Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 10 March 1947.

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Photo of Mr Hugh Dalton Mr Hugh Dalton , Bishop Auckland 12:00, 10 March 1947

Let us put it this way, for I do not think that there is really any disagreement between us. A number of persons, including writers to the financial papers, have been arguing that the rate of interest has been too low, and that it would have been better if it had been higher. This has been linked up with the argument about the inflationary pressure. We have been told that the inflationary pressure has been increased by the cheap money policy, which the Government have pursued. I have looked up the figures, and it seems to me that dear money in the years immediately following the war prevented neither inflation nor deflation. Under both, the rates of interest were too high and, therefore, I believe, this question of interest rates may be largely set aside, so far as the general argument about deflation and inflation is concerned. Whereas we are now paying only ½ per cent. on Treasury Bills, in 1919, when uncontrolled inflation was going on, the Chancellor of the Exchequer was paying 4½ per cent. in October, and in November 5½ per cent. on Treasury Bills. When deflation had set in, they were still paying too much. In 1921 they were paying 6 per cent. in March for Treasury Bills. They were paying too much both when inflation was taking place and when deflation was taking place.

The same is true with regard to long-term rates, on which we are now paying about 2½ per cent. In 1919, when inflation was at its height, the Government were issuing 4 per cent. Victory Bonds at a discount of 15 points, a thing I would never do. My present advisers at the Bank of England would never allow me to do that, and a more discreditable thing one could not imagine. When deflation gets under way, when we get to March and April, 1921, 3½ per cent. Conversion Loan was issued in exchange for 5 per cent. War Bonds at a price of 163. That is a shocking thing, as I am sure right hon. Gentlemen opposite will agree. Whether inflation or deflation was the policy, too much was being charged by those who lent money to the State and those who lent money to industry. We have sought to correct that; I shall be prepared, and, indeed, I fully intend in my Budget speech, to offer an explanation and a defence of the cheap money policy which has been pursued by the Government in the last 18 months. This must be presented in relation to the Government's policy as a whole; and that is too wide a subject for tonight.

But I am prepared to say this, in order to dispel any uncertainties which may have arisen, in the City of London or elsewhere. I still regard, as I did a little while ago, 2½ per cent., and not any higher rate, as the appropriate long-term rate, in present conditions, for British Government borrowing. And I would like to repeat what I said at a gathering at the Mansion House on 16th October last year in this connection: We have been gradually conditioning the capital market to a long-term rate of 2½ per cent. for gilt edged. We have met some psychological resistance, but I am convinced that it is in the national interest that this should be overcome. The advantages of low rates of interest, both to the Budget and to the financial operations of local authorities, of public boards and of private industry, and hence to our great aim of full employment, are so clear that I am sure that our cheap money policy should continue to be resolutely pressed home. I added these words, the general meaning of which should always be in our minds —and I am sure the hon. Member for East Aberdeen (Mr. Boothby), who has aften developed this point, will agree with me—that when a country has a National Debt, as we have now, of more that £24,000 million, this Debt is only endurable if the average rate of interest is kept low. Indeed, this is a necessary condition of any substantial future relief of taxation. Reference has been made to tax reliefs; but we cannot hope for any substantial future tax relief, unless we hold down the rate of interest, firmly and deliberately, on this enormous dead weight mass. I went on to say, on that occasion: Any appreciable rise in the rate of interest would be the surest road to inflation, which would then seem to the plain man the only way of escape from a burden which would have grown beyond all bearing. My predecessor in office is not present, but I have often discussed the matter with him, and I think he would be in complete agreement with that statement. I think that should be in our minds when suggestions are made that it would be beneficial to allow the rate of interest to rise.

I hope to be allowed to ask the House for greater indulgence when I come, soon after Easter, to make my Budget speech. I shall then be able to deal much more fully with many of these topics. I hope that, with the exception of those matters which cannot be touched upon tonight without imperilling the Budget plans, I may have at any rate, offered some reply to the arguments adduced by the right hon. Gentleman opposite.