Almost exactly eighty years ago, at the end of 1929, the Macmillan Committee was established. Its members were appointed by Philip Snowden, Chancellor of the Exchequer in Ramsay Macdonald’s government, in the wake of the 1929 crash. Its purpose was to analyse the links between the banks, the financial markets and the wider economy and to recommend how monetary policy should be conducted to prevent the sort of deep recession the economy was then descending into. Its dominant member was John Maynard Keynes – who was largely responsible for drafting the report which appeared in 1931 and which contained many of the arguments that would later appear in his General Theory.

In describing the reasons why the Committee was established here is what the Report – and that effectively means Keynes – said: “Not only was the adequacy of the volume of credit created called in question, but the efficacy of the means of distribution was also the subject of adverse discussion. It may, indeed, be said that at no time since the termination of the historic disputes which followed the Napoleonic wars and which led to the passing of the Bank Act of 1844 has the monetary organisation of our country been the subject of so much criticism as in recent times.”

Distribution of credit
What was true in 1929 is true eighty years later – the efficiency of the means of the distribution of credit is once again called into question and has been, as the Macmillan Committee put it, “the subject of adverse discussion”. This is inevitable given the scale of the problems in the banking sector we have seen over the past two years – both in the UK and across the world. The way in which banks operate will now be different – in the near term because of the damage done to their balance sheets and the continuing fragility of their funding; and in the longer term because of the need to ensure that the chances of another banking collapse like the one we have just seen are much reduced. Today I want to consider how this might play out and what the macroeconomic implications – for monetary policy in particular – are. I think it is likely – and quite probably desirable – that banks will become less significant intermediaries in channelling savings from households to companies and to other households. This poses short term and longer term issues which have (very different) implications for monetary policy.

Banking sector will become smaller