FINANCE AND INVESTMENT
Two developments occupy the City's thought: one is the Chancellor of the Exchequer's revelation of the Govern- ment's Defence borrowing requirements, the other is the sudden and spectacular rise on Wall Street. To take the borrowing problem first, there is nothing very new in the knowledge that the Government must float a fairly large loan in the comparatively near future, but the Chancellor's statement has inevitably focused attention on the implica- tions of the huge and still increasing total of rearmament expenditure. So far, the Government has given no hint of the terms of the proposed operations, nor do I think it should, but we have been told that prospective Defence borrowing for the current financial year will be no less than £5oo,000,00o, and that of this total £15o,000,000 will be found by increasing the floating debt, in other words by issuing Treasury Bills. That leaves the formid- able balance of £35o,000,000 to be met by public loans " at the appropriate time." As I have emphasised before, the expansion of the float- ing debt should be a simple matter involving no strain on the banking system. Over the past twelve months the Exchange Equalisation Account has lost some £300,000,000 of gold, which has meant that something like that amount of Treasury Bills has been withdrawn from Lombard Street. Not long ago the joint-stock banks were complaining of being starved of bills, and although their hunger is now being satisfied, there is plenty of room for more bills in their portfolios. I feel, therefore, that there should be little diffi- culty in injecting an additional £15o,000,000 or, if need be, £200,000,000 of Treasury Bills in the banking system. The real problem set by the limits on the banks' absorptive capacity imposed by their cash ratios will not arise until a later stage. It will then become necessary, of course, for the Bank of England to enlarge the basis of credit, which will swell the banks' cash holdings and set in motion in- flationary forces, though probably of a fairly mild character.
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