In the City
The price of Mr Benn
Tony Rudd
Mr Tony Benn contributed more to the sudden weakening of the pound last week than most people think. The news was all about the likely fall in the price of North Sea oil and the pull of American interest rates.
Yet, paradoxically, this was not news, because the glut of oil has been building up since the beginning of the year, and Amer ican interest rates went up over a month ago. In fact, the only new news last week was, precisely, about Mr Benn, his chal lenge for the deputy leadership and Mr Michael Foot's ultimatum that would have him challenge not for the deputy leadership but for the leadership. Of course, like the oil glut Mr Benn has been emerging for some while but it only became apparent to world markets last week that he had finally emerged as the contender for the real leadership of the Eeft in Britain. It was this realisation, we suggest, that put the skids under the pound.
For investors can see what the coming of even a moderate Socialist, like Monsieur Mitterrand, can mean to markets. In France the currency has fallen sharply and would have gone further had it not been supported heavily by the authorities and boosted by the tightening-up of exchange control. Leading shares on the Paris Bourse have in many cases more than halved since just before the election. For the holders of capital M. Mitterrand is already an unmitigated disaster. And yet he is a moderate man trying his best to look as unfrightening as possible.
What would it be like, investors ask themselves, if Tony Benn ever got into No 10 Downing Street? A sight worse than anything that has occurred in France these last few weeks, they reflect. On the first day of his coming to office, exchange control would be reimposed (if the Conservatives haven't already had to so in order to prevent a massive flight from the pound before rather than after the event). And this would be done with the full panoply of regulations down to a travel allowance of, say, £25 per person per annum. At almost the same moment a structure of import controls would start to arise. As under the early post-war regime of controls, exchange control has to go hand in hand with import control if foreign exchange is really to be conserved in a siege economy. For this is what it would soon become. The various commodity markets would be closed and replaced with systems of centralised buying, which again would be a return to the regime of the Fifties and the Sixties. This would be necessary in order to ensure the proper allocation of resources within the domestic economy. Britain, being a country which imports a great deal, makes it necessary that a fully dirigiste regime can only operate by external controls being dovetailed with internal ones. The whole thing would of course be a bonanza for the Civil Service. Unemployment among foreign exchange dealers and their like would however be mitigated by a vast expansion of the relevant departments in the Bank of England, as happened in September 1939. Similarly, full control over the export of capital (which would virtually be a thing of the past) would go hand in hand with a total control over the domestic capital market. We would have to have the capital issues committee back again in order to ensure that only the 'right' issues were allowed on to the market and, indeed, to make way for the massive increase in government debt which would have to be floated. This would be found a home by the simple expedient of suggesting to the institutions that they take it up (because they would indeed have a good deal more room to do so in a situation where they could no longer invest abroad) but, failing compliance, direction could easily take over. Interest rates would undoubtedly be made to fall though it is doubtful whether existing holders of debt would be allowed to benefit from the consequent rise in capital values, for it would not be beyond the wit of the new government to find a way of taxing these 'windfall' profits.
It is difficult to judge what exactly would happen to the shares of industrial companies because, with fund investment bar red from the individual investor and the institution, they too, like government debt, would be the subject of an increased demand. However, there might be some blurring as to the exact nature of what it was that was being dealt in. The new regime could be expected to insist upon some kind of sharing of the equity of industrial companies with the work force (certainly it would insist on a sharing of the management with the work force) and this might represent a general watering-down of the equity represented by the quoted share.
Inflation would have been the enemy of the new regime as indeed it had been of its Conservative predecessor. Industry sheltered from competition by import control would find it extremely difficult to keep its costs down. Wages would doubtless rise both in real terms and as a proportion of the total costs. Total demand would rise, fuelled by massive government injections of purchasing power at both national and local government levels. But supply would not mushroom upwards. It couldn't with import controls. And because industry has been stagnating for so many years it would not be possible for the home production to fill the gap. So an increase in prices would be inevitable. Paper profits would shoot up of course but they too, doubtless, would be taxed, leaving real profits lower than ever.
Just a glimpse of Tony Benn's Britain and the economics thereof is enough, surely, to explain why, at the prospect of it actually happening, money should leave the country. As Tony Benn's challenge grows stronger, and if the present Government's success in handling the economic situation fails to improve, the prospect must be of a massive outflow of funds over the next twelve months. The authorities may not mind at this stage but before long they are bound to take fright at it. That is why the reimposifion of exchange control before the next election looks an almost dead certainty.
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