4 DECEMBER 1964, Page 27

The Economy

Lessons to be Learned

By NICHOLAS DAVENPORT IT must be very mortifying for the Wilson Govern- ment to find themselves forced to take the restric- tive financial action which they have so often de- nounced under Tory 'stop- go' management—the 7 per cent Bank rate, the heavy borrowings from foreign bankers (with or without strings), the deflationary Budget putting up prices and costs, the higher income tax falling upon the young managers and technicians and skilled workers whose pro- ductivity they want to encourage. In this ironical situation they need our sympathy and support. To go down to history as the first Labour Government to be saved by a new kind of bankers' ramp' was not the sort of fame they desired or deserved. For Mr. Rees-Mogg to con- gratulate them on preferring deflation to de- valuation and on being willing to drop the 4 per cent growth target and accept a setback to industrial investment and modernisation for the sake of the £ is adding insult to their injury. I am sure they would sooner go out of office than accept defeat and humiliation of this order. My own belief is that they can lead the country out of the economic and financial mess they inherited if they are willing to profit by the mistakes and misunderstandings of the past fifty days.

The first mistake. was to rush into provocative independent action. We are, of course, a sovereign Power entitled to shape our own economic Policies, but we are also members of the OECD and the creators of the EFTA. We are, there- fore, under an obligation to keep in touch with our fellow members of these organisations. Everyone understands that when we are running a deficit on our international account we have to take steps to put it right and that when we are in very serious deficit the steps will have to be drastic—like devaluation or import re- strictions or internal deflation or cutting our military commitments abroad. No one ever ques- tioned our right to decide which course to take. I have before me a supplement from the OECD Journal setting out the widely different policies which the fourteen countries have adopted for guarding against inflation. The preface ran: 'All governments are aware of the imperfect nature 01 the [economic] indicators they try to watch and of the political difficulties which confront them when they decide that the time to tighten the reins has come. . . . The degree of trade liberalisation and convertibility is now such that It is of the utmost importance to each country that excessive strains should not develop in its neighbours. The bugbear of the Thirties was the extent to which countries exported unemploy- ment to each other.'

There was no crying need on our part to take action without consultation. The £ was ‘not being thrown overboard in the first few weeks of the Labour Government. There was much goodwill abroad and consultations might have produced a better remedy. For example, the system of im- Port licences, with which foreign countries are already familiar, might have been extended. (Imports of pottery, toys, cutlery, radios and tele- vision sets, etc., are still being restricted by quotas from certain countries.) Selective restric-

tion might have been better than an import sur- charge laid indiscriminately on all manufactures. What upset foreign confidence was the extra- ordinary tale said to have been told to the sensi- tive and suspicious Swiss that we had to take unilateral action without warning because our situation was so desperate. A flight from the £ was bound to develop from that moment.

The story current in the City is that the Governor of the Bank advised a rise in Bank rate from 5 per cent to 6 per cent on November 5. This may or may not be true, but a flight from the £ is a financial haemorrhage which has to be staunched by monetary measures if de- valuation is ruled out. Postponement of the operation and a jump in Bank rate from 5 per cent to 7 per cent on November 23 undoubtedly increased the panic. Six months before the Labour Government assumed office I had written: 'If the £ sterling were to get into serious trouble we would have to consider devaluation, but long before that stage is reached we could call on plenty of support, for no one wants to see the niakeshift system devised at Bretton Woods break down before a better system is ready to take its place. The £ has, in other words, a nuisance value, which we should not hesitate to exploit.'* Consultation over the surcharge would have en- abled us to exploit that nuisance value and perhaps to avoid a repetition of the Tory dear money with Bank rate at 7 per cent which only worsens our 'invisible' account with higher in- terest payments abroad and puts us more at the mercy of the merchants of 'hot money.'

The danger is that when the OECD Ministers meet Mr. Callaghan and Mr. Jay this week in Paris they will not be convinced of the adequacy of British policy and will demand full defla- tionary action. It is obvious that confidence in the future of sterling has not yet been fully re- stored. The fact that half the $3,000 million credit is being put up by the European bloc does give the unfriendly bankers the opportunity to attach strings to their loan. It is useless for Mr. Callaghan to protest that he will not 'be pushed around by foreign bankers': he has already been pushed into deflationary action in his Budget and the bankers may well ask him to go the whole hog and deflate the whole economy. This must be stoutly resisted.

This brings out the mistake of the budgetary policy which was so hastily devised to meet the disinflationary calculations of the economic tech- nicians. (When did their clever sums ever prove right?) To correct the balance of pay- ments and release resources for exports it is not necessary to plunge into an overall deflation of the economy. This would merely cut our pro- duction runs, raise our costs, increase the misuse of labour and worsen our competitive position abroad...We could release resources for exports without putting up prices and costs if (a) the banks were required to be selective in their ad- vances, (b) the deposit requirements for hire- purchase loans were raised (at present only 20 per cent on motor cars), and (c) building licences were more strictly enforced. (Using the machinery of the Board of Trade for large schemes and the local council surveyors for small.) And we would quickly improve our payments positions by cutting down our military commitments

* The Split Society. abroad and o.ur foreign investment. This policy entails a little more control over the financial system, but it makes sense, would please the Americans and probably convince the European bankers that the Government knows how to put its house in order.