MONEY The permissive society in money

NICHOLAS DAVENPORT

A milestone on the slippery road to inflation has been the floating of £40 million of loan stock by the ice with a coupon of 101- per

cent. It was issued at 98 and because tci have the reputation of mistiming or misjudg-

ing the market it went immecjiately to two premium. But a yield of close on 11 per cent is just as inflationary as yielding an 11 per cent rise to the Electrical Trades Union. It puts up chemical costs in exactly the same way—an anti-social way. Of course, no one thinks of accusing the money market men of being anti-social as the public does the elec- trician strikers. No heart-patient is likely to die if the money men cry out for 15 per cent or 20 per cent. Yet one can imagine a poor widow being unable to meet her mortgage payment if the rate of interest went up to 15 per cent and committing suicide in her 'high speed' gas oven if it went to 20 per cent. In this age of universal inflation no man is a money island. In the City one hears sharp and rude criti- cism of the permissive society outside. Being innocent of long hair, filthy clothes and an addiction to drugs the clean living 'square mile' seems a thousand leagues away from the King's Road in Chelsea, although fifteen minutes only by Underground. Yet it never occurs to its clean-shaven, stiff-collar money market men that when they are demanding higher and higher rates of interest, when they are withholding their money from the gilt- edged market, they are doing what strikers do when they withhold their labour from the factories; they are really demanding a re- turn to a free-for-all permissive society. Left to free market forces the so-called 'equili- brium rate of interest' might settle at 20 per cent which would dangerously fan the flames of all the inflationary forces in the economy. So a return to the permissive society in money could never be tolerated. Money must remain subject to the rules and discipline of the Old Lady in Threadneedle Street. Now it happens that Sir Leslie O'Brien, the Gov- ernor of the Bank of England, has just given us a peep-show of these rules in the Jane Hodge Memorial Lecture which he delivered at the University of Wales on 7 December. In my humble opinion the rules are not all that logical or adequate for the present crisis.

The Tories brought in a permissive society in money when they returned to power in 1951 and began dismantling the then phy- sical controls in the economy. The first per- missive thing they did was to abandon pegged prices in the gilt-edged market and let the market rip. Having been fixed at 2 per cent almost constantly since 1932 Bank rate was raised gradually to 4 per cent and was then to be varied forty times in the next nineteen years! In other words monetary policy, for what it was worth, was directed mainly on the structure of interest rates, the money supply being regarded as of second- ary importance and a fat lot of good it achieved. After the publication of the Rad- cliffe Committee's report on the monetary system in 1959, a report which was regarded

as unsatisfactory, if not misleading, a great controversy arose among the economic ex- perts and, as a result of the general feeling that money should be brought more under control, the concept of a money supply con- trol assumed more importance.

It was good to see that Sir Leslie O'Brien rejects the Friedmanite doctrine of causality, which is that the rate of growth of the money supply dictates the rate of growth of money incomes. Although movements in the money supply, he said, may be a useful indicator of movements in incomes this 'fact tells us noth- ing about causation'. He added: 'Since the authorities have not operated in a strictly monetarist way over the past twenty years but have broadly accommodated the rising demand for money balances as incomes rose, they cannot tell us what would happen if policies were radically different'. Under pres- sure from our creditors—the IN IF—the Bank is now giving more attention to money supply and the DCE (domestic credit expansion). According to Sir Leslie the Bank finds the DCE a more useful indicator, but be adds that to focus on either money supply or DCE is not enough. The Bank has to look closely at the stocks of financial assets held in the various sectors of the economy. No doubt he was thinking that no trade union could embark on a lengthy strike unless it had plenty of cash on deposit at the bank and that no life or pension fund could withhold its money from the gilt-edged market unless it had alternative assets to invest in.

The Governor's lecture remarks on the permissive gilt-edged market have been widely misinterpreted. He did not say that the Bank would not support the market; he denied that they were trying to force through a predetermined volume of sales in order

to reduce the money supply; but he did say that their gilt-edged policy was more flexible and that they would not mind temporarily higher rates, 'as nominal rates can often be illusory when seen in real terms'. For me this was really shocking. It showed a bad lapse from the vigilant authoritarianism of the Bank. It showed either that the Governor was prepared to tolerate a permissive society in money or was simply not aware that rising money rates stoked up the inflationary fires. I was also disturbed to hear that 'the burden of high interest rates on the Exchequer and balance of payments, though always a con- sideration, is not a foremost one'. It should be the foremost one, for higher interest charges leading to higher taxation are as inflationary as excessively high wage claims.

On the broader question of a shock mone- tary treatment the Governor was sound enough. 'It cannot be emphasised too strongly or too often', he said, 'that attack- ing a severe inflation simply by holding down the growth of the money supply means re- ducing real activity or in more homely terms a lot of bankruptcies and unemploy- ment.' The shock monetary treatment, as I have stressed before, would be a dangerous provocation: it would drive the trade union establishment into the hands of the militant revolutionaries.

I wish the Governor would tell Mr Heath or Mr John Davies that while it may be very salutary for inefficient companies to go 'bust' the reliance on higgledy-piggledy bankruptcy is not the proper way out of this inflation. It would be a tragic waste of resources to allow good companies to go under because on account of an excessive and blind finan- cial squeeze they could not pay their bills.

While I am all for more responsibility in our national life I am scared by Mr John Davies's insistence on a return to free market forces

in a more competitive world. This suggests a return to a permissive society in money which would be a disaster in an inflationary

epoch. I hope Sir Leslie will tighten up the rules and not let the money market become his master. We need a less permissive mar- ket in government bonds.

ffolkes's investors' alphabet

T is for Taut funds