MONEY
Iron Chancellor, steely Governor
NICHOLAS DAVENPORT
Are you looking forward happily to next year? Then don't. The Bank of England tells you in its latest Bulletin that you haven't yet felt the real squeeze. Bank credit is going to become 'progressively scarcer'. In the first quarter of next year— the main tax-gathering season—another huge Exchequer surplus will add to all the other pressures on the demand for credit. flow are you going to pay all your bills— quite apart from the tax-man—if you are to have less help from your bank?
The Bank of England takes the unusual step of warning companies to act now `to spread the impact', whatever that means, of the post-Christmas squeeze. It is also warning the banks that the constraints on lending imposed by the ceiling on advances 198 per cent of November 1967) 'will be reinforced by pressures on bank liquidity'. fhe wretched chairmen of the 'big five' were hauled up before the iron Chancellor and the steely Governor of the Bank last week and asked to explain why their non- priority lending was 4+ per cent (about £220 million) over and above the official limit last month. Mr Jenkins, it was said, 'left them under no illusion that he expected a substantial improvement in the coming months'. The naughty boys must have felt they were back at school. They were lucky not to have been caned again—as they were in June when the interest on their Special Deposits was halved.
One wonders how long this farce about the banks' naughtiness will be kept up. The Bank of England in its Bulletin admits that with the increasing squeeze the banks' customers have made increasing use of their existing facilities. And what about Euro- dollars? By this time every one knows that the key figure to the squeeze is not the level of joint stock bank advances but the total money supply. And it is this which the Bank of England is trying to get more under control. Indeed, the question is now being asked whether the Governor of the Bank is not using his control of the money supply too harshly and going beyond the instructions he received from the Chan- cellor.
In his Letter of Intent to the IMF Mr Jenkins undertook to limit the DCE (domes- tic credit expansion) to £100 million a quarter in 1969-70 excluding the effect of the balance of payments which might increase or decrease that figure. If the target of a £300 million surplus on the balance of payments were reached in 1969-70 the permitted DCE would be £700 million. Now it turns out that we actually secured a balance of payments surplus in the second quarter of this calendar year. It was better than any of us had expected.
The visible trade deficit was reduced to £76 million, after allowing for the under-
recording of exports of £35 million, and thanks to the magnificent net surplus on our 'invisible' services of £151 million we secured a favourable balance on current trade account of £75 million.
In addition to that we enjoyed a net surplus inflow of private capital of £57
million which more than offset the official export of long-term capital of £32 million, leaving a net capital surplus of £25 million. So the balance of current and capital transaction for the second quarter was a £100 million surplus compared with a debit of £52 million in the first quarter. Exactly how much that entitles the DcE to expand beyond the agreed limit of £100 million a quarter I will not attempt to estimate, but what does. the Bank of England do but contract the domestic credit by £75 million in the June quarter! Surely it is over- stepping its authority and subjecting traders to an unnecessarily severe squeeze.
What the Bank has been doing is to make hefty sales of gilt-edged stock to the public. In the June quarter it paid off £55 million of maturing stock and made net sales of other stocks to the tune of £150 million. In July it again made 'very substantial sales'. On 23 July it issued a new 'long' tap— £400 million of Treasury 9 per cent 1994— now yielding around 9f per cent at 96f—which has proved popular with the investment institutions and family trusts. Now the first item which goes to make up the total of the DCE is the government borrowing requirement less sales of govern- ment debt to members of the public other than banks. If the Bank goes on selling stock at this rate it will not only eliminate the due increase in the DCE but actually contract the money supply. To pull down the DCE from £2,262 million in 1967-68 to £1,175 million in 1968-69 and to nil today —I am using the Bank's figures—is surely too great a squeeze for the domestic trade. Perhaps it is the Bank's policy that anyone who is not in the export trade must go `broke'. Plenty are in the local building trades.
Reading carefully the Bank's supple- ment on the definition and calculation of the DCE I have come to the conclusion that it is a lot of statistical baloney, that is, that the Bank can produce any figure for the total money supply which it cares to think of. It reminds me of my old friend Hugh Dalton once telling the chairman of the Bank of Montreal—it was in February 1947 —that the rate of interest was just what he chose to make it. The Bank includes in its DCE figure bank lending to overseas resi- dents in sterling but excludes lending to UK residents in foreign currencies for investment abroad. This is a queer dis- crimination. And who defines investment abroad? The Bank mentions in its bulletin that the Eurodollar market in London, as measured by deposits taken from overseas residents, totalled over $25,000 million at the end of June, a rise of about 50 per cent since the beginning of the year! Is the Bank slashing at our bank credits because it cannot control the Eurodollar tap?
It appears from its Bulletin that the Bank does not have much confidence in the Treasury's statistical forecast. for it is sus- picious of a rate of growth faster than can be sustained for very long because of the shortage of capacity. It is also obvious that the Treasury cannot have much confidence in the statistics of the Board of Trade an of the Commissioners of Customs an Excise. The under-recording of exports t £10 million a month must have been shock to My Lords as much as it was to t poor taxpayers, who now have to t. governed by computer-fed statistics. Or begins to wonder whether our rulers real' believe in their new gods—the decin-. points which dictate their policy. I for or shudder at the thought of being governe by a lot of headless mathematicians. Sureh it is time for our politicians to do a little creative thinking.
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