FINANCE AND INVESTMENT
By NICHOLAS DAVENPORT
THE slump in the gilt-edged market has gone beyond a joke. At one time this week 31 per cent, War Loan had fallen to 85 to yield 4.15 per cent. A little more of this and industrialists will be unable to issue debentures or loan stock on a 4 per cent. basis and Mr. Butler's call for more industrial investment—for the modernisa- tion of plant and the extension of factories —will go unanswered. A good deal of the fall is quite unnecessary. I noticed that the other week the US Federal Reserve Board made a public anhourftement that it was changing its money policy from one of 'active ease' to one of 'ease.' It did not make me very much wiser but 1 appreciated that it was trying to keep this public informed of a change. If only the Bank ot England were equally articulate! If only it would say that it was making use of the Treasury bill ratd to control the move- ment of international money, leaving the Bank rate for the Chancellor to use when he thought the nation wanted deflating, it would be something. As it is, it has been left to the discount houses to put their heads together over their tenders for the Government's weekly offer of Treasury bills atd so bring about a rise in this key discount rate (since November) from £1 I Is. 6d. per cent. to £2 Os. 4c1* per cent. That has demoralised the gilt-edged market so much that Old Consols, 'Daltons' and War Loan have all fallen five points or more and the long-term rate of interest has been forced up from 31 per cent, to over 4 per cent. If the monetary authorities did not approve of such a violent change they could have snubbed the discount houses by making lower rates for their day-to-day 'open market' operations. The fact that they have not done so entitles the discount houses to say that their dearer money action has not been an act of sabotage but a skil- ful anti-inflation operation undertaken with the connivance of the authorities. But the secrecy of it all is not good enough.
The speeches of bank chairmen refer to the symptoms of dangerous inflationary pressures in the economy and two of them dislike the implications of the boom in equity shares on the Stock Exchange. Lord
Harlech, chairman of the Midland, regards this as evidence that inflationary forces have not been decisively overcome. It is arguable, he says, that the reduction in Bank rate in the spring of last year may have furthered an undue rise in the prices of equity investments to a level at which they heavily discount the prospects of con- tinued high activity in trade and industry. But if the authorities allow the gilt-edged market to become demoralised who will not prefer good equjties to Government bonds? If there is a permanent inflationary trend in the economy who will not buy equities for his pension fund? The lesson of this sad story is that the monetary authorities must give up mystique for action. The first and immediate step is to instruct the National Debt Commissioners to send the Government broker into the gilt-edged market and buy 'the longs' and 'undateds.' The next step is to tell the dis- count houses that their dearer money maoceuvre has gone far enough. The final step is for Mr. Butler to make a speech say- ing that if inflationary pressures get worse he will have to raise Bank rate.
Previous page
