MONEY The Heathian way out
NICHOLAS DAVENPORT
I have already argued that the Stock Exchange has been on the whole unfair to the new Chancellor, dismissing too quickly his economically sound long-term strategy for disinflation, but it is clear that Mr Heath's talk about freedom and responsi- bility has been above the heads of his aud- ience. The dialogue between rulers and ruled should be in language which the majority understand. If Mr Heath had said that the wage-cost inflation is a contagious disease, which he had caught from Mr Wilson, everyone would have understood his pre- dicament. And if he had gone on to say that the disease was curable—not by dan- gerous_ (monetary) drugs prescribed by economic quacks but by a diet of healthy growth—he might have got a hearing from the rank and file of the trade unions in- terested in productivity deals. It is not too late for him to change his talk but he must first understand the state of anger which lies hidden behind the wage explosion.
It goes back a long way—to the industrial revolution, to the harsh deflations of the moneyed ruling clique in defence of ster- ling—but we need not go further back than to the Labour regime of Mr Wilson who . surprisingly adopted the same harsh mone- tary . measures of the old moneyed ruling clique in defence of sterling. Our present troubles stem from that ghastly mistake. The workers lost all confidence in the word of their own rulers. They were promised growth and stability and got stagnation and price inflation. 'The pound is riding high', said Mr Wilson after the first deflation package, and then bang! it went down again and pulled the economy into another trough with prices still rising. 'Steady as she goes!' -cried the nautical Mr Callaghan, triumphantly steering the economic boat after its third storm, and then crash! it was on the rocks again. Finally, devaluation. This was a device, said Professor Balogh, the economic adviser of Mr Wilson, in a letter to the Times, to reduce the real value of the workers' wages by sending prices and profits rocketing up. Could they have any further belief in their rulers' word? Was it not natural for them, when the prices and incomes policy had broken down, to go all out and grab what they could while the bargaining power lay in their hands? Editors .who write glibly of 'the devaluation of Mr Heath' should understand that what we are seeing today is the devaluation of the poli- tician. The workers look back in anger at the price inflation their governments have actually instigated by their constant increases in government expenditures, in indirect taxation and in interest rates. No trade unionist, no manager can any longer believe in the economic promises of the Westmin- ster politician. This is a little hard on Mr Heath who happens to be one of the most honest prime ministers of recent times and is trying desperately to cope with the in- flationary mess left by Mr Wilson.
Rightly Mr Heath has so far done no- thing but allow prices to rise. Rightly he has rejected so far the savage deflationary policies which would cause, unemployment to rise to,- say, a million. But the time has come for him to act in a more authoritar- ian manner to restore public confidence. This does not mean that Mr Heath will have to give way to the authoritarian Mr Enoch Powell. I do not know the details of Mr Powell's economic policy except that he would let the sterling exchange float. This, of course, is the only ultimate resort if the wage explosion prices our goods out of the export markets. To float is politically easier than to devalue. For the Government to announce another devaluation—say down to $1.80—would bring another angry howl from the embittered workers who now know that devaluation is a bankers' trick to devalue their wages. But for the Bank of England to announce that it had no further dollar resources to maintain a $2.40 rate would be a fait accompli that would arouse dismay rather than anger.
To begin to restore worker confidence Mr Heath must now demonstrate that he is really trying to get prices down. That after all was what he was elected for. He could at a stroke reduce prices by taking 10 per cent off indirect taxes. If the Treas- ury were to object that this would run the risk of turning a wage-cost inflation into a demand inflation, Mr Heath could reply that there are still some.unused resources and that reflation is an orthodox way out.
There is also another way in which Mr Heath could begin to reduce prices. This is to lower the rate of interest and reduce
rents. To do this requires an authoritarian approach, a denial of the 'free market' forces. The Treasury...would have to direct a proportion of the life and pension funds into the gilt-edged market. These funds are accruing at the rate of nearly £30 million a week and if 25 per cent were so 'directed' the gilt-edged market would rise sharply. the rate of interest would fall to, say. 7 per cent, whereupon the building societies would have to cut their mortgage rates and the local councils their rents. There is no reason why Mr Heath should not proceed along these lines at once. The central banks abroad are bringing down their bank rates. The Federal Reserve has cut the American re-discount rate from 6 per cent to 51 per cent, so that our own structure of interest rates is now above the world level. It should be below. Even if it is necessary to have a two tier system of interest rates, as we have a two tier -system for gold prices. one for the domestic housing market and another for commercial banking, we should not hesitate to introduce it and be unorth- odox. There is nothing which aggravates the rise in prices so much as a constantly increasing rate for money. I tend to agree with Professor Vaizey who said (Sunda• Telegraph 8 November): 'The abandonment of cheap money may prove to have been the main ultimate cause of world inflation' Incidentally, if you think that Mr Heath would not dare to intervene in the gilt. edged market you are making a mistake. The only government which has directed the flow of private savings has been a Tory government which directed some £200 million of the life funds into the export credits scheme. The Labour government funked it. I believe that if Mr Heath were to tell the TUC that his first step towards reducing prices will be to cut interest rates and rents and then to reduce indirect tax- ation he would assuage the anger of the workers and turn them towards the co- operation we need in tying wage rises to productivity deals.
ffolkes's investors' alphabet P is for Productivity
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