ABSTRACT
The credit restrictions exacerbated an existing gap in the provision of finance for small firms, known as the Macmillan Gap, as firms saw their overdrafts reduced or curtailed. The firms’ response to the credit restrictions – the strategy they adopted to satisfy their need for capital – was to seek alternative, though costly, sources of funds such as hire purchase on plant and machinery. At the end of the 1960s, the Parliamentary Committee of Inquiry on Small Firms ascertained that the British economy suffered from a long term decline in the number of small firms and in their contribution to output and employment. During the 1950s, the representatives of small firms, such as trade associations and chambers of commerce, remonstrated strongly against the government’s monetary policy. The existence of alternative sources of finance blunted the effectiveness of restricting bank advances as a policy instrument, showing what a narrow view of the operation of the monetary system the authorities had.
