MONEY The money affluence
Nicholas Davenport
It is good to see the Old Lady of Threadneedle Street becoming as bullish about the economy as the Government —
much has been done," she says, "by means of monetary and fiscal relaxations to lay the foundations for a period of strong economic growth" — but after reading her latest bulletin I confess to grave misgivings. A writer in the Financial Times seems to share them, for he came to the conclusion, after apparently talking on the telephone with the authors of the Bulletin, that any further lowering of short-term interest rates is not to be expected. Why, oh why, should that be so? The reflation which Mr Barber has carried out will not work through to the whole economy — after the temporary boost it has given to the consumer trades — unless Bank rate is reduced first to encourage a universal stocking-up and secondly to cheapen the cost of industrial investment. Mr Nigel Vinson, of Plastic Coatings, who is well known to readers of this column as one of our must successful entrepreneurs, writes to the Economist: " Loan capital is not yet cheap and it is the cost of loan capital that fundamentally affects managements' attitutes to investment. Currently, twenty year loans carry an average coupon of 10 per cent. In many cases the competitive investment installed a few years ago would carry a loan service charge of about 6 per cent and this on machinery that was probably half the price at the time. Small wonder that businessmen are more chary of investing in a time of surplus capacity and high competition." The Old Lady must really pull up her stockings or tights, consider the needs of
the investing businessman and stop fussing about such technicalities as the money supply, the borrowing requirement and the state of the reserves.
Hitherto the Old Lady has encouraged the gilt-edged market to believe that the cheapening of money is likely to continue. The hardening terms of the successive long-dated ' tap ' stocks have been regarded, the Bulletin admits, "as indicating a willingness (on the part of the Government) to see a continued gradual decline in interest rates." And how could it be otherwise seeing that the inflow of money into the UK and the accretion to the reserves have been colossal? To begin with, the surplus of payments on current trade in the September quarter was the highest ever. At £342 million it was more than the total for the first half of the year. The surplus on visible trade was £177 million and on ' invisibles ' £165 million. The capital inflow in the third quarter was also huge, amounting to £357 million. This brought the net total currency inflow for the quarter to £668 million and carried the total for the nine months to the stupendous figure of £2,275 million. As a result the reserves bounded up to £2,089 million and after paying off certain liabilities to the IMF the reserves now stand as at the end of November at £2,322 million. If Mr Wilson were prime minister he would now be crowing all over the country.
Incidentally Libya, which has lately victimised our British Petroleum by nationalising her Libyan assets (about £80 million) could not have chosen a better time to withdraw her official deposits from the London money market. They are said to be around £200 million, which is chicken feed. All the overseas sterling countries, which hold around £2,700 million in London deposits, have agreed (ex cept unimportant Malta) to renew their sterling agreements for a further two years and the Basle group of central banks have also agreed to extend the $52,000 million facility with which these agreements were linked. So sterling at the moment is immensely strong and the UK immensely rich.
One cannot expect the unemployed to throw their caps in the air at such affluence. The million out of work contribute to the trading surplus by reducing the import bill through their lack of affluence. But one would expect the gilt edged market to cheer instead of getting the jitters. It has lately been worrying about the future of the balance of payments and about the rise in the over-all budget deficit. Of course the surplus on the balance of payments cannot possibly remain at this year's estimated total of about £900 million. It is unhealthily swollen. November with its sharp drop to a £5 million trade surplus was a freak month because of the American dock strike, but a trading surplus of around £300 million a year would be ample provided exchange controls are maintained to take care of the capital movements. The reserves are much too high at £2,322 million; they involve unnecessarily heavy payments abroad on foreign deposits. Half the present total would be adequate. The danger of these swelling reserves—the mark of an abnormally sickly currency inflow—is that sterling will be driven up to over $2.50 in the exchanges which is too costly for our export trade. It has already touched $2.52. To prevent the over-high upvaluation against the dollar of 5 per cent the Bank should already have been encouraging an outflow of foreign money by reducing Bank rate to 4 per cent.
As for the over-all budget deficit the Treasury's borrowing requirement for the first half of the financial year rose to £445 million against £150 million a year ago. This and the huge currency inflow caused the money supply to rise by 2 per cent in the September quarter. But according to the Bank's Bulletin investors outside the banking sector bought no less than £520 million of gilt-edged stocks (bringing the total for the financial year so far to £717 million) while the banks and discount houses bought £934 million. Altogether the Treasury sold £1,410 million (net) of stock in the September quarter if we include the special transactions with the clearing banks over the new reserve policy. Why, then, should the market worry about the sales which• will come when foreigners withdraw and the spivvy speculators take their profits? The Treasury can well afford to absorb these inevitable sales. It has a clear duty to stop the gilt-edged market becoming a top-hat casino. It should also perform its duty to Mr Barber's reflation policy — which requires above all cheaper money now to encourage stock-building and new capital issues for investment. Any Friedmanite official who dares to object to a rise in the money supply when we have a million unemployed deserves to receive his redundancy notice.
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