Confidence crisis in the City MONEY
NICHOLAS DAVENPORT
In all my experience of City politics, which covers the 1931 financial crisis as well as 1949, I have never known such a profound distrust of—such a strong aversion to—a Labour government as exists today. Handsome Ramsay MacDonald, as we all know, was beloved by elderly duchesses and Earl (Major) Attlee was always trusted by the Establishment. Both had the common British distaste for intellectuals, especially foreign ones, and both could be re- lied upon to muddle through in true national form. But clever Mr Wilson! They have lost all faith in him and his fair words and have become convinced that he is bringing the British ship of state on to the rocks. Lord Cromer voiced the City's bitterness in his angry speech in the Lords : 'This final act [of devaluation] has come as the culmination of a series of crises of confidence in the Government's intentions and even in its ability to create a climate in which the vast potential of skills and resources which we are fortunate enough to possess can develop for the national good.' One of the mis- fortunes of Mr Wilson's administration has been its lack of a channel of communication and understanding between City and White- hall which a sympathetic Governor of the Bank usually provides.
One cannot help feeling sorry for a Labour Prime Minister who has been bravely trying to do the impossible, that is, to preserve simul- taneously the unity of his party and the parity of the sterling exchange. I confess that at one time I thought it was not impossible. The Labour party under Gaitskell's leadership had committed itself in 1960 to a new Statement of Aims in which it recognised that 'both public and private enterprise have a place in the economy.' This should have converted the party from its authoritarian marxist set-up to the democratic socialism of a mixed economy in which private enterprise could work happily along with public enterprise. But a section of the party clearly remained unconverted and to this doctrinaire left wing Mr Wilson and Mr Callaghan kept throwing bones on the pretext that barking dogs must be kept quiet. Far too many bones were thrown. In the end the confi- dence of the private sector of the economy was completely lost—and party unity was not held. And seventeen left-wingers voted against the Government in the devaluation debate when they heard the humiliating language used by Mr Callaghan in his letter of intent to our principal creditor. I am all for revolution in the monetary sphere, but they should have realised that the time for revolution is passed.
Looking back it seems strange that the triumvirate which ruled Labour up to the de- parture of Mr Brown from the DEA should not have realised that the old exchange parity of the £ could not be held unless the confidence of businessmen in the mixed economy experiment was also held—and that that probably meant some resignations from the Labour party. Brit- ain is not an island in the capitalist world: it is one of the main thoroughfares. Each morn- ing the merchant bankers in the City are tele- phoning to their opposite numbers in New York, Zurich, Amsterdam, Bonn and Paris. Lord Cromer's harsh accents are heard in half a dozen financial centres where trading in the f is in full swing.
The new team will appreciate that a delicate and dangerous situation confronts them in the City where confidence has vanished and gov- ernment credit has virtually collapsed. The new £ is not attracting the support it deserves. As I write the spot rate is $2.40i; two weeks ago it was $2.42. (Why did the Bank start dealings at its upper limit from which it could only fall?) The discount on forward sterling has been steadily widening. The quotation for delivery one year ahead is $2.36i. It was obviously a mistake to jerk Bank rate up to 8 per cent to try to attract foreign money which is now pouring into America where there is an uncon- trolled rush upward of interest rates. An 8 per cent Bank rate was a sign of hysteria, not a stabilising force.
I do not believe that business confidence can be recovered unless (a) Mr Jenkins assures the House of Commons that he is preparing a scheme which will cut £1,000 million off govern- ment expenditure over the next twelve to eighteen months and (b) the Government sets a limit to the encroachment of the public sector on the private sector which is reassuring to private business inside and outside this country. (It will be recalled that after the nationalisation of steel came the 'enabling' Bill to acquire shares in private enterprise companies while Mrs Barbara Castle was given a free hand to ex- tend public ownership in the transport and an- cillary trades.) The Government must convince the business world that it really means to work a mixed economy and to allow the capital mar- ket to function properly, which means allowing companies to make and distribute adequate pro- fits. If it doesn't it will not be able to hold the $2.40 rate. The whole capitalist world will be against it. Speculation abroad will engulf it.
If the Government can give these assurances it will do something to restore confidence in the gilt-edged market. At the moment there is none and the time approaches when the Treasury will fail to secure institutional buyers for its `tap' issues. The last Chancellor assured the nn in his letter of intent that he would limit borrowing in the next financial year to £1,000 million. Figures have just been pub- lished showing that the life assurance and pension fund managers have invested (net) in government stocks not much over £250 million from the beginning of 1965 to end-June 1967 although their new money in this period must have been close on £3,000 million. The Treasury can direct a proportion of this new money into government stocks, as some foreign govern- ments do, but this is not likely to restore con- fidence. The time for direction, as I have urged, was when the Government had some goodwill in the City which it has now lost. The urgent task now is for the Government to make con- tact with those of us who have f1,200 million of new money a year to invest and see if we can understand each other's language.
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