Rats off to Mr Healey
Nicholas Davenport
IsiC/1"--r Healey a monetarist? Is he in economic Lenns anything? I do not suppose that he knows h'urnselfIndeed, it would be fatal if we were to LlVe a Chancellor who came to the Treasury With set economic theories — Keynesian or "'Keynesian — which would be turned uPside down in no time by new economic theories. It did, however, appear from the letter Mr Healey wrote to the IMF, when he recently aPplied for close on £1,000 million of mediumtern) credits, that he was very conscious of the :11ntley supply question. He promised that his gnti-inflation policies "would not be undermined by excessive monetary expansinn". Indeed, he intimated that the money sr,ucl3PlY growth would be kept below the growth
the gross national product at current market
Ptices. Thus he tacitly accepted the monetarlt's view that inflation cannot be eliminated unless the money supply growth is ruthlessly c. artailed. But he did not say how he was going
secure such fine tuning.
c In this letter of good intent to the IMF the phancellor reported that in the first half of the onancial year 1975-76 the money supply had nsen at an annual rate of a little over 10 per cent against a rise in the national money income of tarLound 12 per cent per annum. His estimate of e annual rate of increase in the money supply ,tithe second half of the financial year appeared `1113 Work out at 19 per cent but this calculation
already been upset by subsequent events in
e gilt-edged market. Thanks to the incredibly "ge sales of gilt-edged 'tap' stocks to the bank public, to which I have recently been _calling your attention, there was virtually no croWth in the money supply in the third quarter (t)ate f 1975-76. This seems to imply that the annual „ of grovvth in the money supply will be queut 91/2 per cent — certainly under 10 per cent — for the whole 1975-76 financial year. As the egroWth in the national money.income (at factor, in 1976-77 will be around 16 per cent tac,ieurding to the Chancillor's letter the moneclusts may claim to have had a subservient liancellor.
it. 814 Mr Healey should not take any credit for
lie never planned it so. Indeed, his original r, -2-arY policy was based on a borrowing CluIrement of around £9,000 million and he isas tlow had to admit to £12,000 million. What 197Tnre, he has taken the same figure for it '77 in his letter of good intent and excuses as being only "around 11 per cent of national altetsnine at factor cost''. The truth is that u'ough he claims to have a bold anti-inflation hr,nancial policy he has not the slightest idea it will work out because he has no cash e "ontroi of the huge volume of public ninienditure. Nor has he any control of the on the balance of payments. In 1974-75 `r\i'lls deficit amounted to over £3,000 million and 19;cslealeY has said that it would be halved in it ".Now he has had to admit in his letter that al will be around £2,000 million in 1975-76 8though he hopes to improve on it in 1976-77. s ut be can have no feeling of certainty. The c'ealled bonanza from North Sea oil is
continually being postponed.
To make matters more difficult for the unfortunate Chancellor the 'know-all' economic commentators are now trying to make out that there is a conflict of objectives in his economic policy, if he has one. They argue that his external and internal aims are incompatible. If this is intended to confuse and annoy Mr Healey I hope he will ignore them. The burden of their complaint is that he has to raise interest rates to defend sterling, and that he has also to raise interest rates to sell more gilt-edged stock to the public to reduce the money supply growth, and that all this discourages a business revival and makes industrial investment less profitable. I have previously argued that it is no longer necessary to raise interest rates to defend sterling. Foreigners — and in particular Arab governments — will keep their money in sterling when they feel that sterling is safer. The more convinced they get that a communist takeover in Britain is improbable the less they will require to see a much higher level of interest rates in London and in New York. Mr Healey's critics seem to forget that a floating rate of exchange lessens the necessity (if any) for higher interest rates and has always been in the past the precursor of lower interest rates.
The final shot which the Chancellor might take at his critics is that it is no longer necessary to raise interest rates in order to sell more gilt-edged stock to the public. The reverse is the case. The market is presently strong because interest rates are falling — there was another 1/4 per cent cut last week in the minimum lending rate (Bank rate) which is now down to 103/4 per cent and because there is a growing conviction on the part of the institutional investors that inflation is really being tackled and that the TUC will agree to another year of wage restraint after the £6.
I therefore take off my hat to Mr Healey. He may not have a firm -or even a coherent economic policy but the market is going his way and he is continuing to sell a hell of a lot of stock to the non-bank public. It is believed that in the last three months he has sold nearly £3,000 million. The return to the clearing banks of £325 million of their special deposits has been interpreted as a bull point for the market. It shows that Mr Healey does not want interest rates to rise on the pretext that in this tax-gathering season the banks might run short of funds. I therefore welcome the increasing sale of gilt-edged stock to the public not so much because it reduced the rate of increase in the money supply but because it reduces the rate of interest at which businessmen can borrow money for investment and for current needs.
Of course, the market is bound to take a breather. The pace of the advance and the volume of sales have been too hot to hold. A moderate reaction has come as I write but the fundamentals have not changed and another cut in the minimum lending rate to 101/2 per cent would help to bring about a consolidation of the market's recent gains. It may be concluded that I am not a raving monetarist. The rate of increase in money supply has, of course, to be watched but the inflationary effects of inflation must not always be interpreted as causes, which is the monetarist habit. I like the final words which Kenneth Galbraith gave to an Observer interviewer in July lase year. "He said that he did not want to give the impression that he thought monetarists were wicked men. Just eccentric and romantic. And they should be treated as museum pieces."
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