hi the city
The Bank's limit
Nicholas Davenport
At long last the Bank of England has aPPlied a touch of dirigisnre to the moneylenders' market. I have never understood Why a Labour government has never done It before. I suppose it is because it is so Ignorant o,f the mechanism of the money market that it has never dared to interfere in 'affairs of the Bank' (which Dalton leftun-nationalised). But I have never ceased to Point out ad nauseam that if the government relies for its money control solely on the interest rate mechanism it will push us down and down into our financial bog. Business will be choked to death by ruinously dear money.
There are, of course, some extremely Clever economists on the Left who like forcing the City to swallow the unpleasant and fatal medicine of absurdly high Bank ILateS. Their argument is that when the uUclget deficit soars, the Bank has to sell enough gilt-edged stock to the non-bank Public to stop the money supply soaring and that the coupons have to be high enough to clear the stock. This is treating tile City like a greengrocer who has to cut the price of tomatoes to smithereens to clear a glut. The City is not a greengrocer's stall. The responsible old boys who collect the national savings and invest them wisely tO promote the pension funds of us workers would go on strike against a Bank rate high enough to kill free enterprise stone dead. hey very nearly went on strike against the recent Bank rate of 15 per cent which has _now been reduced by a derisory per cent. Necond thoughts—prompted, I am sure, by a, sense of duty—persuaded them to digest 1,11e last £600 million 'tap' stock—Treasury 1'4 Per cent 1980—by the close of last week. „ he Bank promptly issued another new itc,a13.—£.800 million of Treasury 13 per cent
at 96f—the highest coupon ever
ered in the 'short' market. It makes one ashamed to think that this great, and fundaInentally rich, nation has to bribe money
lenders with interest coupons high enough to compare with a banana republic.
A sense of shame must have touched the Governor or the Chancellor for, in addition to the tiny cut in Bank rate, they have applied a little dirigisme by re-introducing what is called 'the corset' scheme, that is, they have restricted the growth of the banks' interest-bearing sterling deposits to only 3 per cent in the next six months instead of 8 per cent—any excess to go into Supplementary Special Deposits. This means that they have restricted the banks' capacity to lend and their readiness to bid aggressively for funds. (This incidentally should tend to lower inter-bank and CD interest rates.) It is time that a closer link between the City money machine and the Treasury was devised, so that there can be more control in the public interest over the uses to which the money supply is put.
The dreadful consequences of the failure to do so in the past can be studied in the history of the Barber regime at the Treasury. After pumping over £3,000 million into the economy the M3 money supply nearly doubled—from around £18,000 million to £35,000 million--between the end of 1970 and the beginning of 1974. And who made most use of this credit bananza? The spivs who promoted the outrageous property speculations, the fringe banks, the takeover deals and the stock market mergers. It cost the Bank and the clearing banks nearly £1,000 million toclear up their messof losses.
If more control or direction were secured over the uses to which an increase in the money supply is put there would be less need to use the interest rate mechanism and jerk Bank rate up to repressively high levels. The recent 15 per cent lift was the limit. It is surprising that the gilt-edged market was able to stomach it. The equity share market couldn't : it has collapsed.
In the last few months the sales of giltedged stock to the non-bank public must have reached £2,500 million or £3,500 million since the beginning of the financial year. The money supply fanatics estimate that for the full financial year £4,000 to £4,500 million sales would be required to finance a budget deficit of around £1 1,000 million without inflationary consequences. Redemptions of stock in the financial year
add another £2,800 million. But there is no reason to expect that sales will fall short of the target if the Bank can convince us all that a Bank rate of 15 per cent was the limit and that money must now be made much cheaper to help business to recover.
No politician, certainly no voter, can understand how the money supply figures are worked out or cooked. The Friedman nostrums ale dangerous because they make people mistake symptoms for causes of our sickness. It was good to hear Mr Harold Lever putting the professor in his place for daring to suggest that there was no merit in our social contract or in 'baling Britain out' and that the best way to get rid of the sterling balances was to let the pound sink and go where it wants. Like many other theoreticians, said Mr Lever, the professor has had little experience of this market or he couldn't give such an inane prescription.
As I have been advocating some dirigisme—mild, I hope, and sympathetic— in place of blind adherence to money supply targets and the use of Bank rate, I must reply to a correspondent, Mr James Filmer Wilson, who objected to my dirigiste suggestion of pledging our portfolio assets overseas for the help of the defence of sterling in the exchange markets. I am certainly no advocate of confiscation. The investment trusts, the unit trusts and other professional managers of funds have built up a great portfolio of foreign securities which they say they cannot manage properly because of the Treasury grab of 25 per cent of the dollar investment premium. The market accepts their confession of management failure because investment trust shares are now selling at a discount of 30 to 40 per cent of their net asset values. So my suggestion is that the professional managers of these overseas portfolios who are fed up should hand them over to Mr Harold Lever. the Chancellor of the Duchy of Lancaster. who is the financial adviser of the Government, ask him to pay them the sterling equivalent—less the 25 per cent premium grab—and implore him to sell them when he can secure good bids (he is a pretty good judge of the market) and apply the dollar proceeds to the reserves for the defence of sterling. They would be doing a good turn for the nation as well as getting rid of a management headache.
I can see no national good or reason in holding a block of overseas securities which the owners say they cannot manage properly. The Bank of England Bulletin for June 1974 gives the market value at the end of 1975 of these overseas portfolios as £6,625 million, but no figures are given of the amount of dollar borrowings which would have to be subtracted.
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