13 OCTOBER 1961, Page 27

Six-and-a-half Per Cent

y NICHOLAS DAVENPORT THE only voice heard in dissent from last week's cut in Bank rate (7 per cent. to 61 per cent.) was that of the Economist, which splashed a huge cover headline: 'NO, Mr. Lloyd, NO NO NO.' This confirms my long-felt suspicion that this , worthy magazine is written mainly by women for women.

:Otherwise the cut had a good reception, especially in the foreign exchange market, where sterling has risen to $2.811. It was particularly gratifying to hear the new Governor of the Bank, Lord Cromer, tell the Establishment assembled at the Mansion House dinner last week that: 'Constant recourse to dis- proportionate use of monetary measures is no substitute for a consistent and appropriate eco- nttlic policy.' Whether or no he reads this jour- nal in preference to the Economist, this happens to he the constant theme of this column.

When Bank rate was raised by Mr. Thorney- croft to 7 per cent. in September, 195q, it stayed there for six months. The fact that it has been cut to 61 per cent. on this occasion after only two and a half sustains my belief that 7 per eent, was never necessary. It was certainly foisted On Mr. Lloyd by Mr. Per Jacobsson as the price "! the huge IMF credit. It put our Treasury bill rate up to 6+ per cent. when the New York comparable rate was under 21 per cent. It has TRW/ come down to 6+ per cent. Even allowing for the 3.4 per cent. p.a. charge for covering the forward exchange there is enough differen- tial to attract 'hot' money into the local mort- gage market (now 7 per cent. for seven-day call ninneY). This seemed to have persuaded the authorities to make the 1 per cent. cut in Bank rate, Is it going too far to conclude that they have learned their costly lesson of 1960—when POO million or.more of 'hot' money was drawn In to bolster up a weak £7 If there is a persistent weakness in the foreign exchange, as there was in 1960, when we traded at a deficit on external account of no less than £340 million, the time-honoured rule is to attack the basic causes of it without delay (in this case the excessive rise in imports and the insufficient rise in exports) and in the meantime to borrow temporarily, if devaluation Is ruled out, from the foreign Central Banks or f' Om the IMF. But to hide an exchange weak- ness by attracting the floating funds of the 'hot' honey merchants is simply asking for trouble. that conies in has to go out, and when about 4645 million went out in the first Seven months of 1961 we were back in another sterling crisis with all the paraphernalia of credit squeeze, dear money and 'little' Budget. There is only one thing to do about 'hot' money and that is to u° without it. We should imitate Switzerland arld impose a penalty on it if it comes. The s lAuss now refuse to accept foreign 'demand' deposits or to pay any interest on other foreign- :Wned deposits made since July, 1960. They lven impose a service charge of a quarter of Per cent. on deposits held less than six months. The Germans did even better, they pro- hibited the payment of interest on foreign 'time' as well as 'demand' deposits and stopped the sale of money market paper to foreigners. Is Great Britain to be the only great trading nation to have recourse to an out-of-date monetary technique? To judge by his words at the bankers' feast, the new and 'very unfuddy-duddy' Gover- nor of the Bank (quoting the Observer's de- scription of him) should stand no truck with this anachronism.

The burden of the Economist's dissent was that it was unrealistic, if not dishonest, of Mr. Lloyd to say that he was not relaxing his defla- tion when he cut Bank rate to 61 per cent. If putting Bank rate up to 7 per cent., they say, had a psychological influence, in what way does putting down to 61 per cent. have none? But who is foolish enough to pretend that 7 per cent. had a psychological influence? On Mr. Cousins? On the TUC? The day is long since past when raising Bank rate meant anything to the trade unions. Everyone knows that the present crisis grew out of wages and salaries rising last year far ahead of the rise in produc- tion and productivity and that the mainspring of Mr. Lloyd's policy was to impose a wages pause to enable production and productivity to catch up. That was the psychological shock to the trade unions he intended. A 7 per cent. Bank rate contributed nothing except once more to raise business costs, narrow profit margins and make us less competitive than ever. If it was any psychological shock to the employer, it was to discover than our rulers were still suffering from monetary madness, were still bewitched by the old falsity that what Lord Cromer calls 'the disproportionate use of monetary measures' could help to maintain a balance between the rise in incomes and the rise in production and productivity.

What makes this dear money madness so damnably serious is that every time Bank rate is used to a 'disproportionate' extent it never re- turns to its previously normal level. We start every new crisis from a higher level of interest rates, so that we are constantly increasing our industrial and trading costs, constantly raising the cost of our houses, hospitals, schools, roads and other public services, constantly putting up the cost of our export goods and export credits; in other words, constantly causing wages to rise and constantly worsening our competitive posi- tion in the world's markets. I see that my friend 'Lombard' in the Fitz‘ancial Times suggests that dear money has cost the UK an extra £1,000 million in interest disbursements abroad over the past ten years. This is mild by comparison with the cost at home, but think of the boom in exports we might have had if this £1,000 million had been invested abroad instead of being' spilt into the coffers of overseas banks.

The obvious way out for us is to rely less on monetary measures and more on planning and control. The letter which Mr. Lloyd has sent to the interested parties on his proposed National Economic Development Council unfortunately leaves no doubt that he does not begin to under- stand what purposeful planning means. He is not even contemplating a permanent expert staff. He suggests that the staff of economists should be temporarily seconded from their real jobs for two or three years and that the work of the Council might be partly in secret. This country is never going to work out of its complacency- and uncompetitiveness if this is the sort of loose amateur planning Mr. Lloyd is intending. A thoroughgoing industrial plan need not neces- sarily involve control—it could work by per- suasion and good will on the French model— but it could hardly fail to propose some form of licensing control for the building and con- tracting industry. It is ironic to think that this industry, whose excesses have landed us in the present inflationary mess, has just brought in the 10 per cent. rise in hourly wages which was agreed to in the spring. Wage pause, my foot! Planning, my foot! I hope the new chairman of the Conservative Party will sit up and take note.