FINANCE AND INVESTMENT
By NICHOLAS DAVENPORT
All this, in my opinion, is too good to be true. I am prepared to believe that dear money will cure this particular crisis in the balance of payments—the disappearance of the £200 million surplus of 1954—but it will not be done overnight. The hire- purchase restrictions-15 per cent. down and twenty-four months to pay—are not onerous and personal consumption does not react quickly to fussy interference from bank managers. Besides, part of the rise in the import bill is due to causes beyond Our control. The prices of import goods in January were 6 per cent. above those of a year ago. This alone can add almost £200 million to the cost of imports. Dear money will certainly restrain our business men from stocking-up (which will tend to pull down commodity prices), but it cannot reduce imports as quickly as direct control through import quotas. It may be six months before we begin to see the effect of Mr. Butler's corrective measures. In the meantime we must watch the gold and dol- lar reserves decline and be prepared to see the deflationary effects of dear money deprive us of some increases in company dividends. The market has not yet discoun- ted this unpleasantness. It does not seem to have realised that the new climate for both the gilt-edged and equity share markets is going to be a much colder one. If the Government is to maintain economic equilibrium by using the instrument of money and not by consumption and import controls, then we may have to have longer and more frequent spells of dear money. Personally I regret the decision. In view of the huge investment outlays needed to mod- ernise our industrial equipment, including railways and roads, I do not believe that we can afford the luxury of dear money. The Treasury, in my view, should try to divorce the long-term rate from the short-term rate of interest by intervening in the market and see that the former is kept low. If it refuses, and the long-term market rate rises to. say, 44 per cent., then the institutional investor will probably refrain from buying equities until yields of around 51 per cent. are in sight. And that, before long, will test the market's recent low point of 177.
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