An Assessment of Monetary Policy

The fear of a post-war return to mass unemployment, which was evident, for example, in the report of National Debt Enquiry of 1945, happily was not realised; the main economic problems of the 1950s were problems of recurrent excess demand, namely inflation and exchange rate weakness.1 Unemployment was very low, with cyclical fluctuations, throughout the decade. It is fair to add, though, that there was no certainty that unemployment would not become a serious problem once again, and this fact must help to explain Macmillan’s hyperactive expansionism of 1959. Although inflation was widely perceived as a serious problem, particularly in 1957, there was no universally accepted measure of it. The retail price index was not a perfect indicator, because it was affected by changes in indirect taxes and subsidies. Nevertheless, retail price inflation fluctuated consistently with other indicators of excess demand (Figure A3): it increased very sharply during the Korean War boom, and fell back equally sharply after the boom had ended and after the monetary policy tightening of 1951–52; it rose again from mid-1954 as domestic demand pressures grew; and it fell back again after 1956 as tighter domestic policies had an effect. The average rate of inflation between 1951 and 1959, measured by retail prices, was 4.3%. This was only moderate by later standards, but it was much higher than between the wars, or than in the pre-1914 days of the gold standard.2