THE . LIMITATIONS OF BANK RATE
By NICHOLAS DAVENPORT
THE speeches at the annual Mansion House dinner to the bankers and merchants of the City are usually more significant for what they leave unsaid than for what they say. But this year the Governor of the Bank must be congratulated on having made in public a frank confession of the limitations of Bank rate policy in a mixed economy. The proportion of the economy which is directly affected by making money dearer and tighter is much smaller than it used to be. With the enormous growth of the public sector, said Mr. Cobbold, monetary action to restrict the borrowing and spending of individuals, firms and companies can be outweighed by the action of Government, local authorities and the nationalised ' industries. The same point was made recently by Sir Frederick Leith-Ross in a provocative article in the financial press. In 1939 bank advances were £993 million and Budget expenditure £940 million. Last month bank advances were £2,215 million— they are at last coming down—while Budget expenditure (above the line) was more than double at £4,562 million. Moreover, said Mr. Cobbold, with the present high taxa- tion business people are less sensitive to an increase in the cost of bank borrowing and Bank rate itself has no immediate impact on consumer spending because of the high level of wage earnings. Monetary policy, he concluded, must therefore work on a much smaller field, although it still exercises 'a gradual and pervasive influence over a much wider field.' Now all these remarks may be twisted by the Socialist opposition into another bankers' ramp—an attack upon the foundations of the Welfare State, upon Government and local authority spending—but' that would be a travesty of Mr. Cobbold's confession. What the Governor is really admitting is the case I have been arguing in these columns for some time—that the British mixed economy cannot be controlled by the use of monetary weapons only and that some measures of direct control are unavoidable:This may offend the .classical economists who, like Sir Oscar Hobson, cry out for a 6 per cent. Bank rate and hang the consequences, but it is obvious that if Bank rate were raised next week even to 54 per cent. the foreigner would sell sterling heavily and the industrial investment on which our ex- port future depends would come to a stand-, still.
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What sort of direct controls should Mr. Butler use? He is already using quite a lot. The credit squeeze itself entails a directive to the banks, albeit without sanctions, to cut their advances by 10 per cent. and to the hire-purchase finance companies to reduce their bank borrowings by 15 per cent. before the end of the year. The new hire-purchase regulations are also a direct intervention in the financial system. The investment control is not simply left to the rate of interest: the housing programmes of the local authorities have been cut by 40,000 houses a year. Capital projects of the nationalised industries are being postponed as far as may be possible 'without jeopardis- ing essential objectives.' Exchange and im- port controls'are still kept over dollar goods and over dollar travel. An exchange con- trol which was abandoned but might have to be reintroduced was over commodity trading. Traders in the. City markets are now free to buy cereals, metals and most other commodities (except paper and jute). It was the steep rise in the imports of these materials in the first six months of the year which helped to push us off our inter- national balance. Another control which may have to be restored—for its absence allowed the investment boom to exceed the bounds of our resources—is the licensing of private building for both houses and fac- tories. I am all for a free economy, but it is getting a bit crazy when the cost of borrow- ing has to be made so high that it holds up not only private house building but urgent industrial investment and re-equipment as well.. In the old days Bank rate worked well because the private sector was dominos' and companies were allowed to go bask'
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rupt and men were thrown out of work n masses. This can still happen but, because of its more restricted field, Bank rate might have to be doubled. Does the Chancellor really want to go the hard free road Monetary action carried to its logical con' elusion means stopping the boom by Great' ing a recession—by throwing sufficiept numbers out of work to prevent wages rls' ing faster than productivity. If the Chan' cellor does not like that prospect, then be, must combine the present mild monetary action with a' greater measure of direct COl: trol, Or he must let the £ float in a free market. He must somehow achieve his objective of driving inflation out of the economy. Failure to do so means pricll ourselves out of the world market andtat. in turn means eventual devaluation—Y/h11j' the wicked process starting all over again'
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