The needless burden MONEY
NICHOLAS DAVENPORT
Looking back without anger we must admit that the Treasury made an egregious mistake in putting Bank rate up to 8 per cent when we devalued the pound in November 1967. A 1 per cent rise to 74- per cent would have been adequate. It is no longer government policy to prop up the pound by attracting 'hot' money to London through the pull of interest rates. It was never sensible to do so at any time, for in the money business what comes in will in the end go out. And in the meantime every 1 per cent excess on the Treasury bill rate will cost the balance of payments an extra £30 million. Eight per cent was a panicky rate, and after it was cut by 4- per cent on 21 March we were still left with dear money which is burdening the Exchequer on its internal as well as its external payments. Do people 'realise that the Treasury has to pay out £650 million on the national debt and that nearly £200 million of it goes to holders overseas?
After the favourable—but freak?—trade re- turns for June everyone expected that Bank rate would be cut to 7 per cent, but I did point out at the time that the cautious authorities would probably wait to see what the July returns portended. And these were horrible, the deficit -sing from £50 to £80 million. The fact that the visible trade deficit in the first seven months was close on £500 million is now making every- one pessimistic about the chances of cheaper money. Our banker creditors abroad, it is said, will never allow us a lower Bank rate; they will regard an easing up on the money front as an incitement to consumers and importers.
But this is nonsense. The visiting team of economic experts from the IMF are neither fools nor dictators. They appreciate that domestic consumption will be cut by the savage taxation Mr Jenkins imposed and by the worsening bank squeeze. The clearing bank chairmen have recently been called to the Bank of England and warned by the Governor that they must not exceed their advances ceiling, which was fixed at the May level, and that if export finance pushes them up against it they must cut private overdrafts. The only stiffening-up the nvs detec- tives might suggest is for the Governor to tell the clearing bank chairmen that their customers ordering goods from abroad must put down cash and be allowed no credit. I urged Mr Cros- land some time ago to take this Italian-style anti-import action, but the Board of Trade seems obsessed with its laissez-faire traditions. With a visible trade deficit of £500 million in seven months this is no time for laissez-faire. Surely it is obvious that if importers were sub- jected to such a no-credit diktat the Treasury could reduce Bank rate immediately and allow cheaper money to play its part in encouraging industrial and private housing investment.
Heaven knows that we need the cheaper money stimulus for industrial investment. Our export trade could have expanded much more under the spur of devaluation if our industrial tools had been more up to date. Take the case of our exports to the United States, our most important expanding market. In the first six months of the year they were up by nearly 18 per cent, but those of the European Common Market countries were up by 36 per cent (Ger- many's by 46 per cent!). This was mainly due to the fact that our total motor-car exports fell behind those of our European rivals, in spite of gains by Ford and Triumph. I am not suggest- ing that dear money was responsible for the conspicuous lack of new models coming from the HMS and Rootes factories, but it is fair to say that if we want our manufacturers to tool up for new export orders they must be able to invest at a cheaper rate than 10 per cent.
Fortunately the fiscal action recently taken by the American government—the 10 per cent tax surcharge and $6,000 million cut in Federal government spending—has enabled the Federal Reserve authorities immediately to reduce in- terest rates and allow a move towards cheaper money in the UK to make a start. Two minor Reserve banks have already cut their rediscount rates from 54- per cent to 5+ per cent, and it is expected that New York will before long bring in a 5 per cent rate all round. The sharp im- provement in the American balance of pay- ments in the second quarter of the year—a near balance against a deficit of $660 million in the first quarter and over $31 billion in 1967— should allow the Federal Reserve to pursue a cheaper money policy as the American economy slows down.
And slow down it must. The government economists are estimating that the American GNP will grow by only half as much in the third quarter as it did in the second. The OECD economists also predict that the German rate of growth may slacken, even if the government, so reluctant always to reflate, refuses to up- value the Deutschemark by 5 per cent. In fact, the whole western world is facing a slowing down after the hectic upsurge of the first half of the year because a correction of the Ameri- can and British inflations, which caused the gold-hoarding rush, could be a deflationary fac- tor in world trade. It is notable that the EEC last year exported only $2,700 million capital out of a trade surplus of $4,100 million.
This point is not always appreciated. In 1967 the hoarding of gold due to the world monetary crisis caused a fall of $1,600 million in world monetary gold stocks. In the first quarter of 1968 renewed gold hoarding caused a further fall of $1,500 million. This means that there must be some countries whose reserves will fall this year not only to balance the increase in the reserves of other countries but to balance this loss of monetary gold as well. In other words, the western world faces a period of monetary contraction rather than expansion unless it off- sets its loss of reserves by issuing the new SDRS of the ma or by writing-up-the price of official gold. How much better it would have been if the western world had accepted the American deficits as providing good new paper for the financing of world trade!
It may be that when the bankers gather in Washington for the September meeting of the IMY they will reopen the discussion on 'world in- terest rate disarmament' which Mr Callaghan and Mr Henry Fowler initiated—too soon—in January 1967. A close rapport has been struck between the heads of the American and British Treasuries, who both strongly resisted the French attempt to write up the price of gold and the South African attempt to force the Central banks to buy their newly-mined gold (which would have enabled South Africa to dictate the free market price of gold). We may, therefore, expect the two Treasuries to encour- age the flow of international trade by cheapen- ing money and by pressing forward with the issue of the SDRS from the am Here is the paradox of the flight from reserve currencies into gold : it may end up in a greater use of paper money.
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