MR. BUTLER, THE PRESS AND THE CITY
By NICHOLAS
DAVENPORT
IT seems that we are all at sixes and sevens. The 'Establishment' in the City is annoyed with Mr. Butler, Mr. Butler is annoyed at the misunderstanding of his policy and the bad reception given to his Budget, and the financial editors are annoyed with one another. I am indebted to the indignant Mr. Westropp, of the Sunday Express, for the news that Mr. Butler met the City editors of four newspapers at the Reform Club last week for an 'off the record' talk. The Sun- day Express was not one of 'the big four' but it was able to give the gist of the con- fidential report which Mr. Butler made. (Not since Guy Burgess attended has the Reform Club been the scene of such a distressing leak !) What intrigued me was the admission of Mr. Butler (I quote the Sunday Express) that although he would like to raise Bank rate still further, he believed that the repercussions on the banks and discount houses would outweigh the advantages, and that no higher rate was .advisable for the time being. This accords with the opinions I have expressed in these Columns, and, although I was not invited to this confidential chat, I feel I could h, ave enlightened Mr. Westropp if we had had an 'off the , record' talk at the Athenaeum. I have always found Mr. Butler's speeches so clear between the lines that there was no need to ring up any mem- ber of the Reform Club for inside informa- tion. Dearer money and the credit squeeze have caused Government stocks to fall this year by nearly 15 per cent. This has brought enough depreciation to the banks' investment portfolios'to wipe out not only their profits but their capital and reserves as well—that is, if they attempted to write down their holdings to present market values. It is small wonder that the bankers are mad with Mr. Butler. Another rise in Bank rate to cause further depreciation would be more than they could bear. In any case, it would be unnecessary, as the market is falling on its own momentum as a result of Mr. Butler's new treatment of local loans. To make them even mad- der the bankers were told by the Governor last week that they must continue with the credit squeeze into 1956. They had set themselves the target of reducing over- drafts by 10 per cent, by the end of the year, This they hoped to secure by trim- ming mostly private and professional loans, but to attack commercial and industrial loans of good quality is to strike at the banks' future earning power and goodwill
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It was certainly very unwise of the City not to realise that Mr. Butler meant busi- ness with his disinflation drive — that he was prepared to hurt the banks, hold up trade and create unemployment if all this was necessary to kill inflation—but a lot of the misunderstanding would have been avoided if we had had an up-to-date financial system. The Bank of England Act will have to be revised. It is not sufficient for the Goiternor of the Bank to have headmasterly chats with the chair- men of the clearing banks at periodic meetings. The Bank must have power to alter the working ratios of the joint stock banks and compel them to adhere to them. Sanctions must therefore apply to the directions which the Bank gives. The Federal Reserve, Board has powers over member banks which the Bank of England does not possess over the joint stock banks, and yet America has still a free economy. I fear that Mr. Butler is trying to use a monetary technique for the control of our mixed economy which is not adapted for the purpose. It may, mean that he will force up interest rates so high and make credit so tight that a serious recession will de- velop. It may happen that the industrial investment necessary to maintain our pro- ductive efficiency and competitiveness in foreign trade will not be forthcoming. My own view is that Mr. Butler will be forced in the end to adopt some sensible controls —such as currency allocations and even building licences—which will enable him to cheapen money, loosen credit and allow for expansion instead of restriction. I am glad to see that the economic-minded Sir Robert Boothby more or less took this line in the Budget debate. If only Mr. Butler could come to an understanding with the trade unions over wage claims, the increasing and dangerous severity of his monetary disinflation might be avoided.
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