ECONOMICS AND THE CITY

A gathering, flight from savings

Bill Jamieson

Whatever "else 1975 may be it will not be a year in which to save money. If anything, a flight from money has already begun. And the reason is simple. No society can withstand a rising inflation rate without loss of confidence in money values and the subsequent cashing in of unprotected capital as insecurity gives way to fear.

The ethic of thrift has always been held dear in Britain. It has been the dynamic of middle-class life. Our banking and financial system, the home ownership movement, the life assurance industry, the pension schemes and unit trust funds were founded on the nation's propensity to save and the belief that the deferment of present consumption for future security was a legitimate activity. Indeed, it was to be positively encouraged lest the entire population be totally dependent on the state after retirement.

For the savings ethic to flourish there have to be three preconditions: an acceptance by the government of both the desire and the need to save; a measure of financial and political stability; and an expectation of protected, if not enhanced, money value.

None of these preconditions now effectively exists. Far from there being an acceptance by the Government that saving should be encouraged by protection and reward this instinct is being deliberately and vindictively repressed by new tax penalties, surcharges, levies on capital gain and estate confiscation. Moreover, the nonindexing of income tax while wages soar ensures that ever larger numbers of the population fall into higher tax brackets at the same time as the purchasing power of their earnings continues to fall. Worsening inflation has made forward financial planning virtually impossible, from companies down to households. The expectation of protected money value has been destroyed. There is now no government bond, building society, insurance contract or interest bearing investment that can fully compensate for the erosion of capital at an inflation rate of over 18 per cent.

But much damage, of course, has already been inflicted. In Britain the relative prosperity of the late 'sixties heralded a new dawn for the unit trust movement. By 1972 there were two and a half million people with unit trust holdings or unitlinked insurance plans. They catered for the least speculative and most cautious of all stock market investors. But the new dawn has been followed by darkness at noon. The collapse of equity values in 1973-74, far more severe than any stock market collapse in this century, has inflicted stunning capital losses. The average unit trust holder who invested £1,000 in 1972 has seen the realisable value of his capital slump to less than £300.

And there is a double tragedy. For the vast majority of unit trust savers, wooed by the illusion of sustained prosperity and upwardshooting graphs, piled in at the top when share prices were at their highest levels. In July of 1972 the unit trust movement took in a record £43.5 million from the public. By the middle of last year most unit-holders had lost two-thirds of their money and sales had slumped to £15 million a month.

Even the most indirect investor is now being hit. Four out of every five households have insurance policies of one kind or another. The premiums are invested in shares, gilts and commercial property, the mainstay of pension fund investment, But property values have slumped by up to 40 per cent this year, triggering some massive write-downs by companies and adding to the liquidity crisis of the secondary banks. Several major insurance companies have been forced to cut bonus rates and in December the solid Scottish Equitable cancelled terminal bonuses altogether across the range of its policies. Pension funds have had to be supported by huge injections of cash, to compensate for the slump in Share and property values.

In these circumstances, what is one to do? Ironically, the higher the inflation rate, the more savers are inclined to settle for the most inadequate returns and keep their money short. To do otherwise would be to ignore the grave dangers that hyperinflation poses for our financial system. But there is a limit to the pull that building society interest rates and shortterm deposits can exercise against the ebb of real money value — and against the expectation of worse.

Indeed, it is the expectation, rather than the reality, that triggers the worst features of the inflationary cycle. Declining capital values, income that cannot make up for the soaring rise in prices, create insecurity and fear. Savers become hoarders. Or gamblers. The entire monetary system becomes a casino in which cash is circulated with ever-increasing velocity in the search for a 'protected' home. The process is well described in William Rees-Mogg's The Reigning Error.

Instead of productive investment, cautious investors switch to antiques or hoarding food or to a commodity in which a severe shortage is expected, or to the gold market in the hope that gold, as the ultimate unit value, will protect their capital. In the process, the expectation of worse becomes self-fulfilling. Even debt becomes preferable to credit, as the value of outstanding loans shrinks to farcical levels. During the height of Brazilian inflation in 1966 the average monthly repayment on home loans sank to less in value than the cost of the receipt issued by the lending agency.

In a recent City lecture on inflation in Brazil the former finance minister, Dr Roberto de Oliveira Campos, identified the erosion of the savings instinct as one of the key evils of inflation. The prevalence of negative interest rates discouraged savings, or channelled them in undesirable directions, such as property or foreign currency hoards.

The Brazilian index-linking experiment has had reasonable, if varied, success. From an inflation level of 100 per cent in 1964 it fell to below 20 per cent in 1972-73. but received an upward kick with the rise in oil imports and the cost of other imports. It necessitated the indexing of all forms of saving — indeed the system is biased in the direction of savings. But it institutionalised, rather than cured, the disease.

At home, however, there is little likelihood of the present Government easing the penalties on investment income and capital, let alone introducing a system that is positively biased in their favour. So the problem grows worse. We prefer the disease to the cure. And the crisis of confidence in the capital market, expressed in falling share prices, a slump in equity business, and a growing reluctance to lend long or take up anything but the shortest, easily realisable position, becomes less financial and more political almost by the week. Indeed, the two are inseparable.

The negative will to save is already posing a threat to the survival of the unit trust and managed investment movement in its present form. The inflow of new money is at pathetic levels. Building societies enjoy a temporary flood of ravaged capital. The inflow looks good, but any building society manager will admit that the growth of the past few months has been in money rather than value terms. After the negative will to save comes the positive will to cash in those savings which exist and which are easily realisable.

In November the National Westminster Bank put out an unprecedented statement to quell rumours of foreign exchange troubles and difficulties arising from its involvement in the secondary banking rescue operations. It stunned financial journalists. It was an indication, as the Economist noted, of just how seriously the major clearers are taking the possibility of a massive run on bank deposits.

It is well to remember that the collapse of the secondary banks first began with a loss of confidence which fed on itself. The loss of confidence brought on the illiquidity which triggered the insolvency. Could this not spread further if nothing is done to protect money values? Certainly, the City cannot have it both ways. It cannot argue, as it has done, that the present level of share values after an inprecedented collapse is a valid, or approximately valid, indicator of the nation's economic health, and still maintain that the public at large should continue to have unshakable faith in Britain's banking and financial institutions. Either share values are way out of line or they are reflecting just this possibility of a collapse in confidence and a flight out of money. Without confidence, no banking system, insurance company, building society or pension fund can survive. Is it possible that we can?

Bill Jamieson is a financial journalist with Thomson Newspapers

A fool and his money

Sweated labour

Bernard Hollowoo d

In the disgraceful 'thirties it was almost impossible to open a British newspaper without seeing headlines containing the words 'sweated labour.' Our management and our unions were convinced that economic recovery was being undermined by rivers of foreign perspiration: filthy capitalists in Japan (the Nips were the chief culprits) were paying their workers next to nothing for long hours of arduous toil and were able in consequence to undersell British manufacturers in the export markets.

The attack on sweated labour was threefold. First, the system was unfair in that it increased unemployment in Britain and cut profits and dividends. Second, it produced sub-standard goods, gimcrack stuff grossly inferior to the merchandise of the oldest industrialised countries. And third, it reduced the workforce of the Land of the Rising Sun to slave status.

All this stuff was believed by the average reader. This was a time, remember, when the Germans were supposed to be bartering trainloads of aspirin tablets for Roumanian oil, making tanks out of cardboard and papier-mâché, and coffee from acorns. Commercial travellers reported that Jap goods, already dirt-cheap, were often sold as 'seconds' because they were disfigured by sweat-stains. When these were sold by weight the importer was usually allowed to deduct one-eighth, it was reported, because they were waterlogged. The curious effect of light on Jap silk was attributed to the chemical salts contained in the sweat of the textile workers.

Either the Daily Mail or the Express (I forget which) came out with a story that one of the Japanese islands had been renamed England and another Birmingham so that exports from these territories could be deceptively labelled 'Made in England' and 'Made in Birmingham.' I recall that I got into hot water at the time for reminding the manufacturers of the North Staffordshire Potteries that the great Josiah Wedgwood had located his first major factory in a village Which he called Etruria and that the Potters of Longton (one of Arnold Bennett's 'Five Towns') had built industrial suburbs — still there — called Dresden and Florence.

Japanese salesmanship was also criticised. It was rumoured, for example, that when offering their saturated goods commercial travellers would open negotiations by handing a bunch of gold-plated pens to the would-be buyer and Placing a Samurai sword and .a bottle of saki on the desk. After a number of drinks the Jap would indicate that if the deal did not go through he would of course commit hama-kini on the Axminster.

Now the odd point about all this is that the British press, most businessmen and some economists condemned imports from Japan in support of the Japanese worker. It was argued that by buying these goods we were encouraging Jap manufacturers and perpetuating sweated labour. No one asked what would happen to the underpaid Nip if his goods remained unsold. No one seemed to care whether he would still get his handful of rice if he were thrown out of employment.

And, curiously, no one seemed to care about the sweated labour that supplied Britain with her raw materials, the millions who slaved to produce our sugar cane, guano, metallic ores, jute, cotton and gold and staples like tea, coffee and rice.

Curiouser and curiouser was our inability to see that British labour too could be sweated. Other countries resorted to price undercutting, but Britain, never. It never occurred to us that we Could sell locomotives to Brazil and Argentina because the cost of producing locos in these countries was substantially higher than in Britain. And it never occurred to us that Americans bought our whisky and Pottery chiefly because by comparison with US wages in distilling and potting those paid in Britain were unusually low or sweated. These thoughts surfaced in my turkey-lined mind a week or so ago after reading the views of a British miners' leader who pointecl out that American coal-face workers earn twice as much ($200 a week in 1973) as their British counterparts. When the miners get their next pay increases they will be top of the Wages league, but they will of course be well down the incomes league if MPs, barristers, estate agents, bank managers, surgeons, headmasters, brokers and jobbers and white collar workers of similar ilk are included. Miners apart, our wages are amongst the lowest in the Common Market and it can surely only be a Matter of time before our competi

tors complain. We are already accused of trying to stimulate exports by devaluing the pound and the crowning indignity will come when France and Belgium accuse us of using sweated labour.

When the economic situation becomes really black I'm afraid that history will repeat itself and we shall once more resort to the ultimate chicanery. It is not too early, 1 suspect, to begin the reconstruction of the nomenclature of our industrial geography. From a careful examination of the Christmas presents stacked round the imported Finnish tree it would appear that consumer durables labelled 'Made in Japan, Taiwan, Hong Kong, Brussels, Bordeaux, Frankfurt, Duisburg, Solingen, Lyons, Milan and Turin have been most popular recently among British shoppers, and there is clearly a case for repeating Wedgwood's duplication of Etruria.

Tentatively, therefore, I suggest that a suburb of Cowley should be remained Detroit, that there should be a Honshu in Birmingham, a Limoges in the Five Towns, an Osaka in Coventry's cycle-making district, a Bordeaux or a Burgundy in the Taunton region, a Solingen near Sheffield and a Paris in Manchester.

Mind you, I draw the line at such blatant deception as calling South Wales the Ruhr and Scotland Nippon.