THE INTEREST RATE MUDDLE

By NICHOLAS DAVENPORT

MR. KHRUSHCHEN'S chief econo- mic adviser—or whoever it is who is Sir Robert Hall's opposite number in Moscow—must be laughing his head of at the frightful muddle the English- speaking Western democracies have made of the interest rate mechanism. I had occasion to say recently that the Canadian authorities were making them- selves a laughing-stock over their money matters but they are no longer unique. The American Congress has refused the Presi- dent's request to raise the 43 per cent. yield limit on the issue of bonds of ;none than five years' duration. The American Treasury has therefore been forced to borrow in the short-loan market and has already driven up rates to 43 per cent. for one-year bills. (The Federal agencies have had to pay 5 per cent.) Their three months' Treasury bill is now 3.98 per cent., which is higher than the British Treasury bill still quoted at just under 31 per cent. There is daily expectation that the American discount (or bank) rate will be raised from 31 per cent, to 4 per cent. The American commercial banks have already raised their prime loan rate from 44 per cent. to 5 per cent., being faced with a withdrawal of time deposits on which they are allowed to pay no more than 3 per cent. The muddle increases daily.

Now the effect of dearer money on the steel workers on strike or on the steel managements who have rejected their claims will be absolutely nil. If the eventual steel settlement is regarded as inflationary, that is, if it leads to other industrial wage claims and settlements which will be passed on in higher prices, dearer money will do nothing to make them less inflationary. If an inflation of the price level does materialise it will be cured by increased productivity and by nothing else. No Republican government entering shortly the Presidential election year is likely to attempt to cure an inflation by dearer and tighter money and economic stagnation. As Mr. Hammarskjold, the Secretary-General of the United Nations, has recently said : price stability is not well won if its cost is economic stagnation.

The whole nonsense of current American interest rates has been brought about by mis- management—arising out of the fact that the political power in Washington does not control the monetary power, which has been pursuing an anti-inflationary restrictive policy. It is compli- cated on this occasion by the fact that the execu- tive does not carry the legislative body with it. The Wall Street boom has created the impression that an inflation-hedging rush after equities is making it impossible for the Government to finance itself on bonds. This is surely ridiculous in a country where the insurance companies, the recipients of a large part of the national savings, are not allowed by law to put more than 5 per cent. of their investment funds into equities. There should not be the slightest difficulty in channelling the funds of these financial institutions into gov- ernment debt—if the American Government took proper control of its financial system and stopped the Federal Reserve tryiVg to cure inflationary nightmares with the sedatives of dear money.

As for the Canadian muddle over interest rates even the Economist in, its issue of August 29 was moved to describe it as a 'financial mess.' The extraordinary rise in Canadian bill rates (to over 6 per cent.) is attributable, it says, primarily to the restrictive open-market operations of the Bank of Canada which has concentrated all its attention on limiting the supply of money to prevent infla- tion in 1960 and 1961! Where money becomes a master instead of a servant, trouble always fol- lows. The Canadian banks recently announced that as they were forced to pay over 6 per cent. for any borrowing from the Central Bank and were bound by law to charge no more than 6 per cent. on customers' loans they would have to restrict their advances. Yet Mr. Diefenbaker claims that he is still trying to promote recovery from the recent recession! Monetary madness

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could not go further than to i induce a 5 per cen premium on the Canadian dollar—a curri which should be standing at a discount in of the huge deficit on the Canadian balanc payments.

Will the madness now spread across the Ath to London? There is some danger of it. The I cliffe Committee thought little of the effective of Bank rate changes but it did report that Bank of England appeared to attach s importance to keeping London rates in line rates in other centres. The Committee added when there was confidence in sterling the int( differentials tended to exert a more pow( influence, so that the need to keep our rates in with those in other financial centres became n pressing. I hope that the authorities will pay attention to these conventional views or, if, do, that they will see to it that an increase in sh term rates will not have any effect upon long-I rates. High long-term rates do have an adv influence, as the Radcliffe Committee hac admit, upon long-range planning, especially in field of social investment.

While this danger remains—that monetary management overseas will adversely affect the of borrowing here—it is surely wise to re sufficient exchange control for our own protect That capital movements designed to take ad' tage of American or, Canadian monetary f should be allowed to upset our industrial reco or public investment is madness on our,par was disappointing to find the Radcliffe Comm taking so conventional a stand over the rate interest and accepting the present high leve long-term rates. I would have expected then think out how investment in houses, hospitals schools could be financed at specially low r insulated against the changes in short-term r which are brought about by old-fashioned incompetent monetary managers abroad. 0051

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