19 APRIL 1957, Page 29

WELCOME AND WARNING TO THE RADCLIFFE COMMITTEE

By NICHOLAS DAVENPORT

As a member of Sir Robert , Boothby's committee, which has been pressing for over a year for an inquiry into the financial system, I am naturally very pleased with the present Chancellor's decision to set up a committee under the chairmanship of I.ord Radcliffe to investigate 'the working of the monetary and credit system and to make recommendations.' In his Budget speech Mr. Thorneycroft was extremely cautious, if not cagey, about monetary affairs. He began by asserting that there was general agreement about the twin objectives of monetary policy— the avoidance on the one hand of domestic infla- tion (in order to maintain a fixed and stable exchange rate) and on the other hand of severe slumps (in order to maintain full employment). These twin objectives, however, can be contra-

dictory as well as complementary. If the wage- cost inflation got out of hand the maintenance of sterling at its fixed rate might require such a high Bank. rate and such a severe credit squeeze that serious unemployment would inevitably follow. •

(Ask Sir Oscar Hobson.) But earlier in his speech Mr. Thorneycroft disclaimed any intention of pursuing what he called 'savage deflationary policies.' He refused to consider depressing demand 'to a paint at which employers cannot afford to pay and workers are in no position to ask for higher wages.' He went even farther. 'To

' slash production, to drive down investment, to push up unemployment to a level at which, despite high world demand, we have manufactured our own depression, is, to say the least of it, a high price to pay for price stability.' As this has long been my own view, so often repeated in this column, I was delighted to hear the Chancellor adopt it as Government policy. It means that to prevent serious unemployment we would, if neces- sary, have to sacrifice exchange stability. Let us not talk, then, of twin objectives of monetary policy. There is only one objective—the control of inflation—and if we fail, devaluation will fol- low sooner or later. And let us not talk of devalu- ation being a policy either : it is merely the failure of a policy, the failure to control inflation In a modern industrial democracy committed to the ideal of full employment it is impossible (as we now realise) to control a wage-cost infla- lion by monetary methods alone. This sort of inflation cannot be avoided if the trade unions will not co-operate with the managements and end their restrictive practices or if the manage- Ments will not co-operate with the trade unions and introduce 'productivity' increases for wages. Is it beyond the wit of industrial and labour leaders to devise indices of productivity for dif- ferent industries, as well as indices of living costs for different parts of the country, which would make the annual wage squabbles on a national basis quite unnecessary?

But this is outside my province. All I am concerned to argue here is that the only sort of inflation which can be stopped by Monetary methods alone is that caused by over-investment —that is, investment in excess of savings. The Chancellor is to be congratulated on giving a new direction to the Capital Issues Committee (which • will not be at all popular in his party), designed to stop over-investment growing out of bank advances. The Treasury rightly takes the view that applications for bank credit to finance invest- ment in buildings, plant and other fixed capital are not in the ordinary course of bank business and therefore require Treasury consent through the Capital Issues Committee, under the Control of Borrowing Order. Hitherto the CIC had con- fined its attention to the purpose of such loans, leaving the terms to the discretion of the banks. In future the committee is to examine the terms as well as the purpose, in other words, is to decide whether a bank overdraft is the appropriate method of finance for the job in hand. The Treasury's aim is to prevent bank advances, if it can, adding to the volume of investment which is not matched by a corresponding increase in savings. If a Labour Government had proposed such an interference in the banking business there would have been a howl of rage from the City. But a polite letter on these lines from Mr. Thorneycroft to Lord Kennet, chairman of the CIC, has passed almost unnoticed.

But to return to the Radcliffe Committee. If they clearly enunciate the principles which govern the use of monetary measures of restraint in con- ditions of full employment in the Welfare State they will be doing a great service for the harassed occupants of the Government front bench. If they can lay down rules for the use of Bank rate now that it has lost its old effectiveness, or for the control of bank credit now that the structure of bank assets makes it almost uncontrollable, they will be relieving every one, not least the financial writer, of some fearful headaches. I only hope that it will not take such an infernally long time as the old Macmillan Committee did to reach its epoch-making conclusions.