How the crisis affects the City MONEY
NICHOLAS DAVENPORT
Last weekend was for me a memorable one, listening to the broadcasts of violence and an- archy in France and reading peacefully the domestic dissertations on such esoteric con- troversies as our egregious balance of payments and the contrasting prices of Government bonds and equities. Insular we have always been, but do we belong to the same world? Perhaps Mr Wedgivood Benn in his scarifying speech about the possibility of revolution was trying to bring us back to reality. If that was Mr Benn's object it will also be mine.
The National Institute of Economic and Social Research brought the Government back to reality on the balance of payments in its May bulletin. It has revised its estimates in the light of the trade returns for the first four months. It no longer expects to see the target figure of £500 million surplus reached in 1969. It fore- casts a deficit for 1968 of no less than £350 mil- lion—most of it falling in the first half of the year—instead of the £100 surplus it expected only three months ago. If this pessimistic fore- cast proves to be too optimistic it suggests direct measures to control imports, such as selective import quotas or import licensing or the deposit of cash at the bank for import orders, which would avoid the further weakening of output and employment. This sensible suggestion made the Government extremely angry, for it prefers to deal with an increase in consumer spending by an increase in consumer taxation.
The Treasury warns that it would be wrong for this nation, trying hard to push its export trade
with the help of a devalued to initiate pro- tectionist action and invite retaliation—par- ticularly from the us. That may well be true, and the National Institute must be reprimanded for being over-hasty in its policy review. But the Government must also consider the ultimate logic of a policy of consumer deflation designed to curb imports. To stop well-to-do people buy- ing tins of freely imported Californian carrots it will be necessary to throw out of work not so well-off people unlucky enough to be engaged in the home service trades instead of exports. The National Institute simply suggested that it might be less harmful for domestic output and employment if the import of Californian carrots were restricted by an import quota. My inclina- tion is to agree with it. Exports may be doing well at the moment—being 17 per cent above the 1967 average so far this year—but with the world in its present unsettled state, in monetary as well as political affairs, I cannot believe that we will be able to right the balance of payments quickly enough for our creditors overseas with- out imposing temporarily some measure of import control.
Or quickly enough for our workers at home whose standard of living is being temporarily reduced! The unions are not likely to tolerate for very long a rise in unemployment as well as a rise in the cost of living. But that is what the Chancellor's policy of consumer deflation entails. Before the National Institute's counter- blast was even read the Chancellor had intensi- fied his attack on the personal consumer. He had asked the Bank of England to freeze bank advances to the private sector at 104 per cent of their level in November, including those for export. Bank advances are already at this ceil- ing. As export loans have to have priority (and are increasing), the order implied that non- priority borrowers would have to be cut down. Personal loans might even have to be repaid. The Chancellor obviously hopes that this new bank squeeze will work through to imports and stop the stockpiling of imported goods.
Bank advances have risen in the past six months by 4f per cent in total and the bulk of the rise has been due to export finance. The new squeeze will, therefore, depress the home trades. Already there have been signs in sensitive employment areas of a sharp fall in store trading and not a month passes without bankruptcies in small businesses, particularly in the building trades which have been hit by the fall in local authority and private contracts. So the clearing banks have been to the Bank of England and to the Treasury to protest. They are particularly angry because the squeeze does not fall on the heavy-spending public boards and nationalised industries, whose increased charges are now costing the public an extra £100 million a year. To a bank manager who has to break word with a trusted private customer it must come as insult to injury to read the ridiculous advertisements for 'high speed gas' from the finance-swollen Gas Board. One would have thought that there had been enough gas explosions to give the Gas Board all the publicity it does not need.
All these quick-marching events were sharply felt in Throgmorton Street. The equity share markets had already begun to fall, as I had been expecting for some time, and the bank squeeze brought the decline up to 30 points or 6 per cent from the top 483. Curiously enough, as one broker points out, the force behind the 1966 decline which brought the Financial Times index down to 284 was the squeeze on bank overdrafts. But do not expect a major slump in equities. The unit trust and life fund man- agers are ready to take up the private selling when it has brought the Financial Times index down to, say, 420. Equity shares, as I have said, represent real values in a political world of illusions, and when their asset value per share is below the market price they will always find what is known in the market as 'cheap buyers.' But if the Government fell on the next monetary crisis, the index could fall below 400. A return to power of the Tories is construed in the market as bearish for equities.
The poor gilt-edged market, which now feels as demoralised as some sections of the public, took the new balance of payments forecasts of the National Institute very badly. It is also worried by the delay in passing the tax surcharge Bill in the us because the Federal Reserve threatens to make money even dearer and tighter. The us bill rate has risen to 5.7 per cent (its top was 5.8 per cent), while our Treasury bill rate at home has jumped to 7.2 per cent. On this long-dated government stocks fell to their lowest prices ever. But the market should not forget that the new bank squeeze could lead ultimately to a further cut in Bank rate to 7 per cent. The old Treasury policy of keeping rates high in London to attract foreign money into sterling has been abandoned. There is no reason why the Bank should not pursue a more independent line. When the ex- port boom has run its course, when the private spender has been deflated by Mr Jenkins to the point when unemployment has begun to rise, the Treasury will then have to consider seri- ously making money cheaper! But how long, oh Lord, how long?
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