In the City
No need for panic
Nicholas Davenport
The clever young economists whom I rebuked for saying that money was too cheap and that Bank rate must go up have been screaming `Yaboo, I told you so' because the Bank was foolish enough to raise the MLR (Bank rate) by 2 per cent to 7 Per cent last week. If I had been answering their telephone calls I would repeat that it is all absolute nonsense. The money supply figure for the month may have exceeded the guide line but at a recent conference on financial statistics the money supply calculation was viewed as extremely experimental. If it had gone up recenfly because businessmen were looking for some expansion and higher profit it would have been a heavenly sign but that was not the case. Business is as depressed as it ever was. Shopkeepers are praying for Christmas When tax relief and higher wages may boost consumer spending. But that could be a flash in the festive pan. The recession is too severe to tolerate dearer money.
The lie about the alleged dangerous increase in bank lending must be exposed. The recent rise in overdrafts has been artificial and accidental. It was largely due to financing the purchase of certificates of tax deposit. These certificates yield the rate of return at the time of purchase for two years or until they are used to pay tax. The return has been adjusted only gradually to the fall in interest rates and for most of September and October they were attractive investments. So these issues of certificates rose to £491 million in the third quarter against £36 million in the second. How absurd, then, to describe the rise in bank lending as anything but an aberration. And how absurd to pretend that it could justify a 2 per cent jump in Bank rate, which will slow down business, Put off a further fall in mortgage rates and add to the inflation. The slump in the giltedged market is an opportunity to buy more 'gilts'.
What is so infuriating about the monetarists is that they pay so little attention to the technical causes of a rise in the money supply and so little attention to the uses to Which the extra supply is put. If the use is good for the economy — to finance business expansion — we could well do with an extra s,uPPIY. This point was overlooked by the two Times journalists who quizzed the Chancellor on the box. Everyone knows that the Chancellor has adopted a monetarist stance to please the IMF overseers but everyone knows that he is no wholehogging Friedmanite. He has said as much. It was pathetic to see the Times economist Hugh Stephenson, with his mean look, trying to trick the Chancellor on monetary trivia and disparage his monetary and economic policy, although Mr Healey made it quite clear why it is having so little effect upon economic growth. The reason is simply bad performance on the shop floor. Whether management is good or bad it takes the worker on the British shop floor usually twice as long to produce a unit of manufacture as the shop floor worker on the Continent or in Japan.
This is the awful problem which faces any government in this country. It is the price which a Labour government has to pay for introducing socialism before it has seeured a partnership between worker and state. The public sector as a whole is likely to be the death of the Labour Party's socialism. The Government has failed to get the key sec tors like power, railways, fire brigades etc to give up the right to strike in return for special pay and privileges and an arbitration service. It has also failed to retain a management's right to decide the level of manning, so that it is forced to carry on lossmaking plants, as in steel, which will be £500 million in the red next year. Labour has created a monster in its public sector which will destroy the economy if it is not chained.
There are only two ways in which this can be done. There is the communist way in which the trade unions will give up their freedoms, like the rest of us, and submit to dictation from the party. There is the individualist way in which the worker can identify himself with the public interest through equity participation. This would, of course, be difficult in the case of public services like electricity, gas, water etc but it could be done through worker participation in a public unit trust in which all the state holdings in the private sector are put. It could also be done in semi-commercial state enterprises like the railway board and the coal board. Suppose the railway board were to hive off its hotels and property in a separate unit trust in which the workers were given, say 25 per cent of the equity. The workers would then feel part of the show, drawing dividends from their 25 per cent, and when they have a clever commerciallyminded chief, like Mr Peter Parker, they would soon find dividends rising and becoming a useful supplement to wages. The Coal Board might even say to the miners that they could have 50 per cent of the equity of a coal unit trust provided they realised that they were in competition with other forms of energy and must not price themselves out of the market. Equity participation is surely a better way to identify the worker with the national profit than so-called productivity schemes, which, as Mr Scargill is always saying, set one comrade against another.
The alienation of the so-called working class from any sense of identity with the national economy and profit is the real British disease, for it has now been written into the statute book. The job protection legislation is making it difficult for any private entrepreneur to employ men whom he will never be allowed to declare redundant. The union bosses have become stupid dogin-the-manger types lacking the imagination of the great Labour leaders like Bevin or Bevan. We are' in a bad phase. Fortunately we have a prime minister who understands and it is not yet midnight.
Fortunately also we have a City which has begun to understand politics as well as economics. It is not going to jettison cheap government bonds when the government credit abroad is improving or cheap company shares whose managements have good relations with their work-force. How the big funds which influence the markets are controlled I will leave to another occasion but meanwhile don't panic if you are an investor with some capital left.
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