In the City
Attack on sterling
Nicholas Davenport
When the established institutions of our City democracy are to meet new attacks from the left wing of the Labour party— the next ordeal for the City comes on 22 March when the Home Policy Committee under the chairmanship of Comrade Benn is to hold a special meeting to consider our banking and financial institutions—the least one would expect of the BBC is to present a fair and impartial view of City affairs. I was therefore astonished to see on BBC 2 last week an attack on Mr John Bentley, who was introduced as the king of asset-strippers, as the wickedest of the whiz-kids, who cashed in about £2 million in the last City boom and left a trail of disaster. They kept showing two sourfaced union men who had lost their jobs when he closed one of the Triang toy factories. They flashed on brief interviews with people who had disapproved of him and his ways: they even had a session with his charming but ignorant ex-wife—after showing pictures of his girl-friends, one of whom had brought a paternity suit against him—and they did not call one single witness in his defence. It was the most blatant character assassination I have ever seen on a BBC programme and it presented a view of the City which was calculated to foster prejudice and misunderstanding.
I met Mr, Bentley only twice—once at a Spectator lunch and once at a cocktail party—and he struck me as a sincere young man who was keen to tackle any business which had gone wrong and make a quick profit for the managers and shareholders as well as for himself. He had done well in the poster business and in pharmaceuticals; he had tried to make toys profitable when the company was bust— and very nearly succeeded—and he went on to take over British Lion and Shepperton studios but ran into solid local opposition and was eventuallytaken over himself. He was clearly a somewhat brash young man—perhaps too young for the job of industrial reconstruction he was attempting—but he was no more inhuman about redundancies in Triang toys than Mr Wilson has been about redundancies in Chrysler Motors. And he did not abuse the machinery of the capital market. The 'risk' equity shares he issued were clearly labelled 'risky'. Any investor who lost money on them has only himself to blame for a bad speculation. He did not promote a fringe bank or set up bogus companies or embark on strip-tease financial operatiOns as you might imagine from the BBC presentation. He was obviously no saint but certainly no City slicker. He was a true entrepreneur—we could do with many more of them to revive our industries—and he made use of the Stock Exchange machine for industrial enterprise, not for financial manipulation.
The City machine is now working extremely well. In 1975 it organised more capital for British industry than at any other period in history. It has recently underwritten £75 million for a speculative North Sea enterprise and £100 million for the Greaterlsindon Council. Before comrade Benn chairs the Labour policy committee to consider our banking and financial institutions I would ask him to read the lecture recently delivered by Professor Harold Rose at the London Business School on the British capital market. The Professor reminds us that the London Stock Exchange provides a higher share of' company external finance than the Bourses do in France and Germany, where historically the banks have taken care of industrial needs. He denies that a structural gap exists in the new issue market which requires to be filled by new institutions such as the ELL sponsored by the Bank of England. He sees no case for it. We already have the FFI and the ICFC to supplement the market in medium and long-term finance. (See their advertising this week.) In Britain the new issue market, the Professor says, has been fed by a flow of savings through the life and pension funds which is on a scale unequalled in France, Germany or Japan. (It now approaches £3000 million net per annum.) Indeed, the demand for industrial securities by life and pension funds consistently outruns the flow of new industrial securities—a fact which should rebut, he adds, the crude charge (made by the left, including, alas, Mr Jack Jones) that industrial investment generally is held back by the inadequacy of long-term finance supplied by the City institutions. Labour critics seem to hanker after a giant state investment bank to which the life and pension funds would be compelled to lend. What a hash it would be likely to make of investment decisions and what havoc it would bring to the life assurance policies and pension rights in which most of us are interested!
The appalling ignorance of City operations which the left displays is truly frightening. Their hatred of a market economy blinds them to the fact that the share markets of the Stock Exchange diffuse the inescapable investment risks of business life over a very wide body of investors. If these risks Were concentrated on a few state-controlled institutions the result would be loss of flexibility, industrial constipation and much worse unemployment.
What the City suffers from is the inability of governments to control the rate of interest, in other words, the economic climate. Last week the Bank of England reduced the minimum lending rate (Bank rate) by another I per cent to 9 per cent although sterling was weak and falling below the S2 rate. It was $1.92i at one time un Monday but closed higher. The Bank's usual gimmick is to enlarge the gap between dollar interest rates and sterling rates when the pound is weak but on this occasion it has not done so but has drawn upon the reserves to support the £. If the sterling collapse Was due to the withdrawal of Nigeria from the sterling pool this was the correct thing to do. We now have an effective depreciation against major currencies of 33 per cent which should be adequate to compensate for our still higher rate of inflation.
As the falling pound helps our export trade and employment therein—outweighing the disadvantage of putting a penny in the pound on the cost of living—it may be that the Government has given up its silly dear money policy. If so it must ask the building societies to reduce their mortgage rates of 11 per cent and so ease that heavy item in the cost of living. By keeping their deposit rates high the building societies have actually been drawing money away from the joint stock banks. The control of our domestic rates-of interest is essential for the proper management of the economy and, as I have often argued, it cannot be complete unless we introduce a two-tier system of interest rates.
If only the left would concentrate on the financial measures which really matter, such as a lower rate of increase for the next wage round and a lower rate of interest to bring down the cost of living, and leave the City alone to get on with itS business of converting savings into investment, which it does extremely well! Meanwhile let us be thankful that shares go up while the pound goes down.
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