The money merry-go-round
Nicholas Davenport
One must admire Mr Heath's infinite capacity CO stand on his
head. Having reversed his old no tions about lame ducks, nationalisation, state feather-bed ding and pump-priming he has now gone back on his principle that bank credit should be ra tioned, if at all, by market price (that is, the rate of interest) and not by state directive. He has in tervened once again to protect the building societies against the competitive pressures for savings in a further desperate attempt to slow down the rise in mortgage rates — now at 11 per cent. His obedient servant, the Chancellor, has placed a limit of 91 per cent on the rate which the joint stock banks may pay on their smaller deposits — up to £10,000.
The famous 1971 White Paper on Competition and Credit Control, which has been described as the last relic of Selsdon Man, is now being whittled away. Mr Heath may claim that Clause 15 of CCC had recognised that the greater freedom given to the banks might upset the flow of savings into building society deposits and that some limit might have to be placed on the terms Offered for bank deposits. True, but the letter to the banks from Mr Gordon Richardson, Governor of the Bank of England, goes much further, for it asks them to restrain their lending to the personal sector, especially for "property. development and financial transactions." And small wonder, According to the new Bank Bulletin the sharpest rise in bank advances between May and August was in loans to services and the financial sector (up by £1,690 million) of which property companies took the biggest slice. Manufacturing industry took a modest increase of £475 million. The Bank Bulletin describes the huge rise in advances in this Period as a large part of the Supply-side counterpart to the incwase in the M3 money supply."
This jargon means that the Government is slowly beginning to realise that an economic growth policy cannot be fairly financed by giving complete freedom to the banks and finance houses to hand out credits to the highest bidders. The money will go to speculators in property development and financial transactions, such as take-overs, mergers and wheeler-dealing, to the detriment of local housing and Industrial development — because
these speculators can afford to pay any fantastic rate for money out of their fat profits. All this is socially divisive, as Mr Wilson keeps on reminding Mr Heath.
The Governor's letter to the banks is worth quoting on this point. He says: " It is clearly necessary, if the growth of the economy is to proceed soundly, that the demand for credit to finance a higher volume of exports and industrial investment and for other essential purposes should be satisfied. This will involve significant restraint on the provision of credit for persons (other than house purchase) and further restraint on lending for property development and financial transactions." At long last a Tory government has admitted that the Labour Government's concept of a qualitative as well as a quantitative control of bank credit is necessary if an all-out expansion policy is not to upset our-improved ideas of a socially just society.
On the publication of the White Paper on Competition and Credit Control I was the only financial writer to criticise it as a retrogressive step. This was because I was brought up on the Keynesian principle that no government should ever give freedom to money-lenders. It is against commonsense as well as against the Bible. Money lenders and money traders are always up to ingenious monkey-tricks to snatch a profit out of the money market. Take the case of the CD — the sterling Certificate of Deposit — a new technique invented a few years ago. The market in CDs and inter-bank loans' has grown so rapidly — it is now over £10,500 million — that the Bank of England has set up an official inquiry into it.
A CD is a document issued by the UK office of a British or foreign bank certifying that a sterling deposit has been made with that bank which is repayable to the bearer at a fixed rate of interest upon surrender of the bearer certificate at maturity. (The maturity can be from three months to five years and the amount can be from £50,000 to £500,000,) This has . enabled aggressive banks to exploit their new freedom by tapping funds from a wider range of sources outside the banking system at a fixed rate and for a fixed period. A secondary market in CDs was developed by the discount houses and so much money was made out of them — nimble traders could borrow at one time at 9 per cent and get 14 per cent on a CD — that the Chancellor had to put a clause in his budget to make these profits subject to tax. No wonder the money supply has been leaping up — by 9 per cent in the last three months. No wonder the price inflation has been speeded up — by 91 per cent in the past twelve months. Would Mr Barber kindly tell us lhat good the restoration of monetary freedom to the banks had done to our split and inflationary society? If the banks can make a killing out of it is it any wonder that the trade unions are now advancing seemingly extravagant money claims?
The whole policy of freedom for money-lending is based on a false premise — that money demand and supply can be balanced by the price — the rate of interest. In a society which has a social conscience and works on social priorities it is plainly impossible to allow money rates to rise to the sky to restrain demand. Housing and a lot of other desirable social investment would then become too expensive to undertake and social tensions would reach flash point. Price inflation which is always enhanced by dearer money, would also reach intolerable heights. Money rates have to be controlled and money lending must now be directed. Mr Heath, I hope, will learn in time. Meanwhile I thank him for postponing Maplin for two years. But what money is he going to funnel into the Chunnel?
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