Monetary System

Part of the debate – in the House of Commons at 12:00 am on 26th November 1959.

Alert me about debates like this

Photo of Mr Nigel Birch Mr Nigel Birch , Flintshire West 12:00 am, 26th November 1959

I am sure the House is deeply grateful to the right hon. Gentleman for his observation.

I shall make a very short speech. With the exception of the speech of my hon. Friend the Member for Nottingham, South (Mr. W. Clark), the speeches so far have been very long indeed. Therefore, I hope the House will take it as read that I have made the required number of ritual genuflections to the work of the Radcliffe Committee.

The most curious thing about the Report is the great stress laid at the beginning on the importance of reaching a unanimous conclusion. Often in our history it has been vital for committees and commissions to reach unanimous conclusions, and to that end it may well have been right for them to fuzz the issues, to leave out of account matters of importance, to be unclear and even to abandon logic. In this case I cannot see any great point in fighting for a unanimous Report.

The people of this country are not passionately excited over the question of monetary management. Many different views are held on this subject. The earnest seeker after truth would like the opposing views clearly set out, so that he could have a chance of deciding for himself where the weight of the argument lay. The Committee cannot have hoped to end the ceaseless gang warfare that exists between professional economists. They are already sharpening their knives and brandishing their bicycle chains.

As a result, everybody who has read the Report has been able to select from it some sentence or some sentiment that is to his fancy. In dissecting this outsize curate's egg everyone has found something—some piece of embryonic tissue or whatever it may be—picked it up with his forceps, exhibited it to the public and said, "This proves that I, at any rate, have always been right".

Where so many eminent men have led I cannot forbear to follow. The exhibit which I should like to put before the House is paragraph 115. It is short and I will read it. It says: Net sales of stock enable the authorities to finance an Exchequer deficit without adding to the credit base of the banking system. So long as the authorities have to finance a large overall cash deficit (including the provision of capital for the public corporation, and for the local authorities through the Public Works Loans Board), and there are maturities of £600 million to £1,000 million to be refinanced each year (and this is the prospect for the foreseeable future) the need to raise as much money as possible by this means will remain pressing; the authorities cannot be expected to relax their efforts to sell stocks unless a time comes when they judge that the economy has moved into so deep a depression that it is necessary to incur the risks that a reversal of this policy would entail. That, quite simply, means that it is the duty of the authorities to fund continually, to sell as much stock as they possibly can, and that only in the event of a really deep depression would they be justified in involving the risk of giving up that policy, the risk being a great increase in bank deposits.

It might well be argued that paragraph 115 is contradicted by paragraphs 546 or 523, and it might well be argued that it was against the general drift of the argument of overall liquidity—I think the hon. Member for Huyton (Mr. H. Wilson) quoted certain passages which would not fit in with paragraph 115 but, as Professor Paish showed quite clearly in The Times on Tuesday, it may well be that, on closer study, the liquidity argument will be found to be orthodox and, therefore, consistent with paragraph 115, and not unorthodox, and, therefore, inconsistent with it.

In any case, whatever contradictions there may be subsequently, this statement in paragraph 115 about the necessity to fund is absolutely clear and absolutely unqualified, vigorous and definite, and it seems to me that it will be grossly discourteous to the Committee to assume that it did not mean what it said in the paragraph.

Also, of course, it is true. Look at what we see not only in this country but elsewhere. Look at the troubles in America, which has had Budget deficits for years which it has been impossible to cover by genuine funding. Therefore, its bond market is in a mess and its economy in disorder.

Take the case of France. Many hon. Members have read a very interesting account of the French financial situation by M. Jacques Rueff in which he described how France had been going on after the war. Like us, the French are burdened in their budgets by heavy capital demands from their nationalised industries, and in deciding how large an overall deficit they were justified in having, they made a guess as to how much money they might be able to borrow, how much they might be able to fund, and that sum was called the "impasse", but every year they calculated the "impasse" wrongly. They practically never managed to borrow as much money as they thought they would, and the result was eight devaluations, the loss of a constitution and the return to orthodoxy.

In our own economy we have seen that every time we fail to cover the capital expenditure of the nationalised industries, whether by taxation or by genuine borrowing, we begin to get into a mess, and we get into a mess fairly quickly. I do not think the general public realise the burden which this financing of the public corporations puts upon us and how much more difficult it makes the whole management of our economy.

I do not suppose there is a more ardent cheap money man living today than Sir Roy Harrod. I think that perhaps he is the only genuine Daltonian still alive. I am perfectly well aware that Mr. Dalton himself is still alive, and I am very sorry indeed no longer to see him on the benches opposite. Speaking for myself, I much regret it, for I always found him fun in the House.

However, here we have this arch-Daltonian, and if one reads paragraph 569 of this Report, and, still more, Sir Roy's review of the committee's work in the Financial Times, one will see that he takes the view that we shall never have an ordered economy in this country and never get interest rates down to what he believes to be a desirable level unless there is a radical change in the pricing and the capital policies of the nationalised industries.

The right hon. Member for Battersea, North (Mr. Jay), who I understand, is to wind up the debate for the Opposition, knows a great deal about these matters, and I am sure that this was in his mind when he made his great declaration about nationalisation. He saw what a burden it was upon our economy, and he saw how absolutely hopeless it would be if we nationalised more industries and, therefore, had a still greater burden. I very much hope that the right hon. Gentleman will testify accordingly at the coming Blackpool inquest.

There it is. We have this great necessity all the time to fund, and it is not a very easy thing to do, because people who have held gilt-edged securities have grown aware that they have had a bad time and they are becoming very suspicious.

In this difficult task of meeting the pressing need for funding, what help can we get from the Report? There are several things which are relevant. First, the Committee says—I cordially agree—that we must get used to higher long-term interest rates than we have been accustomed to in the past. I am sure that is true. But then the Committee adds another sentence which, I confess, rather worries me. It is the second sentence in paragraph 572. There the Committee is talking about the fear of continuing inflation. That fear still exists.

The Committee says: In so far as people foresee a steady rise in prices of 2 per cent. per annum, they will look for a 5 per cent. rate of interest instead of 3 per cent. Let us pause for one second and see what that means. Suppose a man lends £100 to the Government today on a loan repayable in 25 years, and suppose prices go up by 2 per cent. compound per annum, at what would that loan need to be redeemed at 25 years for him to get back the same purchasing power as he originally lent to the Government? The answer is that the loan would have to be redeemed at 164 per cent. If it were a 50-year loan, it would have to be redeemed at 269 per cent. Out of his taxed interest, depreciating in exact proportion to the capital, the man is not likely to be able to put anything by against the enormous capital loss which he will suffer.

That sort of bland sentence saying that one wants 5 per cent. instead of 3 per cent. rather upsets me. It shows some contempt for the intelligence of the people. It may well be true that the majority of the people in this country do not keep the compound interest tables by their beds, but they are not fools. They may sometimes be slow off the mark, but they know when they have been swindled, and if people have been swindled, it will take more than all the soft money men in the world, even if led by Lord Boothby himself, to persuade them either that they have not been swindled, or, if they have been swindled, that it was good for them.

The second relevant point in the Report is that it would be easier to manage the gilt-edged market and make it easier to manage the whole funding problem if the authorities took the market more into their confidence and told the people what they were trying to do. I do not want to argue that case because the case against it has been very well argued by Mr. Rossa in the current issue of Lloyds Bank Review. If the members of the Committee thought that, they showed a most astonishing naïvete, because such a system would not work and the Government would sell even less stock than now. The long-term position is that one is continually under the pressing need to sell. If one takes the market into one's confidence and rubs it into the public that one must sell, one might sell more stock, and, equally, one might not sell more stock.

The third point is a key issue of confidence of getting one's priorities right. In September, 1957, my right hon. Friend the Member for Monmouth (Mr. P. Thorneycroft) said that the swindle had gone far enough, that he put the value of the currency first and that everything else would have to go by the board if people pushed their claims for wages far beyond any possibility of productivity catching up. Again and again, my right hon. Friend the present Chancellor of the Exchequer has affirmed that he puts the value of the currency first.

Since that declaration and stand, we have had, admittedly with some good fortune, the first period of stable prices for decades. There was a time when even the right hon. Member for Huyton (Mr. H. Wilson) said that he put the value of the first. That was in the Budget of 1958, but I do not want to pin anything on him. The Socialist manifesto of this election clearly gave pledges which meant that the £ had been put right at the bottom.

If we do not put the value of the £ first, we get in a mess. What were the priorities of the Radcliffe Committee? It put first a high and stable level of employment and, second, reasonable stability in the value of money. What is reasonable stability in the value of money? Needless to say, the Report does not tell us. Surely all experience shows that if the value of the £ is not put first, it automatically goes to the bottom.

In its Report, the Committee says that the Bank Charter Act, 1844, had the effect of keeping prices steady. The Committee looked wistfully for some substitute. The only substitute is a firm determination to retain the value of the £, whatever that may cost, because without that there is no sanction. It would be perfectly wise for any union to press any wage claim to any extent, whether it broke the £ or did anything else. It could hardly be blamed for doing so if they knew that whatever happened full employment would be maintained.

Still dealing with the question of confidence, I come to the Report's references to the Bank of England. The people of this country, quite rightly in my opinion, look on the Bank of England as an institution devoted to the maintenance of the internal and external value of their money. Why, then, devalue the Bank? Why turn it into the East End branch of the Treasury? Why put the Governor of the Bank into the second eleven and put it about that part-time directors are not to be trusted?

It is curious that the main reason which the Committee puts forward for the proposed change is that it would not make any difference anyway. Would it not? Under the system as it now is and is to continue, supposing a profligate Government with an enormous Budget deficit plays ducks and drakes with the currency and, unable to fund, runs into a foreign exchange crisis, as it inevitably would; in such circumstances, the Governor of the Bank of England would say to the Chancellor, "The only conceivable way of preventing the £ going and of preventing the break-up of the sterling area is a sharp and brutal change of gear; we must have a big rise in the Bank Rate."

The Chancellor of this profligate Government might say, "No. We know much better than that nowadays and we will not have such an increase". In the end, of course, the will of the Chancellor must prevail. Under our Constitution, the Government, backed by the House of Commons, can do anything not naturally impossible. [Laughter.] That is a text book phrase. Faced with that reply, a decent Governor of the Bank would say, "Of course, your will must prevail, but I intend to put up the Bank Rate unless you issue a formal direction forbidding me to do so".

Might not that give pause to even the most profligate and dishonest Chancellor of the Exchequer—the fact that he has solemnly to give a direction to the Bank of England not to do what it was clearly right to do. Would it not make such a Chancellor fear the vengeance of the people? I think that it would. Given the new system proposed, such a sanction would be thrown away. Nothing would happen and down would go the £. The proposal about the Bank of England is mistaken and I am glad that my right hon. Friend has turned it down, although I am sorry that he has given in on a small point about the appointment of part-time directors.

I end by saying that the Report has been of some value—the descriptive passages may be useful to teachers. We may get better statistics, and better statistics will do all that better statistics can do. However, I must say with deep regret that rather than shed light on our problems the Report has darkened counsel.