THE ECONOMY
Conversion on the road to Loughborough
JOCK BRUCE-GARDYNE
In one of Graham Greene's novels the heroine keeps the ashes of her former lover in an urn on her mantlepiece. So it is — or was until last week — with the Bank of England and the ashes of that grand old trouper sterling M3. More than a year has passed since Chancellor Lawson declared that the Old Entertainer was clinically dead. But the ashes were tastefully pre- served on the Governor's mantlepiece, and every now and then inspected lovingly. Back in April he was referring the Com- mons Treasury Committee to what he described somewhat obscurely as 'the pos- sibility of the unleashing of this what you might call glacier of tightly-held money' (while assuring them that he was not suffering 'undue worries', let alone 'night- mares' about it). More to the point, perhaps, the dear departed indicator was resurrected, to general surprise, as a target for the year in course, in response — so it was thought — to the urgent representa- tions of the Bank. Then, as recently as a fortnight ago, at the Mansion House ban- quet, when the Chancellor had firmly announced that the one per cent rise in interest rates had had nothing — but nothing — to do with the surge in either 'broad money' or 'credit', the Governor boldly responded 'oh yes it had': or, to quote him precisely, 'liquidity and credit have been growing uncomfortably fast, and markets have not failed to perceive this.'
Distinctly cheeky, that seemed, on the night, and we waited to see if the Governor would have his knuckles rapped. So all sorts of suggestions have been drawn from the fact that, just one week later, on the road to Loughborough to deliver the First Loughborough University Banking Centre Annual Lecture in Finance, Governor Leigh Pemberton should have seen the light. 'Two years ago. . . I envisaged the possibility that the unpredictability of the relationship beween money and nominal incomes could reach a point. . . at which we would do better to dispense with monetary targetry altogether, and I shall be considering with the Chancellor whether that point has arrived . . . .' Needless to say the Treasury was as keen as the Bank of England to insist that this was all his own work.
It is familiar territory. Back in 1971 Chancellor Barber ceremoniously dropped the monetary pilot bequeathed to him by Roy Jenkins, and for not notably dissimilar reasons. Then, too, the pilot's signals were deemed to be misleading. Lord Young, who has the thankless task of fielding enquiries about these matters in the House of Lords, assured me the other day that 'time has moved on, and. . . we do not live in the conditions that existed' in the early 1970s. Which is true — up to a point. In those days, as the Treasury is quick to point out, interest rates were way below the going rate of inflation, whereas. now they are way above. In those days we had embarked on a very different sort of targetry: we were supposed to be reaching for a five per cent rate of growth in the British economy, and damn the consequ- ences. Nowadays the nearest we come to such highfalutin' ambitions is the cautious and conditional indication of guidelines for money national product growth, which are supposed to mean that if prices rise more, output will have to rise less (and vice versa). In those days we were about to institute a remarkable system of control over wages and prices which was structured to ensure that they would leapfrog over each other like a posse of first world war staff officers. No such weird and wonderful stratagems are currently in prospect.
Some other aspects of the 'Barber boom' are less obviously banished to the history books. The exchange rate has been sliding faster than it did in the early 1970s. The balance of payments appears to be heading firmly for the red — albeit not nearly so dramatically as it was by the end of 1973. House prices accelerate dramatically, and gazumping has returned. Once more we are borrowing as if there were no tomorrow.
Moreover the financial markets like to have some goalposts, even if it is only to enable them to snort derision when they are missed by a mile. The goalposts they would like to have — as would the Chan- cellor — are those on offer from the European currency club. But they are out of bounds, on orders of 10 Downing Street. So all we have just now is 'bearing down' on inflation. Which may be splendid for the labour ward, but hardly satisfies the City.
For the moment, however, our intrepid Chancellor seems to have succeeded once again in staring down the pressure for a further rise in interest rates. Thanks to unexpected friends in Tokyo. The Japanese, having taken fright at the evi- dence of the wear and tear inflicted on their trading companies by the appreciat- ing of the yen, have been piling into the US bond market, and as usual the resulting recovery of the dollar has pulled the pound some of the way with it against other currencies. Sufficient at least to take the immediate pressures off.
The remission could be of limited dura- tion. If so, two rival and seemingly contra- dictory counsels are clamouring for the Chancellor's ear. According to the FT 'sortie of the Treasury's leading economic advisers' (could that be a collective noun for Sir Terence Burns?) are urging him to drop his plans for tax cuts in next spring's Budget, and to go for a cut in borrowing instead. Tax cuts, so the argument runs, would only be squandered on more im- ports; whereas a cut in borrowing would make it easier to 'bear down' on interest rates, thus stimulating industrial invest- ment. The snag about this is that if interest rates were successfully 'born down' upon then so also, presumably, would the ex- change rate, pushing up our imported costs and inflation expectations.
The rival strategy harks back to the European currency club. Here the argu- ment is that it should, with luck, take but one more run on sterling to overcome the Prime Minister's resistance. Then the Ger- mans would stand behind the pound. In- terest rates could come tumbling down without upsetting the exchange rate, and just as the Japanese have been lending hand over first to Uncle Sam to enable Uncle Sam to go on buying Japanese, so the Germans would lend to us to enable us to go on buying German.
There is a third option, which would have the Government seizing the chance presented by the evidence from the opin- ion polls of the two major parties running neck and neck. A prompt election, in other words, enabling the present Chancellor or his successor — to get to grips with the credit boom as soon as all the votes are safely in. It does not have many takers and least of all the only one who matters.
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