POSTSCRIPT ON BANK RATE
By NICHOLAS DAVENPORT IN my open letter to the Chancellor last week I had no space to develop my final plea for a lower Bank rate, so here it goes in a postscript. Please, ,Ifr. Amory, do not go on pretending that nothing has changed at the Treasury. The Prime Minister k)uld not have accepted Mr. Thorneycroft's resignation if he had really believed in his 'hard Illoney' and all that it implied. He gave you the Oh because he expected something better. I am sure that he never liked the 7 per cent. Bank rate, but regarded it as the symbol of our sub- servience to the foreigners who had sold sterling Short. And so it is. It is a ridiculous Bank rate for a country which has exported £3,326 million of goods last year and is running a net surplus this Year of between £250 and £300 million on its international trading account. In the Common- wealth you can only find its equal in New Zea- land, which has a simple farming economy and a restricted credit system. Outside the Common- Wealth I only know of a higher Bank rate in Japan. In Europe it has become a joke and no one IS laughing more heartily at us than the Germans, Who have just reduced their own Bank rate again "-from 4 per cent. to 31 per cent. The Russians niust be tickled to death to see Britain deliberately curtailing vital long-term investment by a penal rate of interest. For an economy as sound as ours, and exposed to no worse a wage-cost inflation titan is America today (or Germany tomorrow), a. Bank rate of 5 per cent, would be more suitable. SO what we all expect of the new Chancellor, Mr. Amory, is to find a way of containing our inflation Without having to subject us to such an expensive, dangerous and ridiculous rate as 7 per cent.
How expensive it is you will soon find out when You come to your Budget. A difference of 2 per cent, on the floating debt is equivalent to over
00 million a year, not to mention the extra cost 01 funding operations. (Think of 54 per cent. ( I) on the £500 million of eight-year Exchequer bonds you have just issued.) As so much of the floating debt is held by central banks overseas each 1 per cent. extra (according to the Chancel- lor last May) costs our balance of payments £15 million—and much more today since the switch Of money from current accounts to Treasury bills. With a 5 per cent. Bank rate you could save today probably £40 million a year on our inter- national account. But what is so dangerous about our 7 per cent. Bank rate is that it brings dear Money and deflation to the weaker countries of the Commonwealth which have to put up their own rates to prevent money flowing to London. We are not only hurting ourselves but our custo- mers overseas. Ask Mr. Macmillan what they said to him on this point in India and New Zea- land: I don't suppose it is printable in the
Spectator.
* • *
Is there any reason, Mr. Amory, why you should not be able to contain the wage-cost inflation equally well with a 5 per cent. Bank rate as with 7 per cent.? The extra 2 per cent, makes not the slightest difference to the attitude of the trade union leaders when they come to consider Wage claims. Nor does it make any difference to the employers who have contracts to fulfil; it only makes them grumble at having to pay more to their bankers and add a bit more to their costs. And here is another objection you might bear in mind. If the industrialist or trader cannot get accoMModated a.t his bank because of your credit
squeeze, he goes to some outside source for his money—the so-called industrial banker. You must have noticed the growing number of 'industrial banker' advertisements in the press asking the public for deposits—often at 81 per cent, or more on three months' notice of with- drawal. What is more, 'hot' money has been pour- ing into London from Zurich and other foreign financial centres to earn the 84 per cent. to 104 per cent, that can be secured from this industrial finance. Do you not see, Mr. Amory, that your 7 per cent, is not curtailing anybody who can afford to pay the 'hot' money price, that it is attracting undesirable foreign money to London which is no support of sterling, that it is merely putting up industrial costs and curtailing the desirable long-term investment which cannot afford 'hot' money rates, not to mention making the cost of essential social investment quite prohibitive? By all means contain the national investment within the limits of our physical re- sources, but do it by a few sensible controls. Don't attempt to do it with dear money because you
won't succeed. * * There is, therefore, no reason why you should retain a 7 per cent. Bank rate a moment longer. It is no longer impressing the foreigner (who is, indeed, laughing at it), for sterling is now standing
on its own trade legs. Our reserves are, of course, hopelessly inadequate, but they cannot be built up by a 7 per cent. Bank rate. It is becoming more and more obvious that unless America helps by writing up the price of gold or by granting a very big stabilisation loan our reserves will remain the cause of instability..
If you are still hesitating, Mr. Amory, I sug- gest you call Mr. Robert Anderson, the new secretary of the US Treasury, on the telephone. He will give you some reassuring news. The American discount rates have been reduced to 3 per cent, and the Treasury bill rate has fallen to 2.6 per cent.—the lowest for a year and a half. On Wall Street stock margin requirements have been reduced from 70 per cent. to 50 per, cent. Why? Because Mr. Anderson has decided that it is much more important just now to stop a depres- sion than it is to stop an inflation.
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