lh the City
After the storm
Nicholas Davenport
It was an extraordinary week. How any Mtelligent stockbroker could have imagined that a new, highly complex, h__EU-roPean Monetary System could have agreed to and set in motion at the .luesday surnmit meeting in Brussels is incomprehensible. Everyone knew that the British were not ready. Mr Callaghan been said so. Yet foolhardy gamblers had r,en piling into Irish gilt-edged on the Muck Exchange, driving them up to a Premium on British gilt-edged — and into the Irish banks on the conviction that the 35_ Per cent net dollar investment preallunt would be tacked on to Irish stocks (311 Wednesday morning so that they could sell at a glorious profit. They caught an at cold. 8Y a stroke of luck Mr Callaghan eseaPed the obloquy of being the odd Lan out who wrecked the ambitious "nuld notscheme. This was because France agree to pay the huge 'transfer resources' sums which Italy and Fire were greedily counting on. So the remain sing six' were left with nothing to do but gn on another currency 'snake'. flecording to Herr Schmidt i as reported In the Financial Times, Mr Callaghan gave assurances that the pound would be stablised within a margin of plus or minus 4t per cent against the currencies of the new 'snake' but Mr Healey happily said later that this was a 'slip'. He gave no such assurances.
a scholarly performance on BBC television :11°r on Saturday night the Chan et explained why we could not join in cje EMS at the moment, but he left no u _oubt my mind that he was not Posed to the EMS idea. The com i Llications of the plan were described n Vail in this column on 26 October. et I liked about it was the attempt to „ Up a European Monetary Fund and a ih• "rn.Pean common currency which would rune become another world reserve currency for traders to use in addition to, T; In substitution for, the dollar. I have oe.v,er liked the dollar as a world currency nad any confidence in the ability of rb4F American establishment to manage t rair% It i was President Nixon who arbit07Y demonetised gold, who destroyed a7, Old Bretton Woods system at a stroke u ushered in the turmoil of floating exchanges which have, alas, added to world inflation. I don't believe that the Americans are temperamentally suitable as managers of a world currency; they are too _emotionally involved with their 'almighty dollar'. I believe that we Europeans are better able to do the job, but we have a long way to go. It may be a year before we can set up a European Monetary Fund. It may be that we shall first have to experiment with a European Central Bank, as Mr Walter Salomon has, and I think Keynes would have suggested. But before we go any further we must all agree upon the essential reforms of the EEC — the Common Agricultural Policy and the Transfer of Resources. Otherwise the EEC will not hold together much longer. All this drama passed without upsetting the even tenor of Stock Exchange markets. The gilt-edged market was hoping that it could look forward to a break with rising American interest rates and a link with European money markets which have traditionally enforced a cheap money regime. I cannot see why the Bank of England should not now declare that it is not looking to an interest rate pull over the dollar for the stabilisation of the sterling exchange rate. We have sufficient reserves and an adequate surplus on the balance of payments to keep sterling steady. As one expert recently put it, if the sterling-dollar rate is replaced by the sterling-deutschemark rate as the key consideration for our monetary policy, the erratic behaviour of the American Federal Reserve Board would become of little more than academic relevance to Bank of England policy or to gilt-edged investment strategy. Most market men expect American interest rates to go on surging upwards in a frenzied attempt to curb their inflation. Let us ignore them.
There is no doubt that with yields of 13 per cent plus at the long end and 12 per cent to 124 per cent at the short end our own gilt-edged market is a buy — particularly at the short end.
It remains to consider whether the even tenor of the equity share markets is likely to be disturbed by the coming Labour election manifesto. As regards the left-wing attack on the City we should have the coming report of the Wilson Committee inquiring into 'the role and functioning of financial institutions and their value to the economy' as a protection. The report will reveal, I under stand, that the City's institutions are managed much more efficiently than any public board. I recall that when the Committee was set up late in 1976 Mr Callaghan's first idea was to get the report delayed until after the election (his second idea, it was said, was to divert Sir Harold's restless mind from South African spy activities). Now the report may Come in handy for settling the manifesto on quieter lines for the City. Incidentally a preliminary report has been requested on the financing of small companies as Mr Harold Lever, the minister in charge of aid for small companies, has said that he will await this report before taking any further action. Something constructive, and not destructive, may come out of this.
Remember that the trade unions are still attacking the City for failure to divert sufficient of the funds pouring in from the life and pension funds to industrial investment. Some obsequious City fathers set up a company called Equity Capital for Industry to plug the alleged gap. I was very scornful of this project at the launching time. The Investors Chronicle has now made an analysis of their results to date. Their first investment of £1.7 million in Bond Worth, a carpet and furniture manufacturer, ended in bankruptcy. They put £3,3 million into two companies now said to have very poor prospects. Their total investment adds up to only £9.8 million out of the £41 million subscribed for trade union sugar. Not a very happy performance. It suggests that new industrial investment is best left to the merchant banks and the brokers who are keenly on the look-out to finance anything likely to produce a profit.
It is therefore important for the City to see that the manifesto does not pour many more billions into the National Enterprise Board for unspecified industrial finance. The NEB is the ingenious Trojan horse which, invited into the citadel to help those in trouble, ends by taking over the private sector's industrial finance. The NEB is beautifully conceived as a help to private enterprise; it could end by making it redundant. Important issues are here involved. Take, for example, the new industrial revolution called micro-electronics. The NEB may proudly announce that it will finance a factory that employs no la6our. Who takes the profit? Who pays for the unemployed? Before you know where you are it will be an authoritarian communist state. The City will be lost if it does not work out a scheme for Great Britain Limited and a national dividend. And how can this be paid except by a public unit trust?
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