WANTED: BANK RATE AT 4%
By NICHOLAS DAVENPORT IT would be churlish not to express 4. thanks for the I per cent. cut in
Bank rate to 5 per cent., but absurd
to pretend it is adequate. Mr. Thorneycroft's remarks in the Commons sug- gested that he has not yet had time to study the controversy over Bank rate and make up his own mind. He Merely repeated the usual parrot cries of the traditional banker. `We intend,' he says, `to continue to make full use of interest rates to dis- courage spending,' etc. Now it is not at all clear how much a high interest rate does discourage spending. That is one of the questions that a new 'Macmillan' committee of inquiry into the financial system would have to try to answer. Clearly, it does not discourage consumer spend- ing. If a prosperous worker wants to buy a tele- vision set he does not ask what the Bank rate is : if he cannot put the money down he, asks how much deposit he has to make. So it is not Bank rate but the hire-purchase controls which have restricted consumer spending. Does a high interest rate discourage business spending? It used to be said that it stopped `stocking up,' but there is no statistical evidence—according to the Treasury —that it has done so up to September, 1956. Does it discourage capital spending? Not if the business man sees a big profit in a short time, but if the period of construction is long and the money is raised in the form of loan- capital, it would cer- tainly be a deterrent. And that is probably the type of capital investment which, in the national interest, should not be. restrained. Does it dis- courage investment in housing? Certainly, but if it is local authority housing it can be restricted by direct order from the Ministry of Housing and if it is private housing it can be restricted easily enough by licence. Conclusion : a high interest rate is partly ineffective, partly unnecessary, partly harmful in the restraint of spending. As it raises rents (every 1 per cent. extra puts 8s. on to the weekly rent of a council house) it increases the pressure for higher wages and can therefore have an inflationary, not a deflationary, effect. Far better, then, if spending is to be restrained by monetary means, rely on squeezing the banks, so that they have less money to lend, or, if that is impossible, directing them to reduce their advances, as Mr. Macmillan did.
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Now consider the cost to your own Budget, Mr. Thorneycroft, if you continue with dear money. Your predecessors ran a floating debt of £5,000 million and a 2 per cent. rise in the rate of interest meant an extra £100 million on the Budget. This added £50 million or more to the debit side of the balance of payments as over half the floating debt is held by central or commercial banks overseas. In the last two months the floating debt has been reduced by about £300 million, but the cost of servicing it is still enormous. Is the doubtful gain in restraint worth it?
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Until the rate of interest is further reduced, the Treasury's funding operations will remain horribly expensive. The rise in the gilt-edged market, which has accompanied the fall in the Treasury bill rate to under 44 per cent., has enabled some funding to be done through `the tap,' but it has been expensive and now the Treasury .is issuing £300 million of the existing 31 per cent. Funding 1999-2004 at 80—on a flat yield basis of over 44 per cent. and a redemption yield basis of over 4+ per cent. I am told that the authorities are willing to see a lower short-term rate of interest but not a lower long-term rate— the idea being to restrain capital spending. This as I have argued, is a misguided attitude. On June 15 next £300 million of Exchequer 5 per cent. bonds and £100 million of Funding 24 per cent. bonds fall due for repayment, and in November £500 million of Funding 24 per cent. bonds. A total of £900 million refunding is formidable enough. And no attempt has yet been made to fund the overdrafts of the nationalised industries which amounted to £118 million at the end of the year. Before all this funding can be attempted on a reasonably inexpensive basis a 4 per cent. Bank rate is desirable.
No one is suggesting that the time has come to abandon credit restraint altogether, but it is absurd for the Chancellor to say that there must be no change in economic policy. The disinflation policy has had its effect. The number of vacancies no longer exceeds the number unemployed—there are now three workers unemployed to every two vacancies, the percentage of total unemployment being 1.8. Now that short-time working is re- ducing weekly earnings and, by raising costs, reducing company profits as well, there is no inflationary threat left in the economy at the moment. This is quite a change in the economic climate and, as the Financial Times pointed out, it is absurd for Mr. Thorneycroft to suggest that economic policy does not change with the economic climate. By next April Mr. Thorney- croft will have to consider doing something to reactivate the unused resources of the economy and stimulate investment which has already begun to fall away. We cannot afford to fall behind our rivals in the rate of productive indus- trial investment. The Chancellor should therefore restore the investment allowances which Mr. Butler instituted in April, 1954, and Mr. Mac- millan removed in April, 1956, and reduce Bank rate to 4 per cent. If we are to spend £1,000 million in nuclear-power developments alone over the next five years it is essential to have cheaper money.
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