A Treasury Obsession?
By NICHOLAS DAVENPORT When the £ gets into trouble you can imagine how agitated and nervous the heads of the Treasury become, especially when some irreverent economists from Cambridge and Lon- don begin to talk of devaluation in the public Press.
The £ has been in a lot of trouble lately. It has been sold down to $2.79*, which is close to the low point reached just after the up- valuation of the German mark nearly three Months ago. At that time the Treasury sold dol- lars out of the reserve heavily enough to drive the £ back to parity. This time the Treasury has not been so prodigal in its support. It has had the help of the Basle agreement whereby the European central banks undertook to stock-pile each other's currencies instead of converting excess holdings into gold. And it has not had to meet such heavy selling—only a trickle of continental sales and forward buying of foreign currencies by British traders.
Clearly—to me—the right policy is to let the reserves take the rap of any further selling of sterling and borrow, if necessary, from the IMF (we have drawing rights up to £900 million). But that does not satisfy the Treasury establishment.
It is bent on deflation. It has already persuaded Mr. Selwyn Lloyd to budget for the huge surplus above-the-line of over £500 million. This, as Sir Roy Harrod pointed out in the Financial Times, is a very large fiscal deflator. It is equivalent to Mr. Kennedy budgeting for a surplus of $11,000 million, which would kill the American recovery stone dead. It is tantamount to saying that the Tieasury expects the demand for goods and ser- vices to exceed the potential supply by over £300 million. Now most economic experts estimate that supply will rise sufficiently to meet the extra demand from the home and the export markets. So the reduction in the overall deficit from £394 million to £69 million implies that the Treasury is deflating the economy to the extent of at least £325 million. But that is putting it mildly. As the Treasury will now let the Treasury bill issue run down, it will keep the banks tight and prevent them from increasing their advances. It will thus cause funds to be withdrawn from the gilt-edged market and bring about a further rise in the long- term rate of interest (now 61 per cent.). This is all very damping to enterprise, especially to those entrepreneurs planning to borrow long-term capital for factory extensions or the installation of new labour-saving or cost-reducing plant. It is a policy calculated to bring our trade recovery generally to a stop.
But I fear worse is to come. The Treasury seems to be preparing the public for bad news. It is suggesting that the improvement in the balance of payments has been insufficient, that exports have risen very slightly and that we are still trading at a deficit (perhaps £100 million a year). Further it is still worried by the labour shortage. Unemployment is down to 1.3 per cent. and vacancies now exceed the numbers un- employed. Obviously, what the Treasury is pre- paring us for is the use of the new fiscal regula- tors as soon as the Finance Bill is passed—not the pay-roll tax, but the raising of the customs and excise duties and purchase taxes by 10 per cent., which will withdraw £200 million from the economy in a full year. And I do not believe that the Treasury Establishment would stop at that. If it were still confronted with a weak it would raise Bank rate and attempt to bring back the 'hot money' which has lately been leav- ing us because the interest rate differential is not so much in our favour. It has already warned the money market: the Treasury bill rate has already risen a few shillings to 4.45 per cent. It looks as if they are determined to stop the boom and quite happy to risk a slump.
Such a policy of deflation would be madness. It would kill our recovery without righting our balance of payments. There is no evidence at all that we increase exports when we knock the home trade. Our exports of durable consumer goods responded very little to the slump in those trades which the Amory squeeze brought on, but our exports of machinery went up in spite of the big home demand. And there is no evidence from the past that a policy of deflation stops the wage claims being successful. Wages will tend to rise faster than productivity as long as there is no proper wages policy. The only practicable way to counter wage-cost inflation is by having a wages policy and by increasing output, not by deflating demand.
I believe that the Prime Minister has the right idea of an economic policy, which is to stop deflating the economy and start joining up with the European Common Market. When the Treaty of Rome is signed our employers and trade unions will both be subjected to healthy competi- tion: the froth on both sides will be blown away.
And who is opposing Mr. Macmillan? Appar- ently none other than Mr. R. A. Butler, our Home Secretary, who, not content with interfer- ing in foreign affairs, is now weighing into economic affairs, posing as the champion of British horticulture and Commonwealth food growers and standing out against the Treaty of Rome. It would be a serious matter if he joined forces with the fuddy-duddy establishment at the Treasury. So I appeal to the Prime Minister to bring the departments of Government to order---- and to their proper size. Far too long has the Treasury been dominating and restricting our commercial and industrial life.
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