and in October 1950 they stood at 1,175 million pounds sterling. They consist primarily of gold and foreign exchange. The object of the fund was to reduce short term fluctuations in exchange rates by a policy of intervention as opposed to one of restriction. Intervention is of no avail in the event of a permanent shift in the value of sterling. Success is dependant upon there being fluctuations in both directions so that gold and foreign exchange lost when sterling is weak can be replaced when it is strong.In August , 1942, the support of the account for sterling was withdrawn. This was done in order to conserve the country’s reserves of gold and foreign currencies and because it was evident that the downward movement of the pound in terms of the dollar was no short term fluctuation but the inevitable result of heavy imports that were being made from the dollar area. From time onwards restriction became the order of the day and exchange control of a more or less severe nature has persisted to even these present times. The exchange equalization account still exist but it is no longer the primary means of controlling sterling exchange rates. It is to be expected and hoped that a time will come again when exchange restrictions are no longer necessary. The strength of sterling in the early months of 1954 many years ago then was encouraging. If that strength should be maintained for it was, then full convertibility for current as opposed to capital transactions may come sooner than had being expected. Strength alone is not enough however and it seems most unlikely that any government would have embarked on convertibility without some form of guarantee from the United states of America of the international monetary fund. This would supplement the country ‘s gold and dollar reserves, which are considered by most people to be too low to sustain such an operation.
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