MONEY The skeleton at the feast
NICHOLAS DAVENPORT
The first ceremonial duty of a Lord Mayor of London is to invite the merchants and bankers of the City to a feast at the Mansion House at which the guest of honour is the Chancellor of the Exchequer. The City looks forward to the occasion because it gives an opportunity to the Governor of the Bank, the chairman of the Stock Exchange and the chairman of Lloyd's to tell a few barbed home truths to the Chancellor and let the Government know exactly what is expected of them by the City. This time the Governor of the Bank stole the limelight. His role may be likened to that of the licensed court jester at a mediaeval royal table. Indeed, the Chan- cellor pointed out in his speech that 'although an agent of Government for certain func- tions the Governor is also an independent authority in his own right'. (That was because Hugh Dalton failed to nationalise the Bank properly in the Bank of England Act of 1946 and left it a semi-independent public board like the Bac.) The result is that the Governor is traditionally allowed to make speeches which are contrary to government policy in spite of the fact he earns his living as a public servant. The last Labour Cabinet were driven wild by the stream of rude warnings which the former Governor, the Earl of Cromer, proclaimed against the shortcomings of Labour policy in defence of sterling; they were greatly relieved when this banking Earl resigned and his place taken by a non-Old-Etonian hanker promoted from the ranks. But just to show that a Governor is politically im- partial Sir Leslie O'Brien jumps up at the Mansion House feast to tell Mr Barber that he cannot possibly fight the inflation battle without an incomes policy. Perhaps he took his cue from that other court jester, the Lord Balogh, who rudely told the trade union royalty at the Blackpool Labour conference that 'the re-creation with more extensive powers of the National Board for Prices and Incomes is essential'. That of course is some- thing which the two Barbers—Anthony and Barbara—are agreed is politically impossible for the time being.
Traditionally Bank Governors are poli- tically naive and Sir Leslie's remarks were taken in good part, but I do wish he had turned his attention more to the practical questions which worry the great middle class who are really suffering under this rampant inflation. These were the skeletons at the feast. They have seen prices go up in every year since the war. The average annual increase over the past twenty-five years has been about 3+ per cent, which is called 'creeping inflation'. Now it is at the rate of 7 per cent, which is galloping inflation. All Sir Leslie did was to say how serious it was and pass on to the technical questions worry- ing a banker. He admitted that the money supply had run away out of his control and that the joint stock bank advances were up against their official ceiling, but he did not say why he had not asked the banks for more 'special deposits' which would reduce their liquidity, that is, their power to make advances. As for the money supply he missed receiving a good clap by failing to tell his audience that he was not proposing to run the Bank's affairs in accordance with the
rules of a Chicago professor and that he had, in fact, instructed the government broker to support the gilt-edged market whenever it was necessary—and to hell with the Fried- manites. Incidentally, the Governor might surely devise a means whereby government stocks can be bought—say, through a semi- official agency—without increasing the cash base of the banks at the Bank of England, which is the point upsetting the Friedmanites.
But to return to the skeletons at the feast. When the trade union bosses have been stopped trying to snatch too large a slice of the national cake, something must be done to help the great middle class increase their savings and make them worth more. The key to this is to bring the market in govern- ment bonds back into favour. What stands out like a beacon. in this monetary darkness —extraordinary that none of the sivakers at the Mansion House feast could see it—is that a firmly rising market in government bonds would lead the way out of the in- flation, for it would attract a rising volume of savings. That surely is the Government philosophy—more savings, less inflation.
The time is ripe for a return of popular favour for the gilt-edged market. The equity cult has fallen into bad odour and the net sales of the unit trusts have dropped to about £5 million a month against £20 million at the height of their popularity. People who have caught a cold on the Stock Exchange have begun to see the merit in government bonds which not only provide security but a tax- free profit on capital gains. Sentiment about fixed bonds is surely changing. For example, what has been so surprising about this year of inflation is that the flow of savings into the building societies has increased. Sep- tember saw a peak inflow of £144 million
from savers attracted by the offer of 5 per cent interest free of tax. Security with tax paid is apparently the lure It was touching to observe that some of the employees of the Westminster City Council who had recently been convicted of stealing money from parking meters had elected to park their gains with the building societies. It was a splendid advertisement. But if more savings can flow into the building societies while the inflation is still rampant what might be expected if the gilt-edged market began to boom? The Chancellor of the Exchequer could start a boom any Thursday of the week by telling the Governor to reduce Bank rate from its present high level of 7 per cent. The calling of 'special deposits' from the banks would be a suitable occasion for Bank rate to be lowered. A lower Bank rate would enable the building societies to reduce their high mortgage rate—still 81 per cent—and the local councils their high rents. Cheaper money, cheaper rents, cheaper mortgages—all this would slow down the pace of the inflation.
The chairman of the Stock Exchange, Sir Martin Wilkinson, was the only speaker at this City feast who seemed to realise the inflationary consequences of high interest rates. They drove up the costs of govern- ment and local authorities, he said, and made it difficult for industry to borrow in the capital market for new investment which might offset rising labour costs. He implored the Chancellor to encourage more savings by removing the discriminatory tax on 'unearned' income. It was absurd, he added, that a man who had struggled to save for his family and his retirement should find himself having to pay a higher rate of tax on the interest from his savings than on the income out of which the savings were made. The removal of this discouragement of saving should be high on the list of Mr Barber's tax reforms.
It would surely add point to Mr Heath's 'quiet revolution' if saving came hack into favour. But make no mistake—the Governor must start the ball rolling by starting a quiet gilt-edged market boom.
ffolkes's investors' alphabet
(-JID Ty K: ATi
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