Bank Rate and the Crisis
-EOBHONIf 111-1E gOr
By NICHOLAS DAVENPORT
BY the time these words are in print Bank rate may have been pushed up from 6 to 7 per cent or even 8 per cent. Any madness is possible an western democratic societies when the mone- tary machine gets out of control. Confronted with a grave wages problem we should all realise, if we Were sane, that dearer money adds to—not lessens—a wage-cost inflation. It puts up the cost of houses and rents directly and, indirectly, all household services (local authority, electricity, Eas, etc.). So it acts inevitably as a stimulant to *age demands with the result that the wage-cost inflation is aggravated. Unfortunately, dearer money has come to be accepted as part of the orthodox measures traditionally taken when Western societies consider it necessary to deflate their economies. The Establishment demands it. bankers (who profit greatly from dear money) 47ry out for it. Ignorant politicians vote for it. But it will only anger Mr Cousins and the proletariat the more and make them demand higher and higher wages more stupidly and more fiercely than ever. All this is bound to happen in split societies where the workers are not Content with their share of the national cake and feel increasingly alienated from a ruling Estab- lishment, even when it is a `Labour' government, 'Which applies harsh monetary measures in an attempt to check and frustrate their wage demands.
The fact that the monetary machine has got out of control is due mainly to America. Before the Vietnam war upset the balance of their domestic economy the United States were the monetary model for the western world. They inanaged to retain price stability with growth. DUI last year prices began to rise and the Federal Reserve Board, having already annoyed Presi- dent Johnson by putting the rediscount rate up to 4 per cent, raised it again to 41 per cent in December. Thereafter the government bond inarket went to pot, President Johnson lost interest—although he won't miss an opportunity .ito blame Mr Martin for the monetary mess which is coming—and the Vietnam war began to push the balance of payments deficit up to over $2,500
Before long the deficit may be $5,000
illion —with the Euro-dollar market bursting at 'the seams. Incidentally the six-months Euro-dollar fitarket rate has jumped to 6+ per cent. All this *catty disturbed the Europeans. The Dutch and . the Germans, who rely a great deal on monetary measures, recently raised their bank rates from
4 per cent to 5 per cent, the Swiss (a narrow provincial economy) moved from 2+ per cent to 31 per cent and only the French remained calm with 3f per cent. I should add that South Africa put up its bank rate last week from 5 per cent to 6 per cent, proving that inflationary pressures are not peculiar to the western world.
In Great Britain the monetary fever has taken the form of a steady rise in bill rates. In the old days Bank rate would no doubt have been raised at an earlier stage, but Mr Callaghan is more conscious than most Chancellors of the fearful cost to the Exchequer of a dear money policy and its aggravation of the wage-price spiral. The Bank of England, denied access to its traditional weapon, had recourse to the Treasury bill rate which has been quietly manoeuvred upward. Last week at the weekly tender the rate rose to £5 16s. 2d. per cent while the rate at which the discount market buys fine bank bills jumped to 6A per cent. This is the first time that this rate has ever exceeded Bank rate. The Bank will no doubt be trying to convince Mr Callaghan that he must now raise Bank rate to bring it into line with the rest of the market. But Mr Callaghan should refuse. The time has gone when sterling can be supported by attracting foreign money into London to earn higher interest rates. 'Hot' money moved out of London at the end of June and has not come back. In fact, foreign money has been leaving the local authority mortgage market where seven-day money is still only 61 per cent. The pull of interest rates, after allowing for the cost of covering sterling forward, is well against London. Mr Callaghan must, therefore, rely on his central bank credits and the American 'swap' arrangement on which he has already drawn to the extent, it is said, of up to £200 million.
Of course, dearer money puts up industrial offerheads as well as the prime (wages) costs of production. In Germany and Italy industrial borrowing rates have risen to between 7 per cent and 8 per cent. The same will soon apply to France now that the rate for state industrial bond issues was raised last week from 51 per cent to 61 per cent. In the United States, a country famed traditionally for its cheap money for industry, a first-class borrower like General Motors is now having to pay 6 per cent and those in the second class over 7 per cent. The more speculative borrowers must pay 10 per cent or more. In the UK, if Bank rate goes up to 7 per cent, borrowers will pay 8 per cent or more on their bank overdrafts and will be asked to cut them down. Already industrial debenture issues on the capital market are edging towards that figure. A great shock was given to the market last week when Barclays DC & 0 raised £15 million with a 7+ per cent bond issue at 97 to yield 71 per cent. If a 'blue chip' has to pay 71 per cent the second-grade industrial borrower would be lucky to got away with 84 per cent.
The end of it all will be a sizeable industrial recession. Mr Callaghan's deflationary measures have made this inevitable. A recession has been timed for the autumn when the SET begins to take its toll of all employers--to the tune of £160 million. The Banks—up to their official 'ceiling' in advances—will be unable to help. It was indelicate of M Pompidou in his London talks last week to suggest that the British people would have to make sacrifices in their standard of living, as the French did, to put their economy in a fit state to join the Common Market. He did not seem to be aware that Mr Callaghan had planned a sacrifice this winter when the British people are due to pass from a full-employment society to a stagnating under-employed society. Let us then avoid panicky measures with Bank rate lest industrial confidence should receive too rude a shock and industrial investment decline too far to allow for any quick recovery from the coming recession.
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