William Allen’s extensive experience at the Bank of England (BoE) between 1972 and 2004 makes him the ideal author of a book on this subject, documenting the history, motivations behind and effects of the Bank of England’s activities in the Government Securities markets. Despite its two hundred pages, this study is extremely rich in detail and is sure to become a reference book for those wishing to understand the practicalities of government debt management and the structures of the U.K. gilt markets, over an exceptional period in U.K. economic history. The author draws upon a wealth of archive material from official sources to reconstruct the historical narrative and conducts miniature quantitative studies throughout which are accompanied by new data on the gilt market.

The book begins at the end of the Great Slump in the United Kingdom and covers the authorities’ interactions with the gilt market from the beginning of the Great Depression, through sterling’s exit from the gold exchange standard in 1931 and the WWII years, concluding at the breakdown of the Bretton Woods system. In the opinion of this reviewer, two key features, with present parallels, make this book an extremely timely and useful guide to contemporary policy makers. The first, and most obvious in terms of current public debt ratios, is the return of financial repression in the form of policies that allow governments to “capture” and “under-pay” domestic savers in order to reduce debt (Reinhart, Carmen M., and M. Belen Sbrancia. “The Liquidation of Government Debt.” NBER Working Paper No. w16893, Cambridge, MA, March 2011). As acknowledged in 1966, the official objective was to “maintain market conditions that will maximise…the desire of investors to hold British government debt” (p. 194). Considering post-war inflation, the only reasonable attraction was to ensure market liquidity.

The reason for such policy forms the second key feature of the book; the often forgotten reality that it “would be a serious mistake to assume that there will always be a liquid market for government securities” (p. 203). This context is familiar in terms of the Eurozone debt crisis, where national governments had no domestic central banks to act as lender of last resort on their debt. However, similar dramas can play out in countries with money-printing central banks with long financial histories, such as the United Kingdom over the period 1928–1972. This book offers an antidote to such amnesia, as well as providing a valuable record of the results of a number of historical experiments in relation to central banking, government debt management, and the trade-offs faced by agents. When quantitative easing is eventually unwound, markets for government debt may prove less liquid than anticipated and this book is a useful case study.

1928 offers the ideal starting point, as WWI Treasury notes were still in circulation and were absorbed officially as BoE (Issue Department) notes in November that year. This immediately increased the Issue Department’s assets to such an extent that it doubled in size (p. 17) and was equipped for the first time to intervene in the gilt market on a substantial scale, growing to become the principal market maker by the 1960s. The period covered in the book was one of historically high government debt, in which market liquidity or the “ease at which” large amounts of an asset can be bought or sold, was “nowhere near perfect” producing “seriously adverse macroeconomic consequences” (p. 7). After all, the most intensive U.K. debt reduction in 200 years (1950–1970) was largely attributable to inflation (Crafts, Nicholas. “Reducing High Public Debt Ratios: Lessons from UK Experience.” Fiscal Studies 37, no. 2 [2016]: 201–23), a crowding out of private investment with quantitative controls (p. 157) and occurred over a period in which Britain’s sluggish growth positioned it as a “laggard” (Eichengreen, Barry. “The Real Exchange Rate and Economic Growth.” Social and Economic Studies [2007]: 88,118, 128).

The large volume of government debt meant that commercial banks and jobbers could neither bear the cost of providing market liquidity, nor absorb the remainder, despite financial repression. However, the BoE was better equipped and could play such a role, when it bought (sold) gilts as yields rose (fell) as it did over the periods 1928–1936 and even more so during 1952–1971 (p. 180). The BoE engaged in a range of activities in the secondary market, which assisted in debt management, such as buying gilts approaching maturity to spread the burden of repayment or to allow itself the option of accepting conversion offers (p. 23). These became a regular feature of debt management following the large 1932 War Loan Conversion (p. 30) where the bank took the role of a price maker. Subsequent conversions followed the practice that each withdrawn issue was replaced by a slightly less attractive one, with the same yield at longer maturities (p. 48). According to Allen (pp. 19–25), it generally acted as a price taker in the period up to 1932 buying up new government issues and releasing them gradually upon the market regardless of price at “disciplined” intervals.

However, it engaged in market support when it provided emergency financing to the temporarily “insolvent” stock exchange jobbers, the traditional market makers that stood between the government broker and institutional investors, when Britain left the gold standard in September 1931. Allen devotes an entire appendix (A) to occasions where the authorities engaged in “bailing out the jobbers” (1931, 1952, 1964, 1967). Later, it assisted the discount houses to raise more capital in order for them to better absorb the resulting sales, without what the authorities described as “unstable and perverse” market reactions to price changes (pp. 194–95). It did not contemplate becoming an exclusive market maker, as it was not mandated and such a situation may have threatened the existence of the Stock Exchange and the revival of the jobbers, which it was actively promoting (pp. 130–31).

In the post-war era especially, the Bank’s actions were primarily driven by the reality that “the government was insolvent” (p. 68) and there was an illiquid market for its debt. Nonetheless, it had learned valuable lessons in debt management since WW1 and largely avoided the same expensive borrowing in WWII, by setting maximum interest rates at issuance, compelling institutions to reinvest profits in gilts, and intimating that future borrowing would not be sought at higher rates (p. 44). This forward guidance continued after WWII when the Chancellor of the Exchequer publicly stated that the “terms of lending may become less attractive and this reflection should dispose any person….to lend to the Treasury without imprudent delay” (p. 61).

The façade of an active market was upheld by the Bank of England, which was increasingly becoming the “jobbers’ jobber” (pp. 129–30), continually buying maturing gilts and underwriting new government issues, despite expressing its public “uncompromising opposition to providing support for the market” (p. 192). As Allen observes, “it was a bit rich for the Bank to say that prices would continue to ‘depend upon general market conditions’, after several months of doing its utmost to prevent prices from depending on general market conditions” (p. 122).

In the end, the authorities became increasingly aware of the conflict between providing support and market liquidity and monetary policy during the Bretton Woods era, as evidenced by successive devaluations and the end of Bretton Woods. The author’s final point is that the era 1986–2006 may prove a “historical anomaly” when commercial banks could provide sufficient liquidity in public debt markets. If this is so, the earlier decades of the twentieth century should be the first port of call to look for experiments, and this book will serve as a valuable source.