THE ECONOMY & THE CITY
The Dearer Money Fracas
By NICHOLAS DAVENPORT klo wonder President Johnson is angry! The NFederal Reserve Board has put up its re- discount rate (the equivalent of Bank rate) from
inper cent to 41 per cent without consultation ' d without warning. It is even said that its arch- conservative chairman, Mr. William McChesney Martin, refused an invitation to see the President shortly before going to the Board to approve the increase. This is the more unpardonable Seeing that Mr. Henry Fowler, the Secretary of the Treasury, outlined the government's eco- nomic and financial policy in a speech to the Executives Club in Chicago four weeks ago. This Policy, he said, was threefold: to hold down industrial prices, to hold down interest rates, and to hold back investment in, and lending to, over- seas markets where prices, rates and profit mar- gins are higher. This was an entirely sensible and logical policy designed to correct the balance of payments disequilibrium and maintain the stable growth of the domestic economy. But when bankers interfere—the Federal Reserve Board is not a nationalised public board like the Bank of England—and stamp the heavy feet of dear money on a sensitive free-enterprise eco- lorny, there is bound to be trouble.
Up to this date, the economic management in the United States has been outstandingly success- ful. For over four years the economy has been expanding, with rising incomes, rising profits and a stable price level. The technique of budget deficits has been' cleverly used without setting tip inflationary pressures. Relatively cheap Money has been held throughout. The only trouble has been an excessive deficit on the balance of payments which the government has been working hard to correct. Of course, the old-fashioned bankers grumbled a lot at what They called 'the new economics.' While admitting that budget deficits and cheap money do not always produce inflation, they have become scared by the rise in government expenditures (Vietnam and all) and have lately been warning the government that 'the new economies' mnst not be pushed too. far. What they particularly dislike is the President's • interference with big business—witness his stern reaction to the rise aluminium prices, which was as effective as kennedy's objection to the rise in steel prices— and also with the banking free-for-all, over- seas, Apart from the 15 per cent tax on foreign portfolio issues, the government is now issuing guide-lines' to companies asking them to restrict Voluntarily their direct investment overseas to certain ratios. As economist Eliot Janeway aptly PEI it in his market letter: `The President has been manoeuvring back and forth between the holdback on domestic' influstrial prices and the bold-back on domestic interest rates. To win on both fronts .Johnson has felt obliged to an- lagonise businessmen in order to appease bankers and antagonise bankers in order to appease businessmen,' Now he has lost-- temporarily-- bis control of interest rates. The President is especially angry with Mr. McChesney Martin for not waiting to see the budget estimates before Making money dearer on the pretence that in- flation is threatened. From his ranch in Texas, the President issued this dignified protest :
regret as do most Americans any action that raises the cost of credit, particularly for homes, schools, hospitals and factories.'
Here the President was expressing exactly the feelings of money reformers like myself. The radical objection to dear money is not merely that it gives profit and privilege to the rentier class in society, but that it makes the cost of social investment in houses, schools, hospitals and public utilities unbearably expensive. In this country we have already reached the limit for local rates and personal taxation and we cannot tolerate any further rise through dear money. The idea that expenditure on social investment has to be restrained in a period of economic stress by dear money, as if it were an.expenclable business enterprise, is a piece of nonsense. It is like asking the doctor in charge of the local lunatic asylum to give sedatives not only to the patients but to the nurses and hospital staff as well. Socially advanced countries like ourselves and the US, which is now intent on the ordering of its 'Great Society,' must have cheap money to carry through our vast social expenditures. For that reason it is essential to operate a two-tie,r system of interest rates—a lower rate for social (non-profit-making) investment. and a higher rate (when necessary) for private profit-making enter- . prise.
I was therefore disappointed to see that the recent conference on interest rates organised by the Stock Exchange firm of Simon and Coates did not make this distinction the key to the whole discussion. The only speaker who was seized of the importance of the two-tier system was Mr. Harold Lever, the Labour Member for the Cheetham division of Manchester, who felt it necessary, alas! to stress that he was not a spokesman for the Labour party or its govern- ment. In his view, the Government should take full responsibility for fixing interest rates for various social purposes. Rates, he said, 'can and should be varied to achieve social purposes. If the Government wishes to lower the cost of mortgages for couples buying their homes. or encourage small savers with higher interest rates, it should consider giving appropriate interest subsidies.'
The new council housing subsidies did, in fact, take the factor of cheaper money into account, but I am not at all sure that a two-tier system of interest rates necessarily involves giving higher and higher subsidies. The whole apparatus of government finance needs to be re-examined. The surpluses exacted by heavy taxation 'above-the- line' should be earmarked as non-interest-bearing money for social investment purposes. The final 'borrowing requirement' below-the-line' should be split up between (a) borrowed at lower rates of interest from National Savings and other sources and (b) borrowed at higher rates of in- terest from the market. The former could be allocated to appropriate social investment—'the latter to the nationalised utilities which are surplus-producing. In short, the two-tier system of interest rates requires new techniques of finance, but it is not an impracticable system. I beg the Chancellor, if he feels compelled to attract 'hot money' to London at higher rates following on the rise in the New York Bank rate, to confine these rates to specially earmarked outlets in the London market. These would not be local housing bonds or deposits.
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