THE OLD LADY'S NEW DRESS
By NICHOLAS DAVENPORT
THE Radcliffe Committee had
some memorable words to 'say about the annual report of the Bank of England ('the meagre- ness of which has become a
byword) and suggested various 3 improvements—the publication
of key monetary statistics, an analysis of the year's operations in the gilt-edged market and finally the issue of a quarterly bulletin. The new report of the Bank for the year ended February 29 responds dutifully to those excellent suggestions and even promises that the first issue of the quarterly bulletin will be made before the end of the year. At long last the Bank has given us a clear picture of what sort of monetary policy it has been pursuing and why. And the picture is like a Picasso of the most dis- turbing kind— revealing because of its distortions.
It may be recalled that in the Radcliffe report there was some emphasis laid on the importance of a 'change of gear' in interest rates when the cccasion demanded it. The Committee apparently accepted the current Treasury view, which is that the rate of interest should be allowed to find a level which somehow ensures an overall balance between saving and investment and at the same time allows the Government to float enough securities on the market to cover its financing needs. (For 'floating' read 'funding' in Treasury language, that is, funding of short-term into longer-term securities.) It seems that the authori- ties decided on 'a change of gear' in interest rates towards the end of 1959.
The Bank gives the following reasons for it in its report: the rapid expansion of bank advances and hire-purchase debt, the boom in equity shares, the shortage of labour in some parts of the country, the rise in consumers' expenditure with the prospect of 'fairly general increases in wage rates' making it worse, the planning of 'a substantial increase in private investment' coupled with larger investment by the nationalised industries and finally the pros- pect of 'a substantial rise in government expen- diture on goods and services.' The Bank began to cause Treasury bill rates to rise in the middle of November, preparing the way for the raising of Bank rate from 4 per cent. to 5 per cent. on January 20. In February the Governor issued another warning against excessive expansion of bank advances and hire-purchase debt and when the joint stock banks began to ease the pressure on their liquidity by heavy sales of gilt-edged securities, the Bank sharply lowered its 'tap' prices and connived at a real slump in the gilt- edged market. Thus the 'change of gear' was effected. The yield on old Consols had been put up by I per cent. as compared witlfir year ago. And, as we now know, this was merely a prelude to a 6 per cent. Bank rate and a further stiffen- ing of interest rates to virtually a 6 per cent. `Voss redemption' basis. This was the rate offered on the recent issue of 5# per cent. Treasury bonds 1962.
The Bank justifies its saddling of the economy with a semi-permanent dear money regime in the following curious words (p. 12 of the report): 'In the light of developments in the economy as a whole, and bearing in mind the longer-run need to attract purchases of stock by non-bank in- vestors, a somewhat higher • level of gilt-edged yields would now be appropriate.' The fallacy of this policy is shown up in the report itself. First, it confesses that the exercise of a general restraint like dear money is not altogether efficacious—as the Radcliffe Committee found. in its last para- graph the report states: 'The economy still appeared (at the end of the year under review) to be moving towards over-strain.' And it hinted at the reason : 'This state of affairs, coupled with the persistent tendency of public expenditure to increase, again brings into prominence the recur- , rent problem of the right balance between fiscal and monetary measures in bringing about the necessary degree of restraint.' This is tantamount to confessing that the general restraint of dear money is useless if Government expenditure goes on rising and the Chancellor does nothing to offset it by heavier taxation in his budget. Indeed, the weakness of Mr. Amory's last Budget is now generally recognised. If the purchase tax on motor-cars had then been doubled for a year the over-strain in the motor industry would quickly have been eliminated. As for the pretence that a higher rate of interest is necessary 'to attract purchases of stock by non-bank investors' the report gives the lie in its excellent szatistital tables. In the year to mid- March 'non-bank investors' actually reduced their gilt-edged holdings by £81 million. The Treasury had to admit complete defeat in its funding operations. It had the difficult task of financing a budgetary cash deficit of £348 million and meeting the clearing banks' sales of gilt-edged holdings which amounted to £448 million{or £324 million net after a rise of £124 million in their other Government debt). It bridged this enor- mous gap by disposing of Treasury bills and National Savings in more or less equal shares. In other words, the debacle in the gilt-edged market had so scared investors that nothing short of near-cash holdings would satisfy them. It is absurd to suppose that the Treasury can attract investors into Government stocks by causing them to fall. In the first three months of the current financial year, according to the Monthly Digest of Statis- tics, de-funding has actually worsened, amount- ing to £269 million.
The fiasco of the Treasury funding policy is the fiasco of the theory that the rate of interest must fall to its 'natural' level. There is no 'natural' rate of interest. It must always be a manipulated rate and the sooner the Treasury and the Bank try to manipulate it in a sensible and practical manner the better it will be for our frustrated economy.
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