The economy
The Bank v. the Treasury
Jock Bruce-Gardyne
It is a truth universally acknowledged that a cause espoused by the Treasury must be renounced by the Bank (and vice versa). And if that leads each of these august institutions from time to time to contradict itself, then that, too, is only conducive to the happiness of the nation in general, and those of us who cling to certainties in this uncertain world in particular.
Throughout the first administration of our present Government the Bank of England yearned in private, and in- creasingly in public, for a return to that blessed haven of exchange rate stability Which we once (supposedly) enjoyed. Since the good old days of 'fixed' parities were gone beyond recall, could we please Sign up with the Deutschemark system known as the European `exchange rate mechanism'. And if we couldn't even do that, then at least we should allow those wizards down in Threadneedle Street to Punch the noses of the speculators with massive intervention in the foreign cur- rency markets. Monetary policy was all very well — and the Bank can pay lip service to the current orthodoxy with the best of us but if that meant tremendous jerks in interest rates the discount houses got uppi- ty: and besides, did the Government really want sky-high mortgage rates? Yet if it didn't, this monetary jag was liable to mean that the Bank would end up with embarrassing piles of bills bought in to stop short-term money going through the roof.
The Treasury dismissed all this as so much stuff and nonsense. Yes, there were sensitivities about mortgages, and that meant that from time to time the Bank and its faithful Government Broker had to do some judicious `over-funding' to get the money figures right. But that was what they were paid for: let them get on with it. What mattered was to get a grip on made-at-home inflation, and the way to do that was to keep a firm hold on the domestic money supply. The exchange rate was a far-off country of which the Treasury knew — almost — nothing. If the Bank started monkeying around with the foreign currency markets it would simply get its fingers burnt. As to that European curren- cy club, it was not for us.
Unhappily as time wore on the Treasury came in for increasing stick for having 'Permitted' the pound to grow so dear in 1979 and 1980 that British industry was crucified upon it. How precisely it could have stopped this happening we were never told: no matter, the stick stuck. Then, last winter, it got into almost equal trouble with the sinking pound. A `corn-
petitive exchange rate' was one thing — everyone believes in that. One measly dollar for our pound was something else altogether.
So the goings-on on the Chicago curren- cy futures market have gradually edged up the scale of Treasury priorities. Of course we have nothing like an exchange rate `target' — perish the thought. But by the time of last month's Budget it had become `necessary to judge the appropriate Com- bination of monetary growth and the ex- change rate needed to keep financial policy on track'. Which, as the Chancellor told the Commons Select Committee in Holy Week, means that now the dollar has gone off the boil the sort of interest rates required in Jantiary (because of domestic credit conditions, you understand — no- thing to do with the exchange rate) were no longer needed.
High time for the Bank to discard the clothes the Treasury has appropriated. Right on cue, in comes the Governor. `It is of no real benefit', Mr Leigh Pemberton advised the self-same Commons commit- tee, `to appear to snatch at every opportun- ity to lower interest rates'. By pure coinci- dence the Bank's quarterly bulletin made a stab at working out just how much we're all taking the Treasury for a ride by borrowing with benefit of tax relief on mortgage interest to purchase such unconsidered trifles as foreign cars and holidays. It doesn't know precisely, but it reckons that additional advances on existing mortgages have grown tenfold (after inflation) over the past 15 years, and modestly concludes that `some lending has not been directed towards expenditure on home improve-
ments' — about enough to contribute 31/2p
to every pound we -spend on consumer goods, it thinks. What it knows for sure is that overall bank lending to the personal sector was growing by an impressive 20 per cent per annum by last Christmas, and • judging by Wednesday's money statistics shows no sign of abating. All of which is too much for the Bank's comfort.
These are deep waters, Watson. It would be just as unfair and misleading to deduce that the Treasury is minded to repeat the error of last autumn by `snatching at every chance . . .' etc as it would be to deduce that the Bank has, at this late hour, got mesmerised by what's happening to £,M3. Mr Leigh Pemberton has signalled his continuing loyalty to his predecessor's dream of participation in the Deutsche- mark bloc, and Mr Lawson insists that interest rates must wait on `other condi- tions' being satisfactory. Yet the conflict remains. If the dollar has now entered into the long decline which we have all been predicting in vain, then the Treasury evidently sees the cheerful prospect of money slopping home to foot the bills for our public spending, accompanied by somewhat higher sterling and somewhat cheaper mortgage rates to reduce the Retail Price Index and inflation expecta- tions, and to keep the economy on the boil. Whereas the Bank wonders how precisely it is to be expected to keep the money aggregates in trim when we are all topping up our mortgages to maximise the tax advantages, and topping up our corporate overdrafts apparently to make a useful turn in the money markets at its expense. In practice I'd guess it all depends upon the dollar. If it has gone out of fashion then the Treasury's new wisdom will prevail and interest rates will be winkled down regard- less of the Governor's worries. If on the other hand what we've seen is no more than a blip on the chart of the almighty dollar then the Bank will be allowed to hang on to rates of interest which should, in time, abate our appetite for credit.
Finally a word for Mr Miller of Leeds, who takes me to task (see Letters) for questioning how North Sea oil could have been 'fitted in' to our accounts without increased import penetration. Mr Miller points to Lord Kaldor's advice that we should have had 'reflation', leading to higher imports to offset our higher exports; and he argues that this would not have led to more steeply rising prices. True enough — providing only that, like Mr Volcker, we ensured that extra borrowing went with higher interest rates to attract the savers. But I'm still not clear why it should be assumed that the extra imports would not have displaced even more jobs at home — unless of course they were `restricted', in Mr Miller's phrase, presumably to raw materials and capital goods we do not produce, and thus invited retaliation against our exports. But alas I fear it must be true that enhanced competitiveness involves creating 'jobs at home by des- troying those overseas'. Which is why I continue to cling to the atavistic notion that the course of wisdom for a government which hopes to get itself re-elected is to achieve consumer satisfaction, regardless of the provenance of the goods which provide it.
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