MONEY AND THE CITY
Warning to the Bank
Nicholas Davenport
A lot of monetary hot air is usually talked, at the Lord Mayor's annual feast to the bankers and merchants of the City of London, and last week the hottest came from the Deputy Governor of the Bank. I hasten to add that Mr Hollom must personally be exonerated because he was merely delivering the set speech prepared by the Governor who was absent on grounds, I hope, of conscience. It was deplorably reactionary. The following paragraph might have been spoken by Montagu Norman in the unenlightened days of the 'thirties:
My opinion now is that late last year we Should have resisted the downward movement in interest rates more strongly than we did, or, failing that, we should have moved earlier this year, perhaps even in February and March, to establish a higher level of interest rates . • . I am not confident that we have now done enough to ensure that monetary expansion will moderate to the desired extent in coming months. . . The sharply rising deficit in the Public sector, the revival of borrowing by manufacturing companies, could lead to a renewed acceleration in monetary expansion. We will need to be vigilant and active to Prevent this.
r suggest that Mr Heath should immediately summon the Governor to No 10 and ask him whether it is the Bank's real intention to kill the revival of borrowing by manufacturing companies, Which the Government has been trying desperately to stimulate, or to slow down the growth of the economy which the Government has been trying to speed up to five per cent through the massive deficit sPending of the public sector. A potential confrontation between Prime Minister and Governor on such a conflict of economic Policy, calls to mind the battle which Mr Harold Wilson once had with Lord Cromer on a similar issue. Mr Wilson had to ask the Governor at that time who Was supposed to be governing the country. The relations between the Treasury and the Bank of England have always been obscure. This has been clue, as we all know, to the bad drafting of the Act of 1946 which prevents the Chancellor giving direct orders to the Bank on monetary matters which are supposed to be its Peculiar province. It took some years before the Bank acknowledged that it had not been given the right to change Bank rate on its own initiative. Now that it has
abolished Bank rate it can fix its "last resort lending rate" each Friday presumably once again on its own initiative. (The rate is Per cent above the average bill rate tender which is clearly subject to manipulation.)
So it looks as though the Bank is once again exercising its old prerogative to play ducks and drakes with the economy by manipulating the money supply and the rate is iper cent above the average bill authority from the Government. This has a sinister connotation at this particular moment when the consensus talks at Chequers might break down. Would this disaster be seized upon by the Bank as an opportunity to cut the money supply in half, make it impossible for financially tight companies to pay their wages and drive up unemployment to two million.
One has to overstate the dire consequences of a split between Treasury and Bank to draw public attention to the mistakes of our monetary policy. It was a terrible mistake to restore freedom to the joint stock banks before the slack in the economy had been taken up, for this meant that the extra money supply created by tax reliefs and deficit spending went to property developers and speculators who have made a killing out of it — to the intense anger of the trade union leaders negotiating with Mr Heath at Chequers. As Mr Heath has proved his readiness to change his policies whenever they prove to be wrong — as they did over the lame ducks — he should now admit that it was a mistake to restore freedom to the banks when the chief beneficiaries were not the employers of labour, but individual speculators in land, houses, company takeovers and the like. He should bring back direct control over the quality and quantity of bank lending instead of issuing vague directions. He should impose a special Betterment Tax on land development and limit the amount of loan interest deductable against tax on land development.
It would appear from the parrot speech of the Deputy Governor at the bankers' feast that the Bank still attaches great importance to the rate of interest as a means of control over money supply and the economy. In this period of rank Inflation — wage rates last month were 17 per cent up on September 1971, and wage earnings 11/ per cent — who would imagine that a sharp increase in the borrowing rate would deter a financial speculator who can see a 100 per cent or even a 200 per cent profit in a slick transaction over a short period of time? It must be obvious to anyone outside the Bank of England that a higher market rate of interest, which puts up not only rents but the whole cost of trading, can only lead to higher wage claims and feed the fires of the inflation. If Mr Heath would only exercise his powers of intervention he would direct a portion of the funds accruing to the life and pension funds from the savings of the people into the gilt-edged market, as France and other countries do, in order to keep down the rate of interest for social and industrial investment.
My fears of reactionary Bank of England moves may be exaggerated — the Chief Secretary of the Treasury has said that convulsive action on the money supply is not politically viable — but I am made suspicious by the lip service paid by the Chancellor at this City feast to the new system of monetary control "which puts more reliance on changes in interest rates." Is he being foxed by the Friedmanite fanatics lurking in the Bank of England?
Let him stick to his guns. If the Chequers talks break down let the expansion of the economy continue. It is going well at the moment. The consumer trades are booming; retail sales are seven per cent up, and new car registrations 35 per cent higher. Industrial production is at last advancing strongly. Unemployment is falling — the trend on a seasonally adjusted basis has been downward since early spring — and vacancies continue to rise.
According to the Chancellor the economy is on its five per cent growth course to which the Government is now committed over the next two years. The standard of living is rising fast thanks to the tax reductions and the wage inflation which is far ahead of the price inflation. Real disposable income per head of the population was eight per cent up in the second quarter of the year as compared with that of 1971. The only economic index which is not moving up is the price index of equity shares on the Stock Exchange which has become hidebound by the talks at Chequers.
A final word of praise for at least one speech at the Lord Mayor's jamboree. Sir Martin Wilkinson, chairman of the Stock Exchange, commenting on our entry into the EEC, pointed out that transfer duty at a substantial rate continues to apply in the UK and Ireland alone among EEC countries while the UK is alone in adding VAT to the private investor's commission charge on his contract note. Why?
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