Avuncular Advice to Mr. Wilson
By NICHOLAS DAVENPORT
IF Mr. Harold Wilson in- tended to encourage the business community, as I believe he did, in his for- ward-looking speech at Swansea, with its emphasis on expanding production and the technological revo- lution in industry, he had the reverse effect in the City. This was partly be- cause he used menacing language about the 'quite ruthless discrimination' he intended to use between industries and com- panies which served or did not serve the national need for exports and partly because he threatened 'the mixture as before,' which brought back to everyone the painful memory of the declining years of the last Labour Government. There is once again to be discriminatory taxation on com- pany profits, that is more tax on the go-ahead, successful companies which are able to increase dividends through higher earnings and less on the 'slothful' companies which don't increase divi- dends but sit on retained and idle earnings. And there is to be another exchange crisis with a high Bank rate and a protected low rate of in- terest for housing and local authorities. All this is so out-of-date—and so unscientific—that it cannot fail to be depressing. As I sincerely wish Mr. Wilson to be successful if he attains high office, I venture to offer him some critical and constructive advice.
Let me take the external problem first. Mr. Wilson clearly expects a flight from the £ if he wins the general election. He did not repeat the late John . Strachey's fearful prophecy that 'the national reserves of gold, dollars and foreign ex- change would pour out of the country in a torrent,' but he said: 'We must be prepared, until our defences can be strengthened in other ways, to use short-term interest rates to staunch any flow of short-term capital so as to safeguard our sterling area reserves.' He promised that if this (Bank rate) weapon had to be used to 'operate on hot money'—who wants to 'operate' on 'hot money' today? Hot money is something to dis- courage—he would not force on the nation a structure of high long-term rates of interest. He would have a two-tier interest-rate structure so• that the local authorities could get capital for housing at the rate the Government could corn-
mand. All this is' calculated not to inspire con- fidence in a Labotir. Government, but to arouse alarm.
First, why talk of a 'two-tier' system of interest rates when it is unnecessary to be so provoca- tive? I have previously advocated—and still do —a low rate of interest for housing and other essential items of social investment, but I have long since ceased to talk of a `two-tier' system, which Upsets the orthodox and old-fashioned, for the simple reason that we have already got two rates at our disposal. A Bill has been brought forward to enable local councils to borrow through the Public Works Loan Board and the Board can charge them 'the rate which the Government has to pay on Treasury bills—at present 3.72 per cent. All the Treasury has to do is to issue more Treasury bills and as the money supply under the Tories has never kept pace with the rise in the national income, this would be a proper course to adopt. (It would also make it possible to bring down the long-term rate of interest, but that is another story.) To quieten those who fear an orgy of local government spending, I would restrict this PWLB cheap rate 10 housing, hospitals and schools, so that the councils are not encouraged to spend money on luxuries like bathing pools and new offices.
Next, why anticipate a flight from the £? To talk about it is to induce it. The wise policy in money matters is always to keep quiet and not proclaim what you think from the rooftops. Everyone knows that the monetary authorities will take all the necessary and obvious steps to offset selling of their currency in the exchange markets, but they don't advertise it beforehand. If Mr. Wilson wants to.avoid an exchange crisis, all that he has to do is to tell the business people tosarry on making as much profit as they can and assure them that those who modernise their plant and introduce automation, etc., will get tax. advantages. He will not achieve a surplus on the balance of payments unless he makes exporters feel secure and happy. Exporting is not fun, but very hard work. If he threatens them with 'ruthless discrimination' he will soon dis- cover what 'lags' mean in the exchange market.
When I heard Mr. Wilson speaking of 'safe- guarding our sterling area reserves' I shuddered. Had he imbibed all the Conservative nonsense about 'reserve currencies'? The international pay- ments system is at present under review at government level in preparation for the next IMF meeting and it is significant that opinion is at last growing more radical:. A group of inter- national economists—all experts in payments problems—has called for 'the liquidation of the so-called reserve currency system.' As far as sterling is concerned, the system has already changed. As the Bank of England pointed out in its December bulletin, the sterling holdings of non-sterling countries are less than a third of the total and are now largely balanced by UK claims on them. At June .30, 1963, our net liabilities to non-sterling countries were only £486 million. We can draw on the IMF for £876 million and in addition we have reserves, includ- ing government holdings of dollar securities, of around £1,300 million, a total of £2,176 million. We have, therefore, no need to fear a foreign run on our 'bank.' As for our sterling liabilities to sterling area countries, these were £2.407 million net at June 30, 1963. In this group, said the Bank of England, the decision on whether to hold sterling is 'increasingly dependent on con- siderations of commercial and financial advant- age.' In other words, they hold sterling because it is convenient to do so and because there is no super-world bank to offer the facilities of London. It should not be difficult to hold their confidence—if only Mr. Wilson would announce that he intends to run a mixed economy (as agreed in the 1960 statement of his party aims) and that he understands the private sector to be motivated by a desire for efficiency and profit which he considers proper.
On the complicated question of company taxa- tion, I reserve criticism for a later date.
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