MONEY

Cheaper money is the spur

NICHOLAS DAVENPORT

No sooner was the printer's ink dry on my remark last week that " sooner or later Bank rate will be cut to 5 per cent one Thursday morning" than the deed was done. But the right reasons for the cut were not mentioned: the irrelevant ones were stressed. There had been an unprecedented inflow of foreign money — £651 million during August — and after handing over £256 million to the IMF to clear off our 1968 drawing the official reserves rose to £2,003 million ($4,807 million), which is the highest ever. The Treasury had imposed strict exchange controls in the previous week to prevent the inflow of money from the non-sterling area and the cut in Bank. rate, they said, was to stop money being attracted from the sterling area where interest rates were lower. The object of the exercise was, of course, to prevent a further rush into sterling which would cause it to be over-valued in this floating period. So far this has been achieved. But what the Treasury is trying to hide is that cheaper money is desperately needed to boost our flagging economy. It does not . strike any working man as funny when our reserves rise to over £2,000 million, proclaiming our financial wealth, and the numbers unemployed rise to over 900,000, proclaiming our economic bankruptcy.

No doubt the Treasury's secret intention was to wait and see whether the April budget and the July mini-budget were having their intended reflationary effects before they considered reducing interest rates. But it has been obvious to business people for some time that Mr Barber's reflationary measures will not bite without cheaper money as a spur. Confidence in the business world is still at a depressingly

low level, as the enfeebled demand for bank loans reveals, and it looks as if there will be no revival in industrial investment before 1972. The latest bulletin of the National Institute of Economic and Social Research even suggests 1973. Reflationary measures of the required magnitude, they say, have been so long delayed that a real down-turn in investment and a real deterioration in confidence have been triggered off. It follows that any substantial upturn in investment will have to wait on several months of upturn in demand and even then may be delayed by continuing low levels of capacity utilization. They conclude: " Our central forecast is that most of the investment response will be delayed until 1973," though this forecast is hedged about with more uncertainty than usual because of our possible entry into the EEC. They do not look for any substantial fall in unemployment before the end of 1972.

Can cheaper money work fast enough to make this depressing forecast wrong? It is not impossible. The cost of floating new issues on the capital market is immediately cheapened by 1 per cent and the building industry is immediately helped by cheaper housing loans. Private housing starts are already on the rise but public housing is still in the doldrums. The Government should tell the local authorities to take full advantage of cheaper money by pushing their 100 per cent mortgage schemes. And the building societies should follow this up by reducing their mortgage rates from 8f per cent to 7f per cent. The 8f per cent rate has been held since April 1969, while Bank rate has been reduced from 8 per cent to 5 per cent, and it has been adding to the inflationary rise in salaries and wages. The building societies are pretending that they cannot cut their rates by more than f per cent because they will drive investors away if they reduce the in terest paid by more than 1 per cent. This is nonsense. They are overflowing with money and in this computer age they can redu6e their expenses. A cut from 8f per cent to 8 per cent would make too small a difference to the mortgagors on a twenty to twenty-five year term. The Government should give the societies a good prod, seeing that high mortgage rates and high rents have been the worst item in the inflationary rise in the cost of living.

I suspect that someone at the Treasury or the Bank of England still believes that you cannot bring interest rates down while the rate of price inflation — 8 per cent to 10 per cent — is making the real rate of interest negative. This again is a piece of nonsense. Bankers do not depend for their living on the real rate of interest. If they did it would be regarded as an act of divine judgement that they should starve during this period of ' stagflation ' when

the numbers of men. out of work exceed

900,000. Bankers make their profits through the difference between the interest rate at which they borrow and the interest rate at which they lend — not to mention the enormous profits they make on other financial services such as making issues on the capital market and effecting mergers and take-overs. Dear money is the con

ventional curse of a capitalist system out of balance; it fans the fires of inflation. Money has got to be made cheaper before the inflation can be checked.

It is pathetic that the Treasury should have just issued a new long 'tap' stock — £600 million of 81 per cent 1987-90 — to replace the old 8i per cent 1997. These high coupon long-dated stocks — £900 mil lion of Treasury 9 per cent 1992-6, £800 lion of Treasury 9 per cent 1992/6, £800 million of Treasury 8i per cent 1997, not to mention £600 million of Treasury 8f per cent 1984-86 — are adding grievously to the burdens of the Exchequer. We wretched taxpayers have to service these costly

loans — over £250 million a year — because we are victims of the dear money

obsessions of the Treasury. If the Treasury had waited for the market rise on the cut in Bank rate to 5 per cent to be fully ex tended it could have issued a medium dated

' tap ' on much cheaper terms (1 am still a ' bull ' of the market). And it would have

given the businessman more confidence that the Government intends to make money cheaper to help the reflation of the depressed economy.

The monetary authorities of ' the Group of Ten' are meeting in London at min isterial level on September 15. It looks as if the Europeans and the Japanese are trying to make a united front against the Americans to force them to devalue prop erly by writing up the monetary price of gold. I doubt whether they will succeed.

We British should play a neutral game.

Our national interest lies in keeping sterling as undervalued as possible in order to

boost our export trade. There is something to be said for reducing Bank rate to 4 per cent, which would not only boost business morale but tend to make sterling cheaper during its float.'