On 22nd January, in a Written Answer, my hon. Friend the Economic Secretary to the Treasury told me that those who had invested £ 100 in 1932 3½ per cent. War Loans had lost £ 78 of their capital as a result of depreciation in the value of the stocks and of inflation, and those who had invested £ 100 in 1946 2½ per cent. Treasury stock had lost £ 70 of their capital. When one bears in mind the nature of these investments and of the people who invest their money in them, these figures can hardly be described as less than tragic.
These are supposed to be gilt-edged stocks, and investors accept comparatively low rates of interest on the assumption that their capital is safe. They put their trust in Governments. They succumb to the blandishments of Chancellors of the Exchequer. They accept the advice of bank managers, trustees, and so on, that by accepting the lower rate of interest they assure the safety of their capital. These figures show that their assumptions have been completely falsified by events.
On 5th February I suggested in another Question that the Government should accept what I regarded as a moral obligation and give urgent consideration to the possibility of an early announcement assigning redemption or conversion dates. If I describe my hon. Friend's Answer as "debatable" I am using the mildest term I can think of. The truth of the matter is that I disagree with practically every word of his reply. Before dealing with it in detail I feel that I owe it to myself to refer to his reply to my supplementary question.
I refuted the suggestion in my hon. Friend's Answer that to do as I asked would be to vary the terms. In this I was referring to one particular stock of which the repayment date is supposed to be "1952 or later". I asked, "How much later?" His reply was, "Ah, that's the question ", a reply which I have to tell my hon. Friend I regard as regrettably flippant, when we bear in mind the serious nature—" tragic nature" would be a more applicable expression—of this matter to thousands of people throughout the country. I would remind my hon. Friend of the schoolteacher who said to one of her pupils, "Johnny, your mouth is open". Johnny replied, "I know. I opened it". It was quite unnecessary for my hon. Friend to tell me that that was the question. I know. I asked it.
What I wanted from my hon. Friend was an answer appropriate to his position as a member of the Government Front Bench. I will deal with his main Answer in some detail. In doing so, I have been very powerfully reinforced by an article which appeared in the Investors' Review of 28th March, and of which I hope my hon. Friend has seen a copy. If he has not, I will gladly let him have mine after this discussion. I will take his reply point by point.
First, my hon. Friend said:
I cannot accept the suggestion that the reputation of Government stocks is at stake.
It constantly amazes me how divorced from reality are the inhabitants of Government offices. If my hon. Friend doubts my word, I invite him to look at the file of letters which I have received from all over the country on this matter and he will find that the reputation of various Government stocks is in very serious jeopardy. I am reinforced by the article in the Investors' Review which finishes by saying:
Until a move is made… to remedy the plight of numerous investors … Government stocks can only … British justifiably be termed 'guilt' edged.
The next point which my hon. Friend made was:
The price of these stocks is, of course, bound to fluctuate with the changes in the long-term rate of interest, but the income remains unchanged.
That is true only of the income at its face value. A very important factor in the depreciation of the value of these stocks as revealed in the Answer of 27th January, is inflation. The investor's only remedy is to realise his stocks and to reinvest but to do that he would obviously be involved in a very heavy capital sacrifice.
The next point is in the words:
Quite apart from the propriety of varying terms in favour of the investor and at the taxpayer's expense.
I dispute that to fix the redemption date for these stocks is, or would be, varying the terms in favour of the investor. There are six main stocks under the heading with which I am concerned. All of them had optional redemption dates. That for 3½ per cent. War Loan as an example was "1952 or later." I do not see how it is possible to argue that to accept the words "or later" at their face value is to vary the terms of issue.
The next point is that he says that this cannot be done
…at the taxpayers' expense.
This can be done not at the taxpayers' expense. I shall not go into this argument in detail because I have not the time, but he will find it in the article to which I have referred which suggests that not only can this operation be carried out not at the taxpayers' expense but that, in fact, it might result in a saving to the taxpayer, since the increased reputation of Governments in this matter would probably result in a saving in the interest rates on long-term loans.
The last point is that he says that
… it would be impossible to find a way of doing so that would be workable and fair to all concerned." — [OFFICIAL REPORT, 5th February, 1959; Vol. 599, c. 557.]
Here again the article in the Investors' Review, upon which I rely so much because it supports my arguments in language far more technically precise than I can command, outlines a scheme by which this could be done.
If there are any serious difficulties 1 have no doubt that my hon. Friend will tell me, but I hope that he will weigh against them the moral obligations which Governments have in these matters. I use the word "Governments" in the plural, because there is not only one Government involved in this but several Governments over the years. In my view, they have a moral obligation to people who respond to their invitation to invest money in gilt-edged stocks. If we are to maintain the reputation of gilt-edged stocks, the reputation of Governments and the sanctity of Ministerial promises, it is not good enough that the Governments should year after year evade their moral responsibilities in matters of this kind, and / hope that my hon. Friend will find it possible to give me a more satisfactory answer than the one which he gave me on 5th February.
I am grateful to the hon. Member for Lewisham, West (Mr. H. A. Price) for raising this subject, because I was distressed to find that both he and certain writers in the Press have regarded my supplementary answer as being in any way flippant. The problem of supplementary answers is that they should be short, but if they are short it is very hard to make them comprehensive. What I was trying to achieve was to make in a short reply the essential point that the phrase "or after" implies no definite date of redemption at all.
The whole question of the depreciation in the value of long-dated and undated Government stocks is one which has caused a good deal of misunderstanding among the investing public. My reply today, I hope, will be read outside this House and while it may appear a somewhat stiff and formal reply that is because I want to set out as fairly as possible the facts as we see them in the Treasury.
I fully appreciate the human difficulties which have been caused to many people by virtue of the decline in the current value of their holdings. I myself have received many letters and I read them with great sympathy. But there are some big issues at stake here.
We appreciate that the rise in long-term rates of interest between 1951 and 1957 led to a corresponding fall in the market price of long-dated and undated stocks paying a fixed rate of interest. We appreciate, further, that this may have led to hardship where people were forced to sell their holdings at a price below what they paid for them. And we are very sorry that this should be so. But the possibility of such loss is inherent in any fixed interest security. I have yet to hear any constructive suggestion for dealing with this situation which would not raise a whole host of other problems if it were adopted.
My hon. Friend has pointed out, further, that the value of holdings of War Loan and 2½ per cent. Treasury Stock, together with the value of the income, has suffered from the fall in the purchasing power of the £, as well as from the depreciation in market values. As regards capital values this is true, but it is a quite separate factor. The fall in the purchasing power of the £ has affected a very wide field, and is in no way peculiar to Government stocks. The only solution is to halt the rise in prices and thus stabilise the cost of living. This has been one of the foremost aims of Government policy, and I think we can claim to have met with some success during the past year.
But to return to the depreciation in the market value of undated stocks— this arises from the very nature of the investments during a period of rising interest rates; but it arises primarily from the fixed rate of interest rather than because of the absence of a fixed redemption date The market price of a stock carrying a fixed rate of interest is bound to fluctuate with the general level of interest rates. If the general level of rates is such that an investor can, with security, expect to earn 5 per cent. on his money, it is clear that he will he unwilling to pay more than about half the face value for stocks with an interest rate of 2½ per cent. and pro rata for stocks at 3½ per cent. If, however, the general level of interest rates falls, then the price of these stocks will rise correspondingly.
There is a wide range of securities open to the investing public. Those who are willing to risk their capital in the hope of big rewards will probably choose equities. At the other extreme stands the small saver who wants to be sure of being able to withdraw at par at very short notice, and for him National Savings and deposits in building societies offer a suitable choice. In between are the people who choose market securities—either industrial debentures or Government stocks—but want an assured money income. If they wish to be sure of being able to realise their investment at a given price after a specified period, they will probably choose a dated stock. If, however, they wish to get an assured income for an indefinite period, they may choose an undated one. Having made this choice, they cannot expect the market price of their holding to remain constant, since they have chosen a form of investment which is bound, as I have explained, to fluctuate in price. These movements in price are not, however, all in one direction. There was a long period, from 1939 to 1949, when the price of War Loan was above par, and, even during the last year, the price of this stock has risen by five points, or about 8 per cent.
It would be wrong for the Government to take any action designed specifically to force down the long-term rate of interest. This would do harm to Government credit, and thus be contrary to the long-term interests of investors and the taxpayer alike. This rate, after all, is not something to be fixed at the whim of Governments but reflects fundamental conditions in the capital market, and is a reality of life which we have to accept.
It has been suggested that we should assign redemption or conversion dates to certain undated stocks. We do not consider that there is any case for taking such action. Very likely it would result in an increased burden on the taxpayer. Quite apart, however, from the point of propriety of benefiting holders at the taxpayer's expense, I cannot see that the fixing of redemption dates at some point in the future, such as was suggested by my hon. Friend, would really meet the situation in an equitable manner. I will try to explain why we see it in this way.
The price at which these stocks have changed hands during the last few years has been determined in large part by the market's expectation that redemption was very unlikely while the general level of interest rates remained above 31 per cent. The announcement of redemption dates, in, say, the year 2000, might well cause an initial rise in the price of these stocks. It would, however, clearly be unfair to give this benefit to people who had bought fairly recently at low prices, and not to those former holders of the stocks who had suffered some capital loss by selling them.
Also it would, in practice, be impossible to distribute the benefit among past holders, and it would be equally impossible to devise a fair and workable scheme for confining the benefit to present holders who had held the stock for a long time, or who had bought it at a price above a specified level. This would imply offering differing conversion or redemption terms to differing groups of holders, which, I suggest, would be quite improper.
A further objection to the suggestion that redemption dates at some far distant time should be fixed to one or two Government stocks, such as War Loan and 2½ per cent. Consols, is that it would be impossible to justify confining this concession to one or two chosen stocks, and it would be necessary to grant it to all undated stocks. This would, however, have the rather strange result that bigger proportionate benefits would accrue to holders of 2½ per cent. Consols than to holders of War Loan. This, in turn, would be rather unfair, since Consols have been regarded for many years as a perpetual stock, equivalent, in some ways, to a Government annuity.
I realise that what I have said is unlikely to bring comfort to those who have suffered a capital loss, or who feel that they have a moral right to interest at a rate well above the 3½ per cent. paid on War Loan. This feeling can arise only from failure to understand the terms of the prospectus of the stock in which they have invested, or to obtain adequate advice on the matter, and the belief seems to have been widely held that the Government have failed in their promise to redeem War Loan in 1952. There was no such promise, and there is no foundation for this belief. And the mere fact that the belief exists does not mean the Government would be justified now, in taking action to benefit a particular group of people at the expense of the whole community.
I have tried to give the reasons, sound ones in my belief, for the policy which we are continuing to pursue, and I hope that my explanation will go some way towards satisfying my hon. Friend.