MONEY AND THE CITY
Behind the Stock Exchange slump
Nicholas Davenport
The great slump on the Stock Exchange last weeii, which knocked £1000 million off market values at one time, was caused by panic and rumour — panic on the part of the Government and rumour on the part of the City. Mr Barber got into a panic about sterling after the extremely bad trade returns for October and the threat of a power hold-up by electricians and miners. He decided to protect sterling by raising Bank rate to 13 per cent, declaring a state of emergency and squeezing bank credit hard. The City rumour was that an autumn budget was coming to impose higher direct and indirect taxation in order to slow down an overstrained economy. The rumour was quickly denied by the Prime Minister. There is to be no return to. 'stop-go.' The growth of the economy is to be sustained at 31 per cent next year. So the markets picked up again.
Behind the Stock Exchange slump there was also a loss of confidence in the Government. It is obvious that you cannot control any economy by just using the rate of interest, which is what the Government is attempting to do. If you give complete freedom to money-lenders you will get into trouble. The famous 1971 white paper on 'Competition and Credit Control ' was a retrograde step and although I was the only financial writer to say so at the time I am now getting plenty of support for my view that the use made of the money handed out by the money-lenders was not compatible with a fair society while the raising of the rate of interest was highly inflationary. The nearest phrase on the latter point was coined by David Malbert, the alert City editor of the Evening Standard, who said: "The frightful dilemma of the Government's policy of trying to drive the economy through the price of money is that the steering wheel is linked to the accelerator."
Even a political correspondent has tumbled to the dangerous implications of the Government's monetary policy. Ronald Butt of the Times said: "To deal with the unacceptable level of bank lending it has had to put up interest rates to a level which itself fuels the rise in industrial costs ... The attack on the incomes policy will be stimulated by the high interest rates now brought in."
The lending spree allowed to the money-lenders who have littered the country with their credit cards and financed every legal bit of ' spivvery ' presented to them, has been socially divisive. They financed the bull market in equity shares on the Stock Exchange. From a low point of 305 in March 1971 the FT ' thirty ' index rose to 540 in May 1972 — a rise of over 77 per cent. Economically it was fully justified, by the subsequent rise in company, profits generated by the Heathian 5 per cent growth policy but it allowed the Marxist critics to remark that the market value of the equity shares quoted on the Stock Exchange had increased from £99,640 million on March 31. 1971, to £124,531 million and then to £142,474 million at the corresponding dates in 1972 and 1973. Of course, this appreciation was spread round the life funds, the pension funds, the charities. the unit trusts and other institutions, which handle the savings of the small investor, but a lot of it went into the pockets of the merchant banks and financiers who floated the company issues and cooked up the mergers and take-overs an which the boom was largely based. How many of those mergers and take-overs really contributed to the national output and employment? The Government was often having to apologise for the big jump in the money supply (M3) which had been caused by immense Stock Exchange "deals.
Secondly, the free-for-all in money financed the great gamble in property development which has put millions into the pockets of the developers. In the two years ending 1972 the value of construction (housing and other) was just over £8000 million. How much was due to the private developer it is impossible to say but the size of the figure suggests that inflation must have given him a profit of some billions. Raising Bank rate would not deter that sort of profiteering. Cannot the Government see that it is socially divisive to allow unlimited money to, say, Mr Harry Hyams to build skyscrapers and leave them empty while he sits prettily on the inflation profit?
My argument is that the freedom given to the money
lenders has resulted in an over e,conorny, and an over,
extended impcirt bill. Controls over bank lending, that is, controls over both the quantity and the quality of bank advances, should never have been lifted. The Bank of England has lately asked the banks to curb their lending in 'the financial sector' but exhortation of this kind is futile. A rigid cbntrol is needed. It is absurd for the Government to pretend that controls over bank lending are objectionable when it is rigidly controlling our incomes and prices.
The point has come when it is necessary to put some control over imports as well. The October bill was really a stinker. Imports were £1306 million — up by £67 million — and exports were £1008 million — down by £54 million. The visible trade deficit was £298 million — the highest ever — and the current account deficit, allowing for invisibles, was E233 million. Of course, there were special items which accounted for the rise in imports. Net imports of diamonds were higher because the Middle East war held up exports of 'precious stones.' Imports of fuels (stocking up for strikes?) were £46 million higher and imports of ships constructed in foreign yards happened to be £44 million higher. Allowing for all this a total payments deficit, which must run into E1300 million this year would normally call for special measures under the old IMF rules such as temporary import quotas. These would be preferable to import surcharges which would add to the domestic imflation of prices. If another import bill as bad as the October one turns up again, then temporary import quotas would become inevitable, for the £ cannot be bolstered up any more by a rise in: Bank rate—now 13 per cent--; without making inflation'at home; intolerable and industrial invest' ment impossible.
It should be appreciated that the. £ has been supported up to date by the dirtiest ' floating ' ever known: The reserves have been 'doctored' by huge borrowings abroJd on the part of the public boards, The total borrowed since March has been $2123 million which accounts for a third of our toal reserves of $6761 million.
Mr Barber claims that his panicky 13 per cent Bank rate saved sterling from collapse. If ,it did it can only be a short term release. Foreigners will remain sceptical until they see action taken to put an over-strained economy right by postponing Maplin and the Chunnel, by cutting more government expenditure and by direct controls over the volume and quality of bank advances.
As I believed this reformation was coming I recently thought that there might be a case for buying gilt-edged stocks, although I emphasised that it was speculative. But the time must come when this Government sees economic sense. Meanwhile although I thought the slump in equity share was 'overdone, I am still sceptical of the equity future. The first sign of a return to a sane financial policy and a lower rate of interest must bring a recovery in the gilt-edged market.
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