MONEY The wicked assault on gilt-edged
NICHOLAS DAVENPORT
The Secretary for Trade and Industry is not apparently unique in his habit of blurt- ing out embarrassing thoughts on financial and economic policy before a coherent government plan had been worked out. The Treasury has virtually done the same thing in an equally embarrassing document called 'Competition and Credit Control'. It caused dealings to be suspended in the gilt-edged market last Friday afternoon when it sud- denly appeared. And no wonder! The gilt- edged market has been the envy of the whole financial world because any buyer or seller has always been able to deal. An institution might have to sell £10 million or more of government stock on a bad day when the Chancellor (Heaven forbid) had trodden on a bomb and lo! there was the Government broker with his poker-face willing to take the stock—at a price! The market could always be relied upon to work. But what does the Treasury do now but throw this unparalleled reputation over- board. The Bank,' it says in this document, 'will no longer be prepared to respond to requests to buy stock outright except in the case of stocks with one year or less to maturity.' It will make purchases of stock with more than one year to run entirely at its own discretion and initiative and it will take care to see that these voluntary ex- changes of stock with the market do not unduly shorten the life of the national debt.' The object apparently is 'to limit . . . fluctuations in the resources of the banking system arising from official operations in the gilt-edged market.'
It looks as if the hidden Friedmanites at the Treasury have managed to slip into a harmless enough document about credit policy their pet nostrum on the money supply. The Chancellor had expressed the opinion in his budget speech that it should be possible to achieve a more flexible but still effective credit control `by operating on the banks' resources rather than by directly guiding their lending'. This the document proposes to effect by abolishing the existing quantitative controls over bank advances and substituting a new 'reserve assets ratio' —it is said to be around 121 per cent— which will compel the banks to keep that prescribed ratio of their sterling deposit liabilities in certain specified reserve assets such as balances at the Bank, Treasury bills, money 'at call', Government bonds with less than a year to run, together with local authority bills and a proportion of commer- cial bills eligible for discount at the Bank. In addition the Bank can call upon the banks, as now, for Special Deposits at the Bank of England. The existing bank cartel for agreed rates on deposits and advances is to be abolished. The banks are free to compete with one another—to satisfy the Tory doctrine of free competition—but there will be some limit on rates to be offered on savings deposits to avoid knock- ing the national savings movement.
These new credit controls are too tech- nical for comment in a weekly column but 1 must draw attention to the unwarrantable and unnecessary disarray into which the gilt-edged market is thrown by the intro- . duction of new Friedmanite rules for the Government broker. These rules mean that
large blocks of Government stock are no longer automatically saleable because they might increase the money supply. But if the Government proposes to throw Friedmanite spanners into the wheel of the capital market it should surely take care to see that the wheel goes on turning—by directing a regular flow of funds (savings) into the market. Last year the net increment of the life funds was around £780 million and of the pension funds around £670 million. The disposition of this vast volume of savings is at the discretion of the fund managers but the managers of the life funds usually put about 16 per cent into Govern- ment bonds, In the old days—in 1958 to be precise—they put just over 22 per cent. Most countries direct insurance companies to hold a proportion of their funds in Government bonds but in our case direction would he unnecessary; a letter of intent would be sufficient. What seems to me in- iquitous is that a Tory government should suddenly upset the gilt-edged market, sub- ject it to wild fluctuations and hand it over to speculation—all in the name of a money supply fanatic whose techniques are in- applicable in Britain.
The importance of the London capital market, where the savings of the people are gathered up and channelled into investment through the financial institutions, cannot be overstressed. it is the lever of the capitalist system as we practise it in our mixed economy. To muck up the most important part of it, which is the gilt-edged market, is wicked. This year the borrowing require- ment of the central government is £600 million and that of the public sector as a whole , is £1.200 million. The gilt-edged market can take care of all that without a tremor if it is left to function under its conventional rules. The Treasury has already sold a huge amount of stock to the public and can sell much more. All that the market needs to know is that there is a floor—provided by the Government broker—and that the Treasury wants to see and sustain an upward trend. And why not? The balance of payments is no immediate worry. In the first quarter of the year there was a surplus on current account of £50 million and the year looks like ending with an overall surplus of around £300 million. The reserves have risen to the highest level in five years—£1,425 million—and can well stand the efflux of 'hot' money when it comes. The overseas debt is down to £683 millionwhich will be paid off in two years in quarterly instalments. Surely the Govern- ment credit is entitled to stand at a better rate than is.provided by War Loan at 37j to yield 9.2 per cent.
There is another prospect which would make for a rising gilt-edged market and enable the Treasury to sell millions of stock to the public and drown the Friedmanites in a negative supply of money. (Flow annoy- ing of them not to distinguish between bank money coming from savers into investment and bank money going into consumption!) This is the prospect of our 'floating' into the European common market. If our appli- cation is accepted it would be difficult for the French to refuse to accept a floating £ while the deutsche mark and the guilder —the two most important currencies of the six—are floating at the time. This would enable us to get down to a lower interest rate structure—certainly no higher than the lowest on the Continent. If the Treasury had not intervened gilt-edged could have become a bull market.
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