Dalton and Cheap Money
By NICHOLAS DAVENPORT
AN economist, discussing with me the remarkable career of our late friend Hugh Dal- ton, complained that he was the Chancellor who unfortu- nately brought cheap money into disrepute. This seemed to me too harsh a judgment. Although the Chancellor must constitutionally bear final responsibility for all the actions of his Treasury subordinates, however foolish, it is absurd to make Dalton personally responsible for the technical mistakes of the monetary mechanics. Some reviewers have even tried to make him responsible for the conver- tibility farce of 1947. We were pledged at that time by the American loan agreement to make sterling convertible on current (trading) account and Dalton was officially advised by the Bank of. England to dismiss his fears and make the Plunge. 'Convertibility has now been discounted,' they told him, and 'when it comes it will make very little difference.' In volume three of his memoirs—surely one of the best written of political biographies—Dalton remarked: 'I am still surprised, looking back, by this profound error of practical judgment.' It was clear who it was he blamed. Alas, there were many more errors of practical judgment on the part of his technical advisers in the cheap-money campaign.
None of his Cabinet colleagues ever raised any Objection to cheap money. Some critics be- lieved that Cripps was opposed to it, but he defended it in the Commons on the ground that it was not inflationary but deflationary. (It Could, of course, in different circumstances be both.) This was on the occasion of the debate on his deflationary autumn Budget of Novem- ber, 1947—Dalton's last and best Budget, which Paved the way for the Crippsian austerity. The only colleague who was critical of his monetary Policy was the late Evan Durbin, a professional economist, who warned him that it had dan- gerous inflationary possibilities. It was a tragedy that Durbin so soon ceased to be his parlia- mentary private secretary—and an irreparable tragedy that he was later drowned on the Cornish coast. But Dalton wrote that he was getting much encouragement from so eminent an economist as Keynes and 'from the top brass both at the Bank and the Treasury.' It was the `top brass' who made the appalling blunder to- wards the end of 1946 in calling 3 per cent. Local Loans stock for redemption (on January S, 1947) and issuing as from October 28, 1946, the undated 24 per cent. Treasury stock, which Came to be known as 'Daltons.'
In volume three Dalton gave the names of the technicians who were responsible for this opera- tion—Catto and Cobbold from the - Bank, Bridges, Hopkins and Compton from the Treasury and Bampton from the Inland Revenue. Dalton had had misgivings about issuing an undated stock--he was hankering after a long- dated stock redeemable in 2000 so that he could !hake a few parliamentary jokes about the date! -hut the technicians were adamant. It would
be a sign of weakness, they said, and bad for the Government's prestige to replace an irredeem- able by a redeemable stock. 'Chancellor,' said Hopkins, 'you must be resolute. . . . We must all speak outside as though we were quite sure that we could carry this thing through.' But they ought to have known that they could not carry the thing through--because they had upset the market badly through their previous blunder in May and had failed to restore confidence. This was an occasion when they had put a 21 per cent. twenty-year stock on tap at par (Savings 21 per cent., 1964-67), when the nearest com- parable security (2-k per cent. Funding, 1956-61) was yielding barely 21 per cent. to final redemp- tion. This tactical mistake was a shock to market confidence and prices had fallen sharply. A re- covery had only been secured by government priming of the market. Towards the end of the year it had become clear that the market was not willingly accepting 21 per cent, as a long-term rate and that the Treasury was only holding it by flooding the banks with money against an increase in Treasury bills. Bank deposits bad risen £830 million in 1946, of which over £600 million had gone into the gilt-edged market. Regardless of the possible inflationary effects of this pump-priming, the Treasury technicians were flagrantly at fault in pressing a thoroughly desirable cheap-money drive to a point which could not then be sustained.
Looking back, it seems clear that everyone (Dalton included) was bemused by the Keynesian theories applicable not to the demand/supply ratios of the 1945-47 period, but to those of the great depression of the Thirties, when Keynes could write of the coming 'euthanasia of the rentier.' Keynes himself, preoccupied with the American loan negotiations, had no time to think out the new monetary techniques for the post-war shortages which culminated—after his death— in the fuel crisis of 'early 1947. But Dalton was undoubtedly right to go all out for cheaper money. With a national debt swollen through war by £17,000 million to over £24,000 million (of which over £6,000 million was float- ing) the tax burden of a high interest rate at that time would have been intolerable and he deserves great credit for reducing the floating debt charge to only 1, per cent. per annum—a mere £30 million a year 1 Having regard to the immense amount of social investment in housing, schools and hospitals waiting to be done and the vast nationalisation programme to which the Labour Government was committed, a low in- terest rate was absolutely vital. And there was no reason why cheaper money should lead to an inflation while the Government held all the physical controls of war-time and legislated quickly for control over borrowing and capital movement overseas. As the late Hubert Hender- son commented, cheaper money was only a minor factor in the inflationary complex.
But it was essential not to carry the cheapen- ing too far. The technicians at the Bank and the Treasury, whose job it was to assess the market, should have told Dalton when to stop or when to go slow. True, he was a dominating
Minister. One had to stand up to his passions —one, of which was a 1930s hatred of money- lenders—but my knowledge of the man con- vinces me that he would have slowed down his cheap-money drive in 1946 if he had had strong expert advice to do so, for he was aware of his ignorance of monetary technicalities. But he did not get it. The experts, having bungled in May, seemed afraid to confess their fault in Octohcr.
It is true that Dalton could be vain- NN ho among us is without fault?—and I suspect that he was not unwilling to go down to history as another Goschen. In his speech to the Com- mons, when calling 3 per cent. Local Loans for redemption, he referred to Goschen's attack on his 'three per cents.' in 1888 (when 21 per cent. Consols were issued) and boasted that, unlike himself, Goschen never secured a better market rate than 2:1- per cent. But he overplayed his hand, for the true market position was never made clear to him. Not even Dalton would have deliberately overridden the market experts on a market matter.
One despairs of these Civil Servant so-called 'experts.' Here we are in 1962 suffering under a Bank rate of 6 per cent., -having our bill rate raised by Is. 10d. to nearly 5.45 per cent. in the week ending February 17, simply because the Treasury has failed in the fifteen years since Dalton's Chancellorship to devise a successful monetary and economic policy and still persists in the ghastly rule that we must meet balance of payments crises with stagnation! How we miss Dalton's courage and vitality in innovation!
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