In the City
Sound money
Nicholas Davenport
If there is one private bank in the City which has grown steadily and on sound principles, eschewing speculation in property, it is Rea Brothers, chaired by Mr Walter Salomon. Before flying off to Brazil he wrote this letter to the Spectator: 'In his reply to my letter of 5 February Mr Nicholas Davenport is skating on very thin ice. As he says, his concern is that monetarism could destroy the gilt-edged market. What has happened in the past is that the lack of monetarism has defrauded the saver, as this was one of the many contributory factors towards the inflation we have experienced now for many years. It would have been much better had Mr Davenport raised his voice a long time ago to prevent the saver losing his money by putting it into gilt-edged. 'As far back as 1957 when I gave evidence to the Radcliffe Committee, I said in my concluding comments that what we are facing is a moral issue; that what is necessary above all is a new respect for money and the ethical principles associated with economic and monetary policy. I went on to say that inflation must come to be regarded as morally wrong and politically dangerous, and that 'unsound' money means deceit, Misrepresentation, breach of contract, injustice, and in the end, impoverishment, chaos, revolution, tyranny and dictatorship. Furthermore, I said it is the prime responsibility of government in a free society to maintain a trustworthy monetary unit of account and medium of exchange. Mr Davenport's answer does not lead to this solution.'
If I am skating on very thin ice Mr Salomon is up in the clouds with the heavenly host from which he really must be brought down to earth. Even if he were God sitting In the Governor's parlour at the Bank of England he could not give us sound money through the techniques of monetarism if Politicians, shop stewards, workers on the Shop floor and a few spivs in the City continue to behave in an unethical, immoral but very human manner in pursuit of their own selfish grabbing interests. When I learned applied economics under Keynes a very long time ago his colleague
Sir Hubert Henderson said to me:
Remember that the natural tendency of prices is to fall because of the application of new technology.' This was true up to the Publication in 1944 of the famous Keynesian White Paper on Employment Policy Which gave top economic priority to 'full employment'. From that moment the trade Onions were given the top bargaining pos ition and as they grew stronger were able to secure cost-inflationary wage rises even during a roaring inflation. In honour to Keynes I must add that the authors of this White Paper of 1944 stated that measures to promote full employment would be fruitless unless wages and prices were kept reasonably stable.
Remember that in those days we had really cheap money —a 2 per cent Bank rate up to 1951 — which was enforced because the government broker was ordered to buy stock in the gilt-edged market whenever yields went over 3i per cent. Certainly the innocents who bought Treasury 2} tons') in 1947 at par were 'defrauded' —they sank to 13i in 1975 and are now 22 — but Keynes had advised a ten-year dated 2 per cent stock and I personally had raised my voice against an undated stock issue (Mr Salomon, please read my Memoirs, pp. 157-9). Neville Chamberlain had also 'defrauded' War Loan holders in the 'thirties by converting the stock from 5 per cent to 3i per cent (undated) which fell to 19t in 1975.
These gilt-edged disasters were the result of, but not a 'contributory factor' to, inflation. Mr Salomon no doubt believes that inflation will break out again this autumn and 'defraud' the present buyers of giltedged. He must know that the gilt-edged market is now in the hands of expert professionals who are quite capable of looking after themselves. There are no innocents left. The Treasury no longer issues undated stock to catch them out. Long-dated, yes, but stockbrokers have their economists who interpret the money supply and interest rate trends and estimate the PSBR (public sec
tor borrowing requirement) outcome, so that their clients can avoid the risks they may be taking. Myself I have advised a purchase of gilt-edged simply because I do not believe that we can get out of our deep trade recession without much cheaper money. And the Chancellor seems to agree.
Of course we all want sound money. We all want good and not evil. And I am prepared to add a fifth horse to those of the Apocalypse called Inflation. But we in this country cannot be isolated from the world and the western world is in an economic mess due to inflationary forces forced upon it by the five-fold increase in the price of oil by the OPEC cartel and by the breakdown of the Bretton Woods system of fixed exchange rates, based on the gold dollar and the substitution of floating exchanges. This was well explained by Mr Harold Lever in recent speeches which were edited by the Sunday Times last week. 'The OPEC oil price rise was thus allowed to depress world demand', he said, 'creating the phenomenon of an inflationary recession which plagued us from 1973 on'. If the surplus financial assets created for the OPEC countries could have been recycled smoothly round the world's banks into the deficit countries all might have been well but it was an impossible operation. It tended to shift the deficits created by OPEC from the stronger surplus countries to the weaker deficit countries and the weaker tended to make their deficits worse by deflating and by making their inflations worse by indirect tax increases. Mr Lever believes that domestic reflation in Germany and Japan, while welcome for world trade, would not be the answer. The correct way, he claims, is 'the proper management of their financial surpluses', so that the demand lost in the deficit countries and accumulated in Germany, Japan, Switzerland and OPEC can be reversed. Mr Lever does not suggest it but it is obvious that his solution cannot be worked out except at a world economic summit. The sooner this is called the better.
It is interesting to observe that Mr Lever does not advocate the application of monetarism, as Mr Salomon does, for the elimination of our inflation. Nor does Sir Douglas Wass, the Permanent Secretary to the Treasury in his recent lecture in Cambridge. 'The bogey of inflation can be dealt with during reflation,' Mr Lever says, 'by reducing price and wage pressures through tax cuts, direct and indirect'. This will, I hope, be the policy of the Chancellor in his 11 April budget, but, as I have said, it is not going to be easy to get out of this intractable world recession — not without a world economic summit. How wise Sir Douglas Wass was — or is — to dissociate himself from his predecessor's (Lord Armstrong) Stamp Memorial lecture of 1968 which declared 'modern economic policy •has clearly been a success'. Sir Douglas comments: 'There are serious problems which no country seems to be able to solve unilaterally.' That is why we must have a world economic 'summit'.
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