§ I now want for a few minutes to consider the techniques of monetary control, and to put forward certain proposals for consideration. It is recognised in every country that effective control of the monetary system is an indispensable part of economic management. By "effective" I mean that the authorities must be able to bring about any necessary tightening of the system when this is called for. But the techniques used should also be flexible and should allow scope for competition and innovation in the banking system.
§ The existing arrangements which we took over when we came into office are clearly defective on the score both of flexibility and of scope for competition. Despite the use of special deposits, these 1372 arrangements have continued to rely, more than I believe most of us on both sides consider to be desirable, on quantitative guidelines and on ceilings applied to bank lending. The use of these techniques over a long period is bound to lead to rigidities, and it perpetuates a rationing approach which is inimical to innovation in banking, and which tends to stultify competition. What I hope we can do is to break away from this approach.
§ I believe it should be possible to achieve more flexible but still effective arrangements basically by operating on the banks' resources rather than by directly guiding their lending. As bank lending to the private sector is only one element, but an important one, for effective management, this means devising a scheme capable of influencing the monetary system as a whole and the interplay between the different sources of credit creation.
§ A great deal of preparatory work and study has been done during recent months towards a more flexible regime on these lines. These ideas will now be fully explored between the authorities and the banks and finance houses.
§ If we can achieve a change in the direction I have indicated, it will be a major step forward. Inevitably there are real difficulties in making the transition. These difficulties will not be easy to overcome, especially since it would be wrong to take any undue risk of excessive monetary expansion. The House will realise that I can make no promise about the outcome, because it does not depend on the authorities alone. All concerned have to convince each other that flexibility can be combined with effective control.