Fiduciary Note Issue

Part of the debate – in the House of Commons at 12:00 am on 1st April 1958.

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Photo of Mr Niall MacDermot Mr Niall MacDermot , Lewisham North 12:00 am, 1st April 1958

I beg to second the Motion.

I should like, first, to express the gratitude which I am sure we all feel for the initiative of my hon. Friend the Member for Loughborough (Mr. Cronin) in moving the Motion and giving us the first opportunity since the Act was passed, in 1954, to discuss in the House the fiduciary note issue. The Act provides the machinery whereby the state and level of the issue can be discussed once every two years. When the opportunity arose last, in 1956, there was no Motion of this character, and the large increase in the fiduciary issue passed by without discussion at all.

I understand that it was the object of the provision in the Act to increase to some extent at least the degree of Parliamentary supervision and control over the fiduciary issue.

I confess I find that any belief that there is any kind of Parliamentary control is illusory. My hon. Friend has suggested that if this Order were annulled the Government could retrieve the situation by transferring the bullion from the Exchange Equalisation Fund back to the vaults of the Bank of England. I doubt whether that is a practical measure. The Minister is able to sit with an air of calm confidence on the Government Front Bench in the knowledge that this House would probably not dare, whatever it might feel, to annul the Order for the simple reason that it would plunge the country into economic and financial chaos. We are blackmailed, in a sense, into accepting the status quo. All we can do is to seek to review what is happening and to discuss the position.

It is through the fiduciary issue that, according to orthodox economic ideas, it is possible primarily to control the supply of money. I see a puzzled expression appearing on the Minister's face. I do not profess to have his economic ability or knowledge, but in the most elementary researches that I have made into the science of economics, I have understood from the beginning that the control of the quantity of bank credit ultimately rests on the fiduciary issue, because the limitation on the amount of credit which the banks can create at any moment is the necessity for them to preserve their cash ratio, which, before the war, was 10 per cent. and is now about 8 per cent.

In fact, any belief that it is possible effectively to control the quantity of bank credit in that way is, again, illusory. The reason is that in an inflationary situation, where there is a demand for more cash, more notes and more coinage, it is impossible for the Government to say, "We refuse to print any more money", because, owing to the structure of our financial situation, if they attempted to do that when there was a real need and demand for that money, it would again provoke a financial crisis.

In an inflationary situation in which wages are rising and increased quantities of bank notes have to be drawn out of the banks every Thursday or Friday to pay the wages of millions of people on the following pay day, if the Government said, "We are so fed up with this inflation. We shall print no more bank notes or allow the Bank of England to issue them.", there would be a panic situation and there would be, in effect, a run on the banks to try to obtain the cash which is being limited. The whole of our financial system, built up as it is on the structure of bank credit, has as its Achilles heel the fact that no action can be taken which might in any way provoke a run on the banks.

It is for this reason that I would like briefly to review the fiduciary issue and to consider what is and what is not the amount of control, either by Parliament or by the Government, which exists over the volume of money. The total volume of money consists, first, of the actual cash, that is to say, bank notes and coinage, and, secondly, of bank credit. And, of course, bank credit or bank deposits represent far the larger quantity of our total money. The fiduciary issue, the actual cash in circulation, represents only about one-quarter of our total money. Bank deposits at the moment are around £6,000 million and the fiduciary issue is about £2,000 million.

It is interesting to compare the prewar figures. In 1939, the total was only about £2,000 million, of which the fiduciary issue represented about £600 million. That is the measure of the inflation. What kind of control is there, either legally or in fact, over the quantity of this expansion of bank money which has taken place since 1939, so that we now have bank money of the order of £6,000 million where before the war it was some £1,500 million?

As I have said, in theory there is the control of the fiduciary issue but, as I have pointed out, that is not a practical control. There is also the control that the banks have to preserve their liquidity ratio, which is about 30 per cent. and which, according to their own practice, they find is a wise and prudent measure. Again, indirectly it is said that the Government have a measure of control over that, since a very large part of the liquid assets of the banks consist of Government securities, above all in the form of the floating debt.

Again, we may question the extent to which, particularly in an inflationary situation, the Government, from a practical point of view, are able to limit the floating debt in a way which would enable them effectively to control at all the supply of money by that means. What is significant is that there is no direct legal way in which the Government can compel the banks to maintain their advances or their deposits at any given level. This is, apparently, the official advice given to the Government, and this was confirmed by the speech made by the right hon. Gentleman the Member for Monmouth (Mr. P. Thorneycroft) at the time of our debate on the alleged Bank Rate leak. He said that the Government … had also agreed at that time to limit bank advances over the next twelve months to the same level as the previous year's… An operation such as that upon which we were engaged would have been impossible without seeing the clearing bankers. The right hon. Gentleman was explaining why he had called them in to consult them. He went on: There is no legislation which can order the level of their advances."—[OFFICIAL REPORT, 3rd February, 1958; Vol. 581, c. 864.] I think that the advice given to the then Chancellor of the Exchequer was correct and that there is no legal way in which the Government can control the level of advances.

I find it a remarkable state of affairs that not only this Parliament, but also the Government of the day have no legal way of controlling the level of what constitutes three-quarters of the volume of our money in this country. It is a remarkable surrender to private interests of something which derives originally from the Royal prerogative, and I should have thought would have been of the very essence of executive power.

When we turn to the fiduciary issue itself, with which this Order is directly concerned, there is some legal power in the Government, but, again, it is remarkably restricted. The position is that the Bank of England is limited, as my hon. Friend pointed out, to the figure of £1,575 million, except to the extent that it is authorised by Treasury directions to increase the fiduciary issue beyond that amount for periods of six months at a time.

What is significant is that the Treasury can issue such directions only if it has received representations from the Bank of England. It cannot take the initiative for an increase itself. Equally, the Treasury can alter the amount of the fiduciary issue only to the extent that it is created by the Bank of England. We have not only initiative but control lying with the Bank of England, which is a body independent of the Government. Even when we are dealing with the fiduciary issue, there is only a limited and indirect control by the Government.

It is time for us to review very carefully whether there is proper and adequate machinery for controlling the volume of money. I entirely agree with what has been said by my hon. Friend the Member for Loughborough about the need for further information about the velocity of circulation, because in so far as it is possible to help towards a solution of the problem of inflation by controlling the supply of money that can be done only if we know a great deal more than we do now about the velocity of circulation.

We need to go further than that and to investigate the machinery of control and the machinery of issue, the machinery by which money is created. My hon. Friend made a valid point when he asked the right hon. Gentleman how the profit which derives to the Government when there is an increase in the fiduciary issue is shown in the accounts. Of course, there is such a profit—if that is the right term to use—and it is very right and proper that the benefit which arises when money is created should accrue to the Government, that is to say, accrue to the public at large through public expenditure.

If the volume of money is increased by, say, £500 million, whoever first has that £500 million to spend is getting something for nothing, something for the mere cost of printing the money. It stands to reason that if there is to be an increase that benefit must accrue to someone. It is precisely because a person who first spends new money gets something for nothing that it is a criminal offence for a counterfeiter to forge money.

One of the criticisms which is to be levelled against our present financial system is that as to three-quarters of our money, namely, the money which is created in the form of bank credit, that benefit accrues to private individuals, the persons who borrow the money, and to the banks by way of interest. The country at large does not benefit as it would if that money were created directly by the Government, either through increasing the fiduciary issue, or by whatever other system was adopted.

Secondly, by allowing three-quarters of our money to be created in this way by the banking system, the amount of money that is increased in that way carries with it into perpetuity, so long as bank deposits and bank advances remain the same, the heavy burden of interest, a burden which, under the policies adopted by the Government, is a very heavy burden, indeed. Where that money is created and loaned to the Government, that burden is borne by the taxpayer. Where it is created and loaned to private borrowers, that burden is paid by the private borrowers and borne in general by the economy of the community.

It does not appear to me to be right in principle, or for any other reason, that if it be necessary to expand the supply of money under our expanding economy, that we should be forced to pay a levy, as it were, to the banking system in the form of these interest charges on the new money which is created in that way.

Above all, the complaint that I make about our existing system is that there is a completely divided responsibility between the banking system and the Government. It appears to me that in a matter of this character the responsibility ought to rest fairly and squarely upon the Government, as should the power to discharge that responsibility. Under the present system, which we have the opportunity to discuss tonight, through the machinery of the debate upon this Order, the power does not exist in the Government, and such control as they have is extremely limited.