15 JULY 1960, Page 29

WANTED-NEW IDEAS AT THE TREASURY

By NICHOLAS DAVENPORT WILL the new broom at the Treasury sweep the floor clean of outworn monetary ideas? There is not the slightest chance of it unless the system of direc- tion at the top is changed. This system puts the direction of economic affairs in the hands of top civil servants who are not professionally trained econo- mists. There is an economic section, of course, and there is a chief economic adviser, but no one is bound to take his advice and he does not even have the last-but-one word. When Mr. Thorneycrott was at the Treasury he is said to have consulted an outside economist who had no departmental responsibilities. When Mr. Macmillan was Chancellor he called in Sir Roger Makins from the foreign service—the Embassy in Washington of all places!—to be head of the Treasury, and Sir Roger has now been succeeded by Sir Frank Lee, from the Board of Trade. Thus the chief adviser to the Chancellor on the direction of economic affairs is not the chief economic adviser at all. He is a lay civil servant. This is contrary to current practice in most advanced industrial countries. It is generally admitted that it needs a profes- sional economist to sift the mass of not very up-to-date statistics and arrive at a correct appraisal of the trend of economic affairs.

The Prime Minister would probably be wise to revive the Economics Ministry, which was tried out—but for too short a time—by the Labour Government. The giving of economic advice has become too important to leave to anyone below Ministerial level and if we have an Economics Minister he would be bound to have a staff of professionally trained economists. Consider, for a moment, how complicated and vital this advisory function has become. We are trying to do what may, after all, be impossible--maintain full employment with price stability. If we fail to balance the demand for resources of capital and labour with their supply, if we allow an excess demand to develop, we run immediately into serious trouble. Wages may rise too fast, or imports may rise too fast, or exports may not rise fast enough—and soon there is a balance of payments crisis. Our gold and dollar reserves are still not strong enough to meet a serious crisis of this nature without a flight from the £. The margins of safety are getting dangerously narrow. The Treasury walks perpetually on a tight-rope between over-employment and under-employ- ment. A few hundred million of excess demand --2 per cent. of the national income—and we have got over-employment and an excess of imports. If this happens, as now, when import quotas have been abolished, the surplus on the balance of payments can run off in twelve months. Then the Treasury has to apply general measures of restraint because the Government does not like direct controls—a high Bank rate. dearer loans, stiffer deposits on hire purchase, etc.—which soon begin to slow down our rate of growth and to make our social investment hideously expensive. Before long industrial in-

vestment, on which our export capacity depends. suffers and we lag behind in the great economic race of the Sixties. Our national survival is even threatened. Most Chancellors crack up under all this strain. The wise ones—like Mr. Amory— resign before a breakdown intervenes.

What the Treasury needs is a more profes- sional and more imaginative direction of our economic affairs—and in particular a discarding of the worn-out monetary ideas which the Rad-' cliffe Committee so clearly exposed. The Prime Minister needs to sit down quietly with an Economics Minister and do some fresh thinking. He may find it impossible to keep our economic balance and maintain growth while allowing so much freedom of economic choice to the indi- vidual or the financial institution., Take, for example, the freedom allowed to the joint stock banks in 1958 to increase advances as they please. The pace became too hot—a 50 per cent. increase in eighteen months!—and this freedom has now had to be restricted by the system of special deposits at the Bank of England. But it was accompanied by a 6 per cent. Bank rate— intended as a psychological shock, but alas! a flop from that point of view—which has put up the cost of housing, schools, hospitals, roads and other vital public works and is bound, in the end, to pull down industrial investment. Did it never occur to the Treasury that if they had made their special deposits interest free, they would have forced the banks to raise their rates against other

borrowers and would have avoided the necessity of putting up Bank rate and increasing the cost of social investment?

Clearly, fresh and imaginative thinking on the use of the monetary weapons is urgently wanted. The two-tier system of interest rates, which 1 suggested recently, is worth examining, for the system of local government borrowing, as Mr. Harold Cowen argued ir. Lloyd's Bank review for July, is not working at all well, either for the local authorities or for the Treasury. The result of the Treasury's present policy is confusion and demoralisation in the gilt-edged market. The Treasury goes on pretending that the market must fall to find its own level, but it is a market entirely subject to manipulation by the authori- ties. The joint stock banks cannot even dispose of their short-dated funds unless the Government buys. If the Treasury admitted that it is essen- tially a rigged market it could rig it to much greater effect. Has it ever thought of giving some direction (by consent and agreement) to the insurance companies as it has to the joint stock banks? Last year the life funds of the insurance companies increased by £420 million, but the amount put into British government stocks was only £14 million-a negligible 3.3 per cent.- although a fair proportion of the new life business was in non-profit policies, that is, in purely money obligations which could be met by redeemable money bonds, and not equi- ties. If ever government bonds became unmarket- able, the Treasury will be thinking of some such direction of investment, but it will then be too late. Where is the Chancellor who can look into the future and take action ahead of events instead of after? Who can lift the Treasury out of its rut?