MONEY The money way out?
NICHOLAS DAVENPORT
The first reaction of the City to the con- fessed inflationary settlement—at around 15 per cent—of the `dirty' strike was not to rush after equity shares—these have long since proved to be a poor or useless hedge against inflation—but to sell everything and accumulate more cash. Illogical, of course, but expressive of the feeling of helplessness which comes from watching the first crude attempts of the Chancellor at economio control. Of course, Mr Barber can do abso- lutely nothing to check the present momen- tum of the wage-cost inflation which stems from the breakdown of the prices and in- comes policy under Labour. And he would be a fool to try to stop the rise in prices at this moment, as ex-economist Harold, Wilson knows full well, because that is how the economy must adjust itself to the wage explosion if it is to survive. Yet it is all very depressing. `Why,' said one broker to me this week, 'why, oh why, don't they send for Professor Friedman?' It seemed to be a counsel of despair.
What the broker was probably recalling was the interview which the Professor gave to the Sunday Times a month or so ago. In it he said that there was no way to control in- flation except by controlling the money supply. He explained that to fight inflation you had to control aggregate demand (the old Keynesian thesis) but added that there was no effective way of controlling aggre- gate demand except by putting a lid on the rate of growth of the money supply. Fiscal measures were useless.
The last point may be conceded. Mr Jenkins plugged the fiscal measures by exacting a budget surplus of over £2,500 million and while he slowed down growth and kept unemployment high he did not pre- vent a wage explosion. If Mr Barber tried to outdo Mr Jenkins and add to our colos- sal tax burden, bringing the unemployed army up to, say, a million, he would play Into the hands of the revoultionaries who would no doubt incite the unemployed to seize the idle factories. Counter-inflationary fiscal measures which throw masses out of Work are not 'on'; they belong to a past age when everyone behaved with respect to the Establishment. It is about time that the gilt-edged market in the City realised the limitations of the old forms of monetary control.
So one comes back to the money supply. The common definition of it is notes and coin plus current and deposit bank accounts in sterling of private sector residents plus public sector deposits. However, the financial statis- tics now give an additional total for money supply which includes sterling deposits of both residents and non-residents. Now there must always be a correlation between money supply and the total of money incomes Which make up the gross national product, but what annoys most British economists— and me—is the Professor's categorical claim that there is a causal relationship. Professor Ka!dor, among many others, has been at pains to deny that money supply governs the level and rate of growth of money incomes and expenditures. On the contrary the quantity of money is largely determined endogenously by the demand- needs of the economy. Certainly the ever- increasing demand-needs of the wage- claimants, hell-bent on exacting more than is justified by the increase in their output and productivity, are pushing up prices and ergo the quantity of money. Can the Treasury stop it by screwing up the 8 per cent minimum cash ratio or the 28 per cent liquidity ratio required of the clearing banks? In theory, yes. The Bank of Eng- land has lately been calling for increased `special deposits' because the banks have been running an excess liquidity ratio of 32 per cent. Putting a tighter squeeze on bank advances may certainly work to resist or prolong strikes and so slow down the rate of wage inflation in the private sector but it has its limitations. And in the public sector it just does not apply.
In the private sector the Government has been insisting that it will not come to the rescue of companies which get into diffi- culties through giving way to inflationary wage demands. This could be serious if bank advances dried up. Company profits have already been squeezed badly by the wage explosion. In the first half of the year there was a decline of 20 per cent in undistributed company income and with rising costs some companies are not going to be able to meet their bills. What will happen if a major com- pany like British Leyland gets into difficulty? Will the Government allow it to throw tens of thousands out of work? It is significant that Mr George Turnbull, the managing dir- ector of British Leyland's Austin-Morris division, warned its managers and foremen at the weekend that the company's finances
were in a serious situation. His statement was said to be part of the new 'communications' policy designed to improve labour relations, but it might have been a flag of distress de- signed to attract government help. But why on earth should the Government help if the management has made bad mistakes? I do not see how the wage explosion can be stop- ped by a money squeeze unless Mr Vic Feather is willing to cooperate. We always come back to this basic point: you cannot run a mixed economy without some con- sensus between management and labour.
Bankruptcy remains a painful and doubt- ful way out for the private sector's troubles and it can hardly apply to the public sector which is outside the rules governing the money supply. Take the case of coal. Lord Robens has already offered an inflationary wage settlement of 12 per cent which the union at first accepted, but unofficial strikes have broken out in Wales and the north-east. Will Lord Robens close down uneconomic pits in these areas? And will the Treasury re- fuse to supply him with the money if he re- fuses? Clearly, the ruthless Friedmanite tac- tic, which incidentally, would involve a float- ing exchange rate and a further rise in prices, cannot be applied in this country where the public sector accounts for nearly half the economy. In this sector you have to use pol- itical sense.
It would also not make political sense to withhold support from the gilt-edged market on the Friedmanite grounds that it might in- crease the money supply. As I have said, it is important to lift the market out of its doldrums in order to improve the capital market and induce companies to borrow not only to fund their bank advances but to finance new investment.
In this crisis of capitalism it may be a com- forting thought that our competitors are in much the same boat, but I wish the Govern- ment would not keep harping on the sup- posed magic of free competition in a free market. Nothing is completely free. Clearly the wage explosion should act as a spur to managements to increase their efficiency and instal the machinery which will enable their workers to increase their productivity. Again we need a consensus.
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