In the City
Labour and money
Nicholas Davenport
The last time we had a Bank rate of 13 " „ was in November 1973 after the Arabs quadrupled the price of oil. It was a big mistake because it meant handing over to the members of this oil cartel much higher amounts of interest on the enormous surplus money they had created for themselves on deposit. And it meant putting ourselves more in the red on our balance of payments. Surely the Bank of England can devise other ways of telling us that a crisis has occurred which are less costly to taxpayer and trader.
Last week the Bank may have thought that to put Bank rate up by I to 13%—an unlucky number at all times—might induce foreigners to keep their money in sterling instead of being frightened out of it by the threat of a seamen's strike, but if so it was a foolish thought. For the Bank to have ignored the seamen's threat and to have relied on the good sense of the TUC not to allow any of their members to break the social contract and precipitate a general election would have impressed the foreign holder of sterling far more by such a dazzling display of British phlegm. Besides, every foreigner this side of the iron curtain knows that you cannot run a capitalist system on a 13".. Bank rate. Dear money at this height makes private enterprise quite unprofitable. The cost of borrowing has got to come down very quickly to make any industrial investment pay.
It is just possible that the Bank, with Mr Healey's assent, hoped to remind the seamen that in the capitalist world Britain is not an island. Of course, a strike could force down the international value of sterling, put up the cost of imports and therefore the cost of living, and reduce the standard of living for themselves and fellow trade unionists. Were they not aware? Or did they just not care?
The joke was that the jump in Bank rate came just after the Labour party had published its 'Banking and Finance' paper which recommended the nationalisation of the joint stock banks and insurance companies. No one could fail to draw the conclusion that when Labour has taken over the financial system we will be bound to have much dearer money. Nationalisation has certainly put up the cost of everything else which has been taken over by the State. And State banks and insurance companies would not only put up the cost of our borrowings and mortgages but accentuate the pace of our inflation. Does anyone suppose that a State bank would say to a trade union that it could not pay their higher wages because the money supply had been cut down ? The Labour idea of socialising the Bank of England means that the money supply tap will never be turned off while the unemployed number a million or so.
This Banking and Finance paper from Labour's National Executive is still based on the fallacy that because British industry has not been investing enough the providers of finance must be responsible for the shortcoming and must therefore be nationalised. That is a non sequitur. British industry has not been investing enough because it has simply not paid to do so on the bad record of labour productivity over-manning and strikes. The NEC paper itself mentions that Finance for Industry was set up and provided with £1000 million to lend over a two year period ending in the financial year 1975/76. Yet so far it has lent no more than £200 million; it cannot find enough industrial borrowers to risk the investment.
The reason for lack of investment can be found in a paper on 'Labour productivity in Europe since 1955', which was published in the last Bulletin of the National Institute of
Economic and Social Research. The first chart of 'gross value added per person employed in GDP' showed that in 1955 labour productivity in the UK was 15."„ higher than in France and Germany, 40"„ higher than in Italy and 150„ lower than in Belgium and Holland, but that thereafter labour productivity in these countries grew much faster than in the UK. By 1961 France and Germany had overtaken the UK and Italy by 1973. After 1973 the UK had the lowest productivity record of the lot. France and Germany were some 30"„ higher than the UK, Belgium 40% higher and Holland 54% higher. In manufacturing, which excludes the service industries, the comparison is even worse for the UK. Although there has been an improvement the value added per manhour in UK manufacturing only reached by 1973 the level attained by France, Germany, Belgium and Holland in 1966 and 1967. In these countries labour productivity in basic metals is two to two-and-a-half times as great as in the UK. The truth is that the trade union movement in Britain has nevee been interested in productivity—not sincr its first beginning. No wonder industrial investment here lags behind that on the Continent.
It is amazing that the capital market in the City provided a record subscription of £1320 million in 1975 and £915 million in the first eight months of 1976 for new equity shares so that companies may expand and invest. So it is not our financial institutions which have been letting industrial investment down; it is the trade union movement which refuses to be interested in its profitability. One can understand their Luddite attitudes. If investment in a new machine is intended to employ less labour they will insist on over-manning. This is the unhappy consequence of a split society. To cure it I have always felt that the government must offer the workers an interest in the profits from economic growth and investment which can easily be done through shares in a public unit trust.
To come back to my first point—this preposterous Bank rate of 13% (now disguised as M.L.R. or Minimum Lending Rate). Up go the banks' base rates on overdrafts and other lending rates to check the first faint signs of business recovery. Most business men will now be paying 14% for money. Because the seamen in our monetary asylum have had a fit every other patient has to be whipped. In the view of the Bank this is regarded as the necessary convulsive therapy. The gossip-mongers in the CitY say that the Governor has more up his sleeve. As he has to sell a few billions of gift-edged stock to the non-bank public in order to finance the budget deficit without increasing the money supply he has to entice buyers with the thought that Bank rate must now come down and the market go up. But let him eschew another 'long tag issue. The last 'long' coupon was 131% up to 1996. More of these and the rise in the debt service charge will mean that the borrowing requirement is irreducible.
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