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The Lawson boom: excessive depreciation versus financial liberalisation1

Published online by Cambridge University Press:  12 September 2008

David Cobham
Affiliation:
University of St Andrews

Abstract

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Articles
Copyright
Copyright © European Association for Banking and Financial History 1997

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References

2 In the United Kingdom inflation rose from a low of 3.5% in 1986 to a peak of 7.1% in 1989, while within the group of countries comprising the G7 inflation rose from a low of 2.9% in 1987 to a peak of 4.1% in 1990, and within the EC inflation increased from 4% in 1987 to 5.3% in 1991. Annual data for GDP deflators from OECD, Economic Outlook (06 1994).Google Scholar

3 For further detail see, for example, Brown, R., ‘British monetary policy and European monetary integration’, in Sherman, H. et al. (eds), Monetary Implications of the 1992 Process (London, 1990)Google Scholar; Goodhart, C. A. E., ‘The conduct of monetary policy’, in Green, C. J. and Llewellyn, D. T. (eds), Surveys in Monetary Economics. I, Monetary Theory and Policy (Oxford, 1991)Google Scholar; and, more generally, Artis, M. and Lewis, M., Money in Britain (Deddington, 1991).Google Scholar

4 Goodhart, , ‘Conduct of monetary policy’.Google Scholar

5 For example, Cobham, D., ‘Loser pays’, Times Higher Education Supplement, 14 09 1990.Google Scholar

6 Forsyth, P. and Kay, J., ‘The economic implications of North Sea oil revenues’, Fiscal Studies, 1 (1980)CrossRefGoogle Scholar was the most influential proponent of the North Sea oil effect, while Niehans, J., The appreciation of sterling – causes, effects, policies, SSRC Money Study Group Discussion Paper (1981)Google Scholar was the clearest statement of the tight monetary policy effect. Trying to disentangle the relative size of these effects is outside the scope of this paper but see, for example, Bean, C., ‘The impact of North Sea oil’, in Dombusch, R. and Layard, R. (eds), The Performance of the British Economy (Oxford, 1987).Google Scholar

7 See Artis, and Lewis, , Money in BritainGoogle Scholar, for a convenient discussion, and Cobham, D., ‘The money supply process’, in Green, C. and Llewellyn, D. (eds), Surveys in Monetary Economics. 2, Financial Markets and Institutions (Oxford, 1991) for a more detailed account of the evolution of the credit counterparts approach.Google Scholar

8 It should be noted that the stock of Treasury bills rapidly became too small to fulfil the role required. See, for further details, Goodhart, , ‘Conduct of monetary policy’, p. 298.Google Scholar

9 As measured by the four-quarter growth of the retail prices index. These and other data are taken (unless otherwise indicated) from Economic Trends and Economic Trends Annual Supplement, various issues.

10 An initial peak of 8.2% in 1989, Q2, was followed by a small dip to 7.6% in 1989, Q4.

11 The relevant articles are reprinted as chapters 5 and 7 of Congdon, T., Reflections on Monetarism (Aldershot, 1992)CrossRefGoogle Scholar; the quotes are from The Times (Jul. 1988) and reprinted on p. 156.Google Scholar

12 Data for the growth of the real money supply (emphasised, for example, by Congdon, , Reflections on Monetarism, pp. 156–7)Google Scholar show a sharper acceleration from early 1986, but this reflects the short-run fluctuations in inflation (a minor upturn in 1985 followed by a minor downturn in 1986) rather than decisive changes in monetary growth.

13 See market shares in Buckle, M. and Thompson, J., The United Kingdom Financial System in Transition (Manchester, 1992), p. 103.Google Scholar See also the figures (Financial Statistics (Mar. 1989)Google Scholar) on the credit counterparts to changes in M4 and M5. Lending to the private sector undertaken by banks and building societies respectively was comparable in the second half of 1984, but bank lending rose much more rapidly from 1985 to 1987 and, in 1987–88, bank lending was more than twice the level of building society lending.

14 Financial change and broad money’, Bank of England Quarterly Bulletin, 26 (1986).Google Scholar

15 For example, Artis, M. J. and Lewis, M. K., ‘The demand for money in the UK, 1963–73”, Manchester School, 44 (1976)Google Scholar; idem, Monetary Control in the United Kingdom (Deddington, 1981), ch. 2.Google Scholar

16 Formally in the Chancellor's Mansion House speech in October. On the one hand, the authorities’ bill purchases, which completely dominated the bill market, were distorting relative interest rates. On the other hand, there were doubts as to whether such operations were having a genuine, or a merely cosmetic, effect on underlying monetary growth. See Goodhart, , ‘Conduct of monetary policy’, pp. 298–9.Google Scholar

17 The amount of bills held by the Issue Department of the Bank of England fell sharply from a peak of £11,043m. in Dec. 1985 to £6,717m. in Sep. 1986, but then rose to a new peak of £11,576m. in Dec. 1986, before embarking on a more sustained fall over 1987 and 1988.

18 See, for example, Goodhart, C. A. E., Monetary Theory and Practice (London, 1984), ch. 4CrossRefGoogle Scholar; Arris, and Lewis, , Money in Britain, p. 160.Google Scholar

19 Sargent, J. R., ‘Deregulation, debt and downturn in the UK economy’, National Institute Economic Review, 137 (1991).CrossRefGoogle Scholar

20 Lawson, N., The View from No. 11 (London, 1992).Google Scholar

21 This case is set out most persuasively in the Governor's Loughborough Lecture: ‘Financial change’.

22 Miles, D., ‘Housing and the wider economy in the short and long run’, National Institute Economic Review, 139 (1992). In real terms (1985 prices), net cash withdrawal rose from £5,348 in 1982, £5,566 in 1983, £7,131 in 1984 and £7,520 in 1985, to £12,571 in 1986, £12,221 in 1987 and £17,087 in 1988.CrossRefGoogle Scholar

23 Sargent, , ‘Deregulation, debt and downturn’, p. 79.Google Scholar

24 Lawson, , The View, p. 631.Google Scholar

25 Monetary policy in the second half of the 1980s’, Bank of England Quarterly Bulletin, 30 (1990).Google Scholar

26 Bayoumi, T., ‘Financial deregulation and household saving’, Economic Journal, 103 (1993)CrossRefGoogle Scholar; Carruth, A. and Henley, A., ‘Consumer durables spending and housing market activity’, Scottish Journal of Political Economy, 39 (1992)CrossRefGoogle Scholar; Miles, D., Assessing the impact of financial liberalisation and income shocks on consumption, mimeo, Birkbeck College and Bank of England (1994).Google Scholar Miles's results suggest that about a third of the increase in consumer spending between 1986, Q1, and 1988, Q4, was due to the rise in house prices (which can be associated at least in part with credit liberalisation), one-fifth was due to anticipated and unanticipated changes in income, and another fifth was due to real interest rate movements.

27 Walters, A., Sterling in Danger (London, 1990), p. 108.Google Scholar

28 Bank of England Quarterly Bulletin, 28 (1988), p. 8.Google Scholar

29 Debt figures from OECD Economic Outlook (06 1994). The same source gives calculations for the general government structural balance (% of trend GDP) which suggest some fiscal expansion in 1986 and 1987 (more than reversed in 1988). But such figures are highly sensitive to the assumptions used for their construction (they differ considerably, for example, from the figures given in the same source only six months earlier), so that it is difficult to give them much weight and particularly for a period when the personal sector saving ratio was far from constant.Google Scholar

30 Keegan, W., Mr Lawson's Gamble (London, 1989), p. 227Google Scholar; Smith, D., From Boom to Bust (London, 1992) p. 152Google Scholar; and Lawson, , The View, pp. 919–21.Google Scholar

31 Walters, , Sterling in Danger, p. 112.Google Scholar

32 Walters, A., Britain's Economic Renaissance (Oxford, 1986), ch. 7Google Scholar; idem, Sterling in Danger, ch. 5.

33 Giavazzi, F. and Spaventa, L., ‘The “new” EMS’, in De Grauwe, P. and Papademos, L. (eds), The European Monetary System in the 1990s (London, 1990).Google Scholar

34 Artis, M., ‘Counter-inflationary policy in the framework of the EMS’, in Round, J. and Nevin, M. (eds), The European Economy in Perspective (Swansea, 1994).Google Scholar

35 According to Lawson, , The View, pp. 784–5, 788–9, 794–5Google Scholar, Mrs Thatcher was concerned mainly about the foreign exchange market intervention which the policy involved, rather than about the low level of interest rates; she was also perfectly aware of the DM-shadowing policy at the time. Thatcher's own account, in her The Downing Street Years (London, 1993), p. 702Google Scholar, suggests even sterilised intervention would increase monetary growth and put downward pressure on interest rates.

36 On a base of average 1985 = 100, the 1979 figures are as follows: relative export prices 98.6; relative producer prices 97.0; IMF index of relative unit labour costs – actual 98.6 and normalised 88.9; and import price competitiveness 108.9.

37 Williamson, J., The Exchange Rate System (Washington, DC, rev. ed., 1985)Google Scholar; and see also Wren-Lewis, S., Westaway, P., Soteri, S. and Barrell, R., ‘Evaluating the UK's choice of entry rate into the ERM’, Manchester School, 54 (1991).Google Scholar

38 This paragraph draws on the ‘general assessment’ and ‘economic commentary’ in the Bank of England Quarterly Bulletin, 25 (1985), pp. 341–60.Google Scholar

39 The implicit money GDP forecast, produced by adding the official forecasts for real GDP and retail prices over the target year, was 7.25% and the explicit forecast for the growth of money GDP between 1984/85 and 1985/86 was 8.3%. See Cobham, D., ‘UK monetary targets 1977–86: picking the numbers’, in Cobham, D., Harrington, R. and Zis, G. (eds), Money, Trade and Payments (Manchester, 1989).Google Scholar

40 The official forecasts for the PSBR are published and these can be put together with estimates of what the authorities were likely to have expected for the other counterparts, to produce a sum for the credit counterparts in 1985/86 of 11.8% of £M3. See Cobham, , ‘UK monetary targets 1977–86’.Google Scholar

41 Bank of England Quarterly Bulletin, 25 (1985), pp. 518, 534–5.Google Scholar

42 See Keegan, , Lawson's Gamble, p. 181Google Scholar; Brittan, S., ‘The Thatcher government's economic policy’, in Kavanagh, D. and Seldon, A. (eds), The Thatcher Effect (Oxford, 1989), p. 33Google Scholar; Walters, , Sterling in Danger, pp. 99101Google Scholar; Smith, , From Boom to Bust, p. 61Google Scholar; Lawson, , The View, chs 33, 39 and 40Google Scholar; and Thatcher, , Downing Street Years, pp. 693–8.Google Scholar

43 Figures supplied by the Royal Bank of Scotland. The price fell to $12 in April, rose to $14 in May and then declined to its lowest point of $9.6 in July; over the rest of 1986 it hovered around $14. Monthly prices averaged $18 in 1987, $15 in 1988 and $18 in 1989.

44 Bank of England Quarterly Bulletin, 26 (1986), p. 6Google Scholar for the quotation; pp. 27–8 for the signal. Lawson, , The View, p. 650, notes that he had himself argued in 1984 the related case for the eventual exhaustion of North Sea oil to be countered by a real depreciation of sterling, an argument consistent with Forsyth and Kay, ‘The economic implications of North sea oil revenues’.Google Scholar

45 Lawson, , The View, pp. 653–6.Google Scholar

46 Keegan, , Lawson's Gamble, p. 183.Google Scholar

47 Brittan, , ‘The Thatcher government's economic policy’, p. 33.Google Scholar

48 Lawson, , The View, p. 651.Google Scholar

49 The impact of changing oil prices’, Bank of England Quarterly Bulletin, 26 (1986), pp. 331–2.Google Scholar

50 ibid., p. 333.

51 ibid., p. 451; and see also p. 475.

52 Bank of England Quarterly Bulletin, 27 (1987), p. 8.Google Scholar Lawson's own account stresses that he was concerned about the weakness of sterling as early as September 1986, but says that it was ‘not until the summer of 1987 that the Bank began to worry that monetary conditions may not be tight enough’. See The View, pp. 653–5, 659.Google Scholar

53 Keegan, , Lawson's Gamble, p. 193.Google Scholar

54 Funabashi, Y., Managing the Dollar: From the Plaza to the Louvre (Washington, DC, 1988), p. 186.Google Scholar

55 Keegan, , Lawson's Gamble, pp. 193–8.Google Scholar

56 Lawson, , The View, pp. 682, 683.Google Scholar He also notes that ‘there was no meeting at which the DM3 ceiling was formally agreed’ (p. 789).Google Scholar

57 Bank of England Quarterly Bulletin, 27 (1987), p. 189.Google Scholar

58 ibid., p. 479.

59 ibid., 28 (1988), p. 60.

60 See Keegan, , Lawson's Gamble, pp. 222–6Google Scholar; Smith, , From Boom to Bust, pp. 132–8Google Scholar; and, for the views of the chief protagonists, Lawson, , The View, chs 63–4Google Scholar and Thatcher, , Downing Street Years, ch. 24.Google Scholar

61 Bank of England Quarterly Bulletin, 28 (1988), p. 181.Google Scholar

62 Keegan, , Mr Lawson's Gamble, e.g. pp. 222–6, 230–2.Google Scholar

63 Bank of England Quarterly Bulletin, 26 (1986), p. 507.Google Scholar

64 Lawson argued at the time that at least part of that deterioration reflected private sector borrowing to finance the boom in investment. See The View, pp. 854–7.Google Scholar

65 ibid., pp. 804–5.

66 Bank of England Quarterly Bulletin, 27 (1987), p. 321.Google Scholar

67 In fact most measures of United Kingdom competitiveness did not return to their 1985 levels until early 1988.

68 Lawson, , The View, pp. 645, 799800, 991–3; for the veto see pp. 665–8, 681.Google Scholar

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