MONETARY MANAGERS CASTIGATED
By NICHOLAS DAVENPORT
* * Mr. Butler might say that he agreed and that he had had resort to direct controls guch as the bank squeeze (a ceiling on advances and a qualita- tive test), the hire-purchase restrictions, the capital issues control, cuts in public and local authority investment, not to mention the discrim- inatory purchase taxes. Even so, the Committee thought little of his and his successors' monetary strategems. The bank squeeze, it said (para. 460), merely drove frustrated borrowers to other sources of credit—at more expensive rates— proving that the market for credit is a single market. The capital issues control it regarded as useless in ordinary times and it thought (para. 514) there were 'narrow limits to the usefulness of hire- purchase controls.' (Deprived of bank loans the hire-purchase companies simply advertised for public deposits or made use of foreign money— also at very expensive rates.) In fact, the Com- mittee wrote off the whole Conservative monetary experiment of the past eight years as well-meaning but misguided. It was an experiment based on old-fashioned beliefs in the influence of interest rate changes and in the efficiency of bank money restrictions. 'The insignificance of interest changes,' said the Committee in para. 451, 'in relation to other costs and to the risks involved was emphasised to us again and again'—not only in connection with fixed investment but with investment in stocks of commodities. The Com- mittee fully shared the scepticism of their wit- nesses in regard to the interest rate incentive. As for Mr. Thorneycroft's reliance on restricting the supply of money, it had these few devastating words to say (para. 391): 'It is possible to demonstrate statistically that during the last few years the volume of spending has greatly in- creased while the supply of money has hardly changed : the velocity of circulation of money has increased . . . we cannot find any reason for supposing, or any experience in monetary history indicating, that there is any limit to the velocity of circulation.' In this the Committee wisely fol- lowed Professor Kahn. It was a pity Mr. Thorney- croft called in the wrong professor. * * *
In spite of this convincing summing-up the Economist persists in pretending that the 7 per cent. Bank rate of September, 1957, did the trick and worked. The Committee do not deny that a violent manipulation of Bank rate has a psycho- logical effect—especially on foreigners. We are
prepared to accept the view' (para. 441) 'that in the present state of world opinion Bank rate itself has considerable external significance.' But they added: 'We find it difficult to believe that such veneration for Bank rate can persist if there develops a general scepticism of the power of interest rates over the internal economic situation.'
* * * The Committee finally came to the conclusion that if monetary action was to affect the level of total demand decisively it must concern itself with the state of liquidity in the whole economy. The supply of money and the interest rate structure were only important in so far as they affected the liquidity position of the financial institutions which lent money to the spenders. But the Com- mittee extended the meaning of liquidity to cover `money power' (para. 390). 'Spending is not limited by the amount of money in existence, but it is related to the amount of money people think they can get hold of.' There is no one group of lenders which are exclusively important : they all compete in a single market for credit.
* * * In a review (Chapter IV) of the financial institutions the Committee found that the sources of liquidity were multifarious and the ease of substitution high. In the event of an emergency (of grave inflation) the Committee therefore recommended a combination of direct controls of capital issues, bank advances and consumer credit and pointed out that it was useless to limit hank advances if the lending of building societies, insur- ance companies and hire-purchase finance com- panies remained uncontrolled. But in normal times the Committee thought that the liquidity of financial institutions could be effectively tackled through changes in the interest rate structure (which affects the market value of their funds) and that these changes could best be secured through the management of the national debt in the market, which it described as 'an instrument of singular potency.' • * * * This part of the Report I venture to say is the weakest and most controversial. The public wilt be confused by the Committee playing down the effectiveness of interest rate incentives in the first place and then recommending a more vigor- ous use of the interest rate weapon in the gilt- edged market. What the Committee had in mind was the lack of clear purpose in the funding opera- tions of the Bank of England, which is tacitly criticised for not allowing gilt-edged prices to fall in 1957. when the Government wanted to deflate. and for preventing a rise in 1958 (through the over-funding which I have constantly exposed) when it would have been appropriate. The authori- ties must consciously exercise a more positive market policy, the Committee says, about long rates as well as short, and what is more must make their intentions known to the market. But in para- graph 562 the Committee begs the whole question of debt management. In the `no control' circuni stances of today one cannot 'push the rate of interest to a level that is high enough to attract suflicient firm holders of the debt' without en- dangering the first aim of economic policy, which is a high and stable level of employment.
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But what a relief it is to have a State document of this fine calibre explaining how money can be a useful servant but a bad master ! Two years ago, we were on the point of handing over our economic destiny to a false money god'
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