MONEY MYSTERIES
By OSCAR R. HOBSON
"T HE Chancellor of the Exchequer has decided to reduce the rate of interest on Treasury Deposit Receipts from r* per cent, per annum to 1 per cent." "The Clearing Banks give notice that their buying rate for Treasury Bills will be reduced from i per cent. to 1. per cent." . . . A good many readers of sentences like these which appeared last week in the City columns of the news- papers must have asked themselves—Whatever does it all mean, and, anyhow, how does it affect me? Well, one of the announce- ments, namely that relating to the rate of interest henceforth to be paid by the banks on their customers' deposits, does affect you. For the future no interest at all will be paid by the banks on current account balances or on deposit accounts callable at less than fourteen days' notice—and that does mean you.
But as to the interest on Treasury Deposit Receipts and Treasury Bills, what is the inner significance of that? First of all let us be clear what these Treasury Deposit Receipts are. They are receipts for deposits of money with the Treasury by the banks. The deposits are normally for six months—Treasury Bills run for only three months—but the banks have certain rights of calling them in earlier if they want the money for subscriptions, either on their own or their customers' account, for the longer-dated Government issues like National War Bonds. Apart from those refinements, the banks stand in much the same relation to the Treasury in respect of these deposits as you do to your bank in respect of your deposit with it. At the present moment there are some £2,000,000,000 of these Treasury Deposit Receipts (T.D.R.s to the City) held by the clearing banks as against their customers' deposits with them of L4,800,000,000. If, then, you have a deposit with your bank (whether an ordinary current account or a deposit account) of Do°, your bank holds about £40 of this in the form of a Treasury Deposit Receipt, on which it has hitherto earned per cent. and will now earn 1 per cent. The rest of your £m it holds in cash (about Do), money at call with the discount market (Li), longer-term Government investments (£22) and loans to industry, commerce, the professions and private indi- duals (£15).
Now the L2,000,000,000 of banks' T.D.R.s, plus the additional cash they hold by reason of the war, represents very roughly the increase in the banks' customers' deposits since the war. By and large this increase in banks' deposits can be classified as "infla- tionary." It represents an increase in purchasing-power which has no counterpart (or only a partial counterpart) in an increased out- put of goods and services by the community. It has been brought into being by this stage army process of "credit creation" which to many people seems so mysterious. The Government, failing to raise from you and from me (in taxes or subscriptions to war loans) all the money it wants for the prosecution of the war, applies to the banks for the balance. The banks advance the Government say Li,000,000 (against T.D.R.s or Treasury Bills or any other form of Government acknowledgment of indebtedness), the Government pays the Li,000,000 to say Vickers Armstrong, who are building a new battleship, Vickers Armstrong pay the Lipoo,000 into their
bank and, hey presto! the bank deposits of the country have risen by Et,000,000.
Of course this creation of credit depends ultimately upon the public's belief and trust in the banks. Nevertheless, it does enable the banks in wartime to increase their deposits and their assets and their earnings without any special effort on their part. There- fore it seems reasonable that they should receive only a low rate of interest on their additional funds. That was why, when T.D.R.'s were first instituted in 1940, the rate of interest was fixed at only itk per cent., and that is why the present Government—its appetite increased by the eating of the previous one—is now reducing it to per cent.
So much for what has happened. But what consequences outs'cle the rarefied atmosphere of "high finance," what consequences of more intimate concern to the ordinary citizen than the loss of interest (if he has been drawing any), on his bank account, are to be looked for? I don't know that I can answer that question, but I can at least restate it in more pointed form. Will, then, this cut in interest rates on short-term securities held by the banking system lead to a similar reduction in interest rates on the medium and long-term securities, held by the public as well as by financial institutions, which form the bulk of the National Debt? And if so, will there bt any sort of revolt by the saving and investing public? Will the public withdraw deposits from the banks? Will it, if the Govern- ment decides to follow up its present step by reducing interest on Savings Certificates and Post Office deposits, either save less or employ its savings in some other way than investment in Govern- ment securities?
In the first place, the principle of the "better 'ole" applies very largely. Up to a point depositors in the banks can shift to the Post Office Savings Bank or National Savings Certificates, but there are limits to individual investments of these, and the money is not quite so readily available as it is on a bank account. And if interest on Savings Certificates and Savings Bank deposits is presently cut, investors can no doubt shift into preference or ordinary shares or into real property or commodities of one kind or another. But there are objections to all these courses which might count for very little in the face of really serious fears of inflation, but will certainly prove generally effective so long as the fear of inflation is no greater than it is at present.
Then there is the possibility of people being discouraged from saving at all and deciding to spend their money. I think this possibility deserves serious attention, and will no doubt receive it before the authorities decide upon any reduction in Savings Bank and Savings Certificate interest. It certainly is a delicate matter, at this moment, when the flow of at any rate small savings is showing signs of flagging, to determine whether it is safe to reduce the scale of remuneration offered to savers. On the other hand it is un- doubtedly true, as Lord Keynes and other economists have insisted, that the rate of saving of a community is determined by other considerations than the rate of interest. Some people, in fact, having a certain provision in mind for old agt or for dependents, will save more if interest rates are low than if they are high.
On the whole, therefore, one may conclude that the supply of savings is not likely to be very greatly affected if the Government decides to reduce the Savings Bank and Savings Certificates and War Bonds interest. And one must conclude that that is its intention, since the saving of National Debt interest secured by the cut in the T.D.R. and Treasury Bill rates will in any case be very modest—much less than the £3o,000,000 which a number of commentators have mentioned—and may indeed be reduced almost to vanishing point if holders of T.D.R.'s and Treasury Bills transfer part of their holdings into 21 per cent. National Aar Bonds.
Nevertheless, there remains a very important factor which ought to be considered, though it will probably not be by the present Government. It is this—that whatever doubts there may be about the supply of savings in the next few years, there can be no doubt whatever about the demand for them. The demand for savings, the demand for new capital, will be immense throughout the world. And the price which borrowers would be willing to pay for it in a free market, so far from falling, would be very high. In depressing rates of interest, therefore, the Government are swimming against the tide. They can do so because of their "controls." By control of the capital market and control of building and of the use of raw materials, they can prevent industry from bidding for new capital. By control of the foreign exchanges, they can prevent capitalists from exporting their capital to take advantage of higher rates of interest which may be obtainable elsewhere, and can more or less force them to invest at home. The trouble is that the maintenance and increase in the gap between enforced domestic rates of interest and the natural rates is certain, on the one hand, to stimulate evasion of the regulations against issue and export of capital and, on the other hand, to perpetuate the need for controls.
The cut in the interest rates on T.D.R.s and Treasury Bills hardly makes sense unless it is to be followed by a much more far- reaching attack on the present interest-rates structure. And impor- tant as it is to keep the National Debt interest bill down to the minimum, such an enterprise may in the end cost us a big price in the form of perpetuated controls and regimentation of the free enterprise section of industry, with all the inevitable accompanying frustration and discouragement. But current Left Wing philosophy, with its down on money-lending and speculation and its hankering after a zero interest-rate, is likely to reck little of such arguments.
Previous page
