Penal money rates
Nicholas Davenport The public must have been utterly bewildered by the sky-rocketing (3t‘ money rates last week. It was riolY a month or so ago that the Government was telling the buildSocieties that they must not raise their mortgage rate from 91 Der cent to 10 per cent and even giving them a temporary subsidy to make ends meet. Then sterling went sick in the exchange markets and to help prop it up the Treasury bill rate rose to 10.9 per cent and the minimum lending rate (Bank rate disguised) to 11e Per cent. Whereupon the joint stock banks became furious and raised their base rates from 8 per cent to 10 per cent. Barclays capped it all by offering 91 per cent 211 deposits, which made the °inkling societies deposit rate of 6.4 per cent tax free look silly. The !Tian in the street came naturally
the conclusion that the Government not only did not have money under control but did not even know what it was doing °r ought to be doing.
The bizarre situation was reached where Germany, a surPlus country with huge reserves, was imposing tight credit controls and raising interest rates to fantastic heights, being congenitally seared of inflation, while Britain, deficit country and inflation-rid!ten, was caught out having lower interest rates and a weak exrhange. Our official reserves were drawn upon in July by $385 million but as the Bank received $300 Million from public sector borrowing of foreign currencies the run away from sterling was of the Order of $685 million. At the end Of the month the reserves stood at 6628 million (£2289 "We shall not hesitate to use the reserin defence of sterling," said Mr barber before flying off to the tneeting of the twenty Finance Ministers who were meeting once More in a final desperate attempt to, restore some order and disciPline to the international monetary system. It goes without saying that none of the free capitalist democracies have their money systems tinder control. The buccaneering Oloney market decides and the rates follow on the moves of the speculators, who happen to he mainly the money managers of the giant international corporations. The best managed money
system is perhaps the Federal Reserve system of the United States. Recently the Federal Reserve raised its discount rate to 7 per cent in an attempt to slow down the American boom and inflation. The American banks thereupon raised their base rates to tie per cent. But clever as it may be in its domestic market the Federal Reserve is responsible for the crying weakness of the whole monetary system of the western democracies — the Euro-dollar market.
While the Bretton Woods monetary regime was slowly breaking down, and allowing the US to pile up huge deficits on its trading account with the outside world, the Euro-dollar market, which is simply dollars owned by foreigners and deposited in banks outside the US, grew year by year until it has reached the monstrous size of some $80,000 million. And being State-less, it is virtually uncontrolled. The Federal Reserve has not attempted to reach an agreement with the European governments on joint measures for control. Nor has it ever suggested to the IMF that Euro-dollars should be funded and repaid over a period of years. Of course Euro-dollars have been very helpful in financing the industrial expansion of Europe, but they have also been unhelpful in contributing to domestic inflations. Being a law unto themselves a sudden demand will cause their short-term rates to rocket and this is what recently happened to the detriment of short-term rates in the UK. A rush into Euro-dollars as the easiest way into German marks caused Euro-dollar short rates to rise to 12 per cent. Our own money in the street,' which had been quiescent at 7 per cent, suddenly rose to 12 per cent on the spur of this rise in Euro-dollar rates. Smart people found that they could borrow from our own banks at 8 per cent and make a handsome turn. Hence the new base rates of 10 per cent charged by the angry banks, which means that an overdraft will cost the average borrower 12 per cent or more.
The fact that money in a free capitalist democracy is never under control does not excuse Mr Heath's supine inaction. He should not blame the outside world for all his failures to con
tam inflation. He knows perfectly well that dearer money adds to the domestic rise in prices, for it enters into the cost of all trades and all services. He should there fore do everything he can to avoid a ridiculous Bank rate of I l per cent which merely aggravates the inflationary fever at home, If the weakness of sterling was the immediate cause of the trouble, then he should tackle the source of that weakness, which is clearly the lack of foreign confidence in the Government's financial policies.
It is perhaps unfair to Mr Heath that the money markets of the world should have got the impres sion that his Government has disregarded ordinary financial pru dence. He was somewhat late in going all out for economic growth. He first had to work out of his lame duck phase. It was the sharp rise in unemployment to near a million which caused him to throw money into the economy at an almost reckless pace. Over £3000 million went in by way of relief of taxation and then industrial subsidies were poured into the regions. He ended up with a borrowing requirement of no less than £4000 million for the financial year 1973 74 which has caused all the trouble. He has so far been able to sell only £1000 million of Government stock in the giltedged market and probably less than half of it was to the nonbanking public. With morale in the market completely shattered there is little hope that he will be able to sell much more unless he requires the life and pension funds to raise the level of their gilt-edged holdings. At the moment of writing Treasury 9i per cent 1999 is offered under 87 to yield close on 11 per cent with no takers. Daltons ' 2-1 per cent (pray rest his soul) yields Ili per cent at 23.
Now the Treasury may be lucky in being able to finance its huge borrowing requirement partly through the flight from sterling, which allows 'Treasury bills to be cancelled, partly through the borrowing of public boards overseas in foreign currencies, partly through the failure of the nationalised industries to spend as much as they were authorised to do. But what the chief concern of the Government should be is to resore morale in the gilt-edged market so that it will be able to finance its reduced borrowings in the normal and prudent manner out of voluntary savings. This can only be done by cutting its own ex
penditure further or raising its own revenues.
As regards the first point, the Chancellor has already announced (in May) that the Government had made policy changes which would result in a cut in public expenditure of about £100 million in 1973 74 and of about £500 million in 1974/75. According to the Eleventh Report from the Parliamentary Expenditure Committee, which was published at the end of last week, it is clear that its members do not believe the Treasury figures. The Treasury's information system," they say, "is not good enough for assurances of this kind to be completely convincing." Apparently the E100 million sav ings promised for 1973/74 will not now be realised, because of extra estimates. What is obviously re quired is a further statement in the House by the Chancellor that not only will the promised cuts in spending be made on time but increased. And he should specify the Votes which will be affected in de tail. Further, he should assure the nation that the vast investment schemes the Government has un dertaken — Maplin and the Channel Tunnel — will be postponed for a year, so that the estimates can be more carefully examined and second thoughts more carefully considered.
As regards the second point, no one would suggest that the Government should abandon its growth policy and return to " stopgo 'with a new round of taxation.
But there are levies which could be made to offset expenditures without putting up costs at home, or restraining economic growth.
For example, the joint stock banks have just reported a 70 per cent plus rise in half-term profits before taxation, so that the full year should provide them with, say, £600 million against £400 mil lion last year. This huge rise in profits is due entirely to the Government's reflation programme which has allowed money supply and money rates to soar. If this unearned bonanza had fallen into the lap of a duke there would be a huge public out cry. A levy on the banks could be made by charging the banks, as Vic Feather cunningly suggests, a negative rate of interest on their special deposits.
I have never believed in giving freedom to money-lenders. It is against Holy Script and incidentally, against the Agreement of the People of 1647 to which we owe our democracy.
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