MONEY The revolution in banking
Nicholas Davenport
"The quiet Heathian revolution goes on." It would be considered a Poor joke if this sentence were repeated at the start of each money Page but it has got to be done this week because a really quiet revolution has just been effected in the banking system. It was so quiet that it never hit the headlines and was not even discussed in Parliament. It has only been noticed in the financial press and, being a technical revolution, it has not excited much comment outside the City. On the whole the comment has been favourable but Personally I have my reservations. I may be somewhat prejudiced against rentiers in general — Whose euthanasia I dreamed about in Keynesian days — and against bankers in particular but I believe this quiet revolution could have dangerous consequences.
Briefly, and in non-technical language, the Government has stopped imposing a ceiling on bank advances which Labour used to do Ifl a vain attempt to curb the Inflation. The restriction of bank advances was always difficult to enforce, for there were always finance houses and other ' nearbanks ' ready to provide the facilities which the joint stock banks could not do when they had reached their ceiling. The Labour technique tended, in fact, to put a ceiling on bank efficiency. So the Government has now declared that cney-lenders can lend what they like to whom they like, provided the banks hold 121 per cent of their liabilities and the finance houses 10 Per cent of tl-eir liabilities in specified reserve assets.
The finance houses were fixed at 10
Per cent — and allowed a full Year to build up their reserve assets to that figure — partly °Fcause they had never been under direct Bank control before, partly because they do not have access, as the banks do, to a lot of interest-free deposits from their customers, partly because they are a mixed-up bunch of bodies yarY greatly in size. (The largest, like United Dominions
Trust, will elect to be classified as banks.) But being now subject to Bank control as to reserve assets the finance houses are now freed from all control over hire-purchase or credit terms.
The eligible reserve assets are balances with the Bank of England (but not cash in the till), Treasury bills, tax reserve certificates, money at call, government stocks with one year or less to maturity, local authority bills discountable at the Bank of England and up to a limited amount discountable commercial bills. To guard against excess liquidity and its potential inflationary consequences the Bank of England reserves the right to call each Thursday for a percentage of each bank's or each finance house's assets into idle special deposits at the Bank. For this restoration of freedom ,he clearing banks have agreed to abandon their cartel; they will in future compete with one another on deposit rates and on bank overdraft rates.
All this sounds like a well behaved return to the market economy which the Tory government is said to desire. And no great harm may come of it while the banking system is bulging with money to lend because of the prevailing recession and the nearmillion unemployed. But suppose the reflationary measures of Mr Barber begin to take effect next year and there is a scramble for money. Some of the joint stock banks may then be anxious to attract more depositors and may be raising their deposit rates. This will cause money to be withdrawn from the building societies and savings banks and will adversely affect both private and public housing. The Bank of England in its recent memorandum declared: "The authorities see no need, at least in present circumstances, to seek to limit the terms offered by the banks for savings deposits to protect the position of the savings banks and building societies." But circumstances can change very quickly. I regard the new freedom for the banks as a definite threat to the building societies.
My second objection is that under the new freedom greater power will pass to the money lenders, which, for a democratic society, is a step backwards. The Economist makes the point that with ceiling controls off there will be something like a common pool of possible deposits and possible borrowers and that this will tend to make industry much more bank finance-oriented and much less stock-market-financed. In Germany and Japan big industrial companies are 70 per cent bank-financed and only 30 per cent stock-marketfinanced. Power therefore resides with the banks and as this country has not got the strict anti-trust and anti-monopoly laws of Ame rica we run the risk of handing over our industrial future to the stuffy boards of the established joint stock banks. This again is retrograde. I cannot believe that a bank-dominated regime will promote a more efficient use of our resources. It could mean that the least desirable borrowers — the purveyors of pornography, the manufacturers of luxury leisure goods, the candy-floss merchants and all — will grab too high a proportion of bank finance because they are able to pay the highest rates of interest.
If the new freedom means that money is going to be rationed by price instead of government con trol it implies that money may get dearer just when we need cheaper money to speed the reflation and absorb the unemployed. This again is a backward step. At the back of the Treasury mind is, of course, the Friedmanite obsession that it is better to manage the economy through the control of the money supply than the rate of interest and that the rate of interest can be left to the law of demand and supply. In a democratic society which is committed to a heavy programme of social investment in houses, schools, hospitals and roads it is extremely antisocial to allow the capital demands of private enterprise, which includes the candy-floss as well as the productive industries, to drive up the rate of interest to heights which make the desirable social investment too expensive for the taxpayer. The old idea of an equilibrium rate of interest, mean ing in effect the highest marginal rate which drives demand down to balance supply, implies that the demand for houses, schools and hospitals will be driven down well below the socially desirable volume.
I conclude that the quiet revolution in banking is retrograde.
Instead of restoring competition for money and freedom for the rate of interest, we need a more sophisticated control, leading up to a two-tier system of interest rates — just as some countries have a two-tier system of exchange rates — one for the commercial community and another for housing, hospitals and schools. Some advanced social democracies have already moved in that direction.
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