In the City
The crisis revealed
Nicholas Davenport
The cause of the monetary panic which seiz ed.the Chancellor on 7 October was revealed this week. It was, as I suggested, the jump in the rate of increase in the money supply. Using the M3 index (notes, coin and all bank
a. eeount money) the money supply rose during the three months to mid-September at an annual rate of 26.9 per cent, which is more than double the 1/ per cent target which the Chancellor had fixed upon himself. One of the mairrreasons for the sharp increase was the fact that the Treasury had been unable in this period to sell any gilt-edged stock to the non-bank public. Another reason was that cdmPanies had been pushing up their import orders--and delaying the cash collection of their export sales—because of the continual fall of sterling in the exchange markets. Why, asked, did the Chancellor not immediately issue an order to stop this exchange hedging, this Persistent abuse of 'leads and lags'? Why uId not the Governor of the Bank immedi4.telY can the heads of the investment institutions into his parlour for a frank talk and an e,,xplanation of the Government's strategy rdr the gilt-edged market ? It was surely wrong to act so precipitately as to hoist Bank tdie up to 15 per cent--a penal rate which wilI cause unemployment to rise, inflation to worsen and business morale and profitability to fade. Surely the Governor of the Bank should have advised against a monetary Move so reminiscent of a bankrupt banana rePublic.
Instead of a quiet talk in the secretive tiovernor's parlour I can imagine an exremelY acrimonious debate when the bankers and life insurance directors are finally e..alled in for advice as they should be. Relas at present could not be worse. They `tve been fooled and robbed by the Bank 'sstle of two 'short' and two 'long' tap stocks
at different prices within a few weeks, a move which not even a Jim Slater would have countenanced. The result has been that they have lost four points on £600 million of the first 'long tap' and over five points on £600 million of the first 'short tap'. No wonder that they are sulky and only nibbling at the new 'long tap' which gives the fantastic yield of over 16 Percent up to 1988. Any tiro could have told the Chancellor that no foreign holder of sterling would be persuaded to hold on to his pounds just because the Bank had been forced to put up its rate of interest to a South American level.
At the moment of writing sterling has improved because the German mark has been upvalued. But it could fall again to any level while the 'official' reserve holders of sterling remain unfunded. This is a perennial problem which all IMF members have known about for years and funked resolving. In June 1975 these reserve holdings of sterling amounted to £4.6 billion but since then the Arab and Iranian holders have liquidated nearly £2 billion reducing the total to the present level of £3.1 billion. The Germans are willing to help the funding but the Americans are equivocating—thank goodness, Mr Simon, the US Treasury secretary, is retiring--and the French remain cynical and aloof. Nothing is likely to be done quickly. So the Germans will probably have to help us repay the drawings on the s5.3 billion stand-by credit which has to be repaid on 9 December before our I M F loan of S3.9 billion can be arranged. To make matters worse, Italy is also on the brink of default, having pledged its gold against German credits which it cannot now repay. As a final upset to an awkward international crisis the OPEC oil cartel are threatening to raise oil prices by 10 or 15 per cent in December which would give another blow to our balance of payments deficit.
How much gloomier, you may ask, can one get ? Much more, if no action is soon taken. The so-called 'rich' countries (two of them near bankruptcy) which go by the name of 'the group of ten', must call an emergency meeting to decide how to meet the approaching financial and economic storm threatened by the OPEC cartel and the sterling crisis. This is not a crisis of capitalism. It might be called a crisis of socialism, because the race towards a socialist state has landed too many countries in too much debt. The developing countries alone now carry a debt load of S30 billion. Over 121 per cent of their exports are needed to pay their interest charges. But even they are not so buried under debt as the socialised UK whose debt charges now take up over 6 per cent of the gross national product. The question is whether we can extricate ourselves from this financial bog without a social or political explosion.
Believing, as Keynes did, in the innate rationality of man, which many now dispute, I still believe we can avoid an explosion if the crisis is properly explained to those reasonable trade union leaders who lack not intelligence but financial expertise. The man to do the explaining is, of course, our extremely astute Prime Minister who can talk to trade unionists in simple but very foreceful language. He will have to explain to them that for two years the standard of living of their members will have to decline until increased productivity through less overmanning brings a boom to the export trade and a rise in employment. He could promise them a share in the resulting profits through participation in a national unit trust whose units (of private enterprise equit ies) could be given to them for dividend income or cashed in for capital profit. The worker must obviously be offered a bonus for his wage restraint. Mr Callaghan has already told the economic truth to his party conference: 'We used to think that you could spend your way out of a recession and increase employment by cutting taxes and increasing government spending ... that option no longer exists.'
The trouble is that some of his own Cabinet and his own party did not believe him. One member of the Cabinet has openly said that he disagreed with his economic and industrial strategy. It is not for me to express political opinions but I would have thought that before the Prime Minister can speak to the trade unions with the authority required he would have to get rid of recalcitrant mini sters. I would love to see, for example, Mr Tony Benn replaced as Minister of Energy by an expert technocrat like Sir Arnold Weinstock who not only understands the right development for nuclear energy but the correct industrial strategy for an export-led boom. I do not believe that the trade union leaders are as stupid as the lefties in the Labour Party. I believe that Mr Callaghan can convince theM of the economic truth he has so clearly and courageously expounded. Which makes me almost a quiet optimist.
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