MONEY MADNESS
By NICHOLAS DAVENPORT
SCARED that a new wage-cost inflation may be sparked off by
the steel industry, terrified that the inflation-hedging boom on Wall Street may get out of hand, the monetary authorities of America, with the blessing of the ageing President, have begun to make money dearer. Last week the Federal Reserve Banks of New York, Chicago, Philadelphia and Dallas raised their discount rates from 24 per cent. to 3 per cent, and the remaining eight members of the Federal Reserve system are expected to follow suit. Could mone- tary orthodoxy be more insane? A wage-cost inflation in the United States, as in the United Kingdom, will never be stopped by dearer money. As for Wall Street, it is now in full orbit as the latest American satellite and has long since soared beyond the gravitational pull of interest rates. What the -Federal Reserve authorities are more likely to do with their dear money _policy, especially as they are being aided and abetted by a President intent on producing a budget surplus before he dies or retires, is to kill the business recovery in America.
It may be recalled that the Federal Reserve did not wake up to the onslaught of the 1957 reces- sion before the last quarter of that year, when they began to reduce their rates from 3+ per cent. After touching 1 per cent, in the first half of 1958 the discount rate began to rise again in the second half and finished the year at 21 per cent. This was extraordinary enough in view of what was happening in the bond market. The Treasury was having great difficulty as usual in funding and the yield on long-term government bonds had risen to a shade over 4 per cent. Now interest rates on government-insured mortgages tend to oscil- late on a level about 2 per cent. above the yield on long-term government bonds. With mortgage rates up to 6 per cent, and over, the housing boom has collapsed, for intending house purchasers, worried by the threat of short-time working or unemployment, are not disposed to take on rents which dear money has raised to nearly $120 a month even on low-priced housing. Meanwhile the Federal mortgage agencies have run out of money and a new housing Bill is to be rushed through Congress. It will probably be the end of the year before housing can pick up again and that depends on a cheapening of money which the Federal Reserve seems determined to prevent! Indeed, the President has already suggested that he will ask Congress to raise the statutory ceiling on the rate which the Treasury is allowed to pay for long-term money, Which is 4+ per cent. That would mean house-owners and purchasers paying over 64 per cent, for government-sponsored mort- gages. To kill the housing boom before industrial investment in the private sector of the economy gets going, and to balance the Budget by June, 1960—all this is suicidal. The madness in Wall Street seems to have conjured up nihilistic tenden- cies in Washington.
The monetary authorities in London must be warned against being drawn into this monetary madness. The Treasury bill rate was fortunately left unchanged last week at 31% per cent. after its previous week's rise. Last year continental coun- tries pursued a cheaper money policy and, exclud- ing France, Bank rates were reduced well below the British level of 4 per cent. Money rates in London are still somewhat higher than in most
continental centres. As the £ is for the time being a more popular currency than the dollar it will not matter if New York rates rite above London. And this should not prevent our Bank rate being reduced to 31 per cent.—as it should if unemploy- ment remains long at its present high level and if the Continent reinforces a cheaper money policy. As Sir George Bolton has suggested, the European capital market must unite and break away from the American influence. Let the British Govern- ment go ahead with its encouragement of con- sumer buying and at the same time step up the capital expenditures of the public sector and stimulate investment in the private sector by re- introducing differential investment allowances. And let it give orders to the Bank of England to provide the banking system with the cash base needed to support a further rise in deposits. After all, since the credit squeeze the increase in bank deposits has fallen far short of the increase in the national income.
Even if Bank rate is not reduced in the near future the Treasury can help industrial investment by reducing the long-term rate of interest. This is not a difficult thing to do but the Chancellor must be -prepared first for an over-all Budget deficit and then for an expansion of bank cash as the economy moves into higher activity. An over-all Budget- deficit (pace the Governor of the Bank of England) is really of no importance provided total savings are equal to total investment (as they seem to be) and provided total demand is not in excess of the potential supply of labour and resources. If there is no inflation in the economy and therefore no need for higher rates of interest, then there is absolutely no harm in an increase in the supply of bank money which will enable the banks to increase their assets (high time this, seeing that the banks are now being forced to sell investments in order to increase advances!). As soon as the supply of bank money has been in- creased the prices of gilt-edged securities will rise, the long-term rate of interest will fall and indus- trialists will be tempted to raise more capital for the improvement of their old plant and the instal- lation of new. Let us hope that the monetary authorities do not tie their' hands, as they have done in America, by looking fearfully for infla- tion under every banker's bed.
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