Credit uncontrollable? MONEY
NICHOLAS DAVENPORT
It is not for me to come to the aid of the bankers. In fact, I have already ventured to suggest that the Chancellor might well impose an excess profits tax on bank profits when he raises Bank rate to preposterously- high levels, for, as money-lenders they make a killing out of very dear money. But I appreciate that it is not their fault. They are not running the economy and they are not responsible for the fantastically high interest rates which are heaping millions into their trading accounts. They are merely pawns in the dangerous money game which is being played in the western world. They are therefore entitled to some sympathy when the Bank of England, acting as accuser, judge and executioner, suddenly fines them in a very arbitrary fashion for their failure to bring their ad- vances down to the Chancellor's target, which is 2 per cent below their level of November 1967.
I do not believe that they could help it. In the last five weeks their advances rose by a mere £183 million to £5,613 million which was about £90 million or 2 per cent above the target. Now two-thirds of this rise were due to 'exempt' borrowers, namely the nationalised industries, the local authorities and exporters and shipbuilders needing short-term credits. Only a third, that is about £60 million, was due to the private sector of the economy which is struggling against the unpaid bills and bankruptcies of traders falling victim to the Chancellor's deflationary squeeze. The bankers unite in saying that the target is unfair and unreasonable, being regardless of the fall in the value of money and good banker-customer relationships. The Midland Bank, perhaps the worst 'culprit', declares that it has not lent a penny in the past fifteen months except to essential industry. Another banker remarked that the fine was 'a strange way of showing appreciation for the splendid show we have put up'. As Stephen Potter would say, it was hardly good bankmanship as taught at Eton, but dammit what would you expect of a non- Etonian Governor?
The fine consists of halving the rate of interest paid by the Bank of England on the 'special deposits' which it has already extracted from the banks. These now stand at £215.6 million, being 2 per cent of gross deposits. The normal rate paid on them is the equivalent of Treasury bill rate, now marked up to the unprecedented level of £7 I7s. per cent. The fine will therefore cost the banks' trading account about £8 million in a full year. (The combined net profits of the banks are around £70 million a year.) It will fall on 'innocent' as well as `guilty' but this merely adds to the arbitrariness of an edict emanating from a statutory body which can act, like the Star. Chamber, as accuser and judge. Having regard to the warning given to the banks by the Chancellor in his budget Speech, and subsequently, it was generally thought that the Bank of England would call for more 'special deposits' but that would have forced the banks to sell short government bonds and the Bank to buy
them and so increase the money supply. Was there, then, no alternative? I believe there was. The Bank could have instructed the banks to raise their overdraft rate for 'prime' borrowers which is now 3 per cent above Bank rate. As 84 per cent is still below the market, borrowers having to pay at least 10 per cent or more outside the joint stock banks, the bank customers are naturally pushing their agreed overdrafts up to the limit.
Far be it from me to suggest that a fur- ther rise in interest rates can solve anything. The prevailing explosion of money rates is already a serious threat to trade and em- ployment. The threat is persistent because it stems from the determined effort of the Federal Reserve authorities to stop the American inflation by making money tighter and dearer. To counter their squeeze the European branches of the American com- mercial banks have been tapping the $25,000 million Euro-dollar pool and send- ing home in the first four months of this year no less than S3.000 million. (Their head offices in the United States are at pre- sent not allowed to pay more than 63 per cent on their domestic deposits.) This has caused the three-months Euro-dollar rate to rise, as I write, to 101 per cent. No end to the rise is yet seen. Yet Elliot Janeway, the most experienced of American financial critics, is now convinced that the Federal Reserve authorities will not succeed in stopping the inflation by the exercise of their monetary powers. He believes that the American economy has now improved new sources of liquidity which are being pumped into the system 'on a vastly greater scale than can be siphoned out by the authorities using their control over the commercial banking system.' If Mr Janeway doubts the success of the Federal Reserve monetary manoeuvres how much more should we doubt the success of those of the Bank of England! The British economy, like the American, has really grown out of the reach of the indirect monetary controls of the Treasury. No better example could be given than the last currency crisis when forfign banks and private speculators were selling British government stock in order to switch into Deutsche Marks, thus forcing the Bank of England, the buyer of the stock, to increase the money supply through the enlarged deposits of the clearing banks.
The attempt of the monetary authorities to achieve the impossible through a bank squeeze and an escalating rate of interest is already having a freezing effect upon our domestic output and industrial investment: I disagree with one passage in the new Bulletin of the National Institute which looks for a 'substantial boom' in private investment demand (excluding housing), 'though it may fade very quickly in the closing months of the year'. If Metal Box has to pay a coupon of 103 per cent on its recent issue of loan stock how many com- panies can contemplate new investment when the financial cost may exceed the rate of return on their invested assets? But it is significant that the National Institute has become less bullish in its forecast. It notes that the recovery which took place in the last half of 1968 has been 'braked very sharply' in the first quarter of 1969 and that its forecast rate of expansion—in the range of 2 per cent to 23 per cent--is not sufficient to prevent a further rise in the rate of unemployment. On present policies, it says, this might reach a level above 23
per cent by the end of next year. One won- ders how long the present monetary policies will be allowed to go on seeing that they are as unlikely to achieve their target as the fining of the joint stock banks.
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