The Pause and Bank Rate
By NICHOLAS DAVENPORT As Mr. Lloyd's `pay' neurosis gets worse the symptoms of it will be seen in greater de- grees of irrational behaviour. Here is the latest example. The pay pause—already breaking down—is to be fol- lowed by an 'intermediate' phase in which profits and dividends as well as wages are somehow to be restrained, if not controlled. Now you can limit dividends by law and you can tax profits to death, but you cannot control profitS except indirectly, by con- trolling the economic weather. Profits are the result of 'a simple mathematical calculation— obtained by subtracting your expenses and de- preciation from your receipts. If there is any' balance left after Mr. Lloyd has done his best to cause a slump by reducing an already in- sufficient demand—stopping the growth of out- put and raising costs—you will be lucky. Profits are already taxed 53f per cent.—income tax 38f per cent. and profits tax 15 per cent. To in- crease the profits tax and diminish the profits at the same time will be like causing a downpour and putting a penal tax on umbrellas, My Jupiter Pluviusi
'There are some who disapprove of profits in principle. I do not share their view. In an eco-
nomy three-quarters of which is run by private enterprise it is foolish to ignore the function of profit as an incentive.' Does Mr. Lloyd remem- ber who said these words? None other than Mr. Hugh Gaitskell when he. introduced his Budget of April, 1951. But perhaps Mr. Lloyd, actuated by his death instinct, is trying to repeat Mr. Gaitskell's subsequent history. Annoyed by the then rise in Stock Exchange share prices, which his Left-wing opponents had been throw- ing rudely in his face, and alarmed by the fact that the trade unions were preparing for a second round of wage increases, Mr. Gaitskell forgot his brave words of April and gave notice in July, 1951, of a Bill to control dividends. 'I hope that the control of dividends,' he said, 'and the other measures which I have announced today [extension of price controls] will help to ensure the acceptance of a policy of reasonable restraint in the field of wages.' We all know what hap- pened.
It is interesting to recall that Mr. Gaitskell's Bill intended not only to prohibit increases in dividends for the next three years, but to cut dividends to the average of the past two (dis- criminating against those companies who had obeyed Cripps's appeal for restraint and endow- ing those who had cocked a snook at him) and, further, to put companies who had paid no divi- dend into the straitjacket of a fixed 5 per cent.
while new companies were allowed 7 per cent. on 'the relevant capital' (whatever that implied). It was generally thought at the time that this meant the end of the private-enterprise system. Unless risk capital is allowed to earn an in- creasing dividend if its gamble pays off, it will never be ventured. If Mr. Lloyd does not under- stand this elementary rule of the capitalist system he will forfeit all those business subscriptions to the Tory Party at the next election.
I have lately been arguing that the pay pause is rightly resented by the workers because they have been singled out for attack—even to the point of an attack on arbitration awards—and because similar efforts to restrain increases in salaries, rents, dividends and the profits of usury have not been made. My theme is that any at- tempt to control increases in incomes is doomed to failure. No fair legislation can be devised to bring it about in a free-enterprise system. And any short-run 'pause' on Mr. Lloyd's blunder- ing lines is not worth having because of the bad psychological effect it has on both workers and employers. By all means ask for restraint— seventy-six companies have already declared that a higher dividend would have been paid but for the Chancellor's request—but the really impor- tant thing is to set up the machinery which could enable a wages policy to be carried out in favourable circumstances. The proposed National Economic Development Council could do some useful long-term planning and guiding for the benefit of those concerned in wage and salary negotiations, but it will have to go carefully and win confidence. Drop the pay pause, Mr. Lloyd, and the trade unions would co-operate imme- diately.
In the meantime lower the rate of interest. It is pathetic that he cannot see that if he retains a 6 per cent. Bank rate much longer the export trade, which urgently needs easier credits, will stagnate, industrial investment will decline, industrial profits will vanish and unem- ployment will increase. The 4 per cent. decline in industrial production since July should be a warning to him that he is forcing the country into a serious recession. The idea that he can right the balance of payments by reducing domestic demand, which is already insufficient to employ industrial capacity, is dangerous non- sense. The recent balance of payments deficit was accounted for largely by the fall in net 'invisible' receipts from £285 million in 1958 to £59 million in 1960. These 'invisibles' could be improved by cutting defence expenditures abroad (Dr. Adenauer could save us £70 million) and by cheaper money (2 per cent. less on foreign holdings of sterling could save another £70 million a year). Without cheaper money there will certainly be no revival in trade, internal or external, for the stock accumulation which sets trade moving is not going to start while borrow- ing remains so expensive.
What good is a 6 per cent. Bank rate now doing? We do not want to attract 'hot money,' especially from New York where the authorities are increasingly anxious to avoid another flight from the dollar. The new credits ($6,000 million) recently arranged for the IMF mean that no country need try to bolster up its currency by dear money: the members of the 'Club' will rally round. So why do we want a 6 per cent. Bank rate? The whole of Europe, where the boom has spilled over, is now tending towards cheaper money. Only Mr. Lloyd is holding out. This 6 per cent. could be the last irrational act of the Chancellor's neurosis.
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