In the City
The end of the affair
Nicholas Davenport
The analysts calculate that in the financial year from mid-April the gilt-edged sales to the non-bank public amount to over £2,000 million — much more than was necessary to put a damper on the money supply. The confrontation in the City which ended in the victory of the Old Boys Brigade and the defeat and humiliation of the Chancellor should be written down in the history books as the biggest farce of all financial time. The farce reached its climax when the Bank of England, which had just re-imposed the `corset' on the clearing banks, had to hand them back £640 million of special deposits last Thursday to ease the squeeze it had created. But it is really too important a monetary affair to be treated as a joke. It was serious enough not only to upset the economic policy of the Government, which was one of mild reflation and cheap money, but to cut short a recovery which was just beginning to show up in the consumer trade and unemployment figures. Was it necessary to have a 10 per cent Bank rate to sell £2,000 million of `tap' stocks to the nonbank public?
At the risk of boring my readers I must once more explain that monetarism has been dragged into the front of the counterinflation policy because the politicians funk having an incomes policy. We all know why. 13ut monetarism is no real substitute. The monetarist Governor of the Bank has explained that the M3 money supply figure is his target monetary aggregate which he intends to keep under control by regulating the interest rate (MLR). But as Mr Blac kaby, the deputy director of the National Institute of Economic and Social Research,
pointed out in a letter to The Times the M3
money supply is a poor and erratic indicator of the state of the economy, being affected by foreign money inflows and outflows and by the liquidity or investment whims of the City institutions, the directors of the great life and pension funds whom I call the Old Boys Brigade. (I was once one of them.) When they want to stay liquid and not invest their millions in gilt-edged stocks, up goes the money supply and up goes the blood pressure of the Governor of the Bank who promptly puts up Bank rate. A more farcical way of controlling the economy can hardly be imagined.
I was intrigued by Lord Kaldor's letter to The Times of 19 June in which he said that the Governor's chosen method of regulating the money supply by varying Bank rate was bound to have the opposite effect to what he intended. To make interest rates an effective regulator of M3 the Bank rate instrument ought, according to Lord Kaldor, to be operated in reverse — by lowering interest rates whenever M3 rises too much and raising them when it falls too much. For in that case any sign of an excessive rise in M3 would cause an institutional rush to buy gilt-edged in the expectation of a cut in Bank rate and a rise in the market. But this poker game between the Bank and the City institutions is too absurd to contemplate; it makes nonsense of a serious economic policy. As Mr Blackaby said in his letter, economic policy becomes a matter of monetary 'myth' interpretation. In primitive societies virgins were sacrificed to bring on the spring. The Chancellor is no virgin but he was laid on the altar of sacrifice in the Commons for a monetary myth. Mrs Thatcher was very wise not to join in the sacrificial rites. She had the sense to see that the joke was being carried too far.
Where do we go from here? Obviously
we must work out a better system of monetary control. The first step, says the Economist, is to produce better definitions of money supply. Norman Macrae adds: 'The Bank of
England's latter-day monetarism has been effected by looking at complicated money supply figures five weeks old, tarted up by even more complicated seasonal adjusters which have recently been discovered to be totally wrong, and with decisions taken vaguely by a committee which sends out such instructions as "ask the government broker to sell a few more gilts if he can".' We all want to avoid having to give positive directions to the life and pension fund managers as to their investment policy but clearly if we have another Labour government which is left-oriented the institutions will not only be directed but nationalised. 1 presume the prime minister is hoping to keep this fatal nationalisation clause out of the election manifesto by telling his wild men that they must wait upon the recommendations of Sir Harold Wilson's ponderous committee whose inquiry into the working of the City institutions will not be published before next year.
It is sad that this farcical confrontation between the City institutions and the Treasury should have brought the doomsday of nationalisation nearer. The Old Boys Brigade in the City are not unreasonable men. They are always anxious to do the ' right thing by the economy. I remember when I belonged to them —long ago in 1966 — I brought three of the most important 'Life' chairmen to see Jim Callaghan when he was Chancellor of the Exchequer. I had persuaded them to support a Public Works Loan Agency, if the Chancellor was prepared to launch such a body, with 1200 million a year without disturbing their current purchases of gilt-edged stocks. Nothing came of the meeting because the Chancellor was preoccupied with the perennial sterling crisis, but it showed that if the Treasury called upon the City institutional chairmen lila reasonable way they would always offer their co-operation. 1 recall insisting with dear old Dalton that taking over 'the com
manding heights of the economy,' as the Marxists still desire, was quite unnecessary if the life and pension funds agreed to cooperate and work with the government's economic and financial policy. On this last occasion, when confrontation blew up last week, unfortunately, no attempt was made to talk to the fund chairmen personally and confidentially either by the Chancellor or by the Governor of the Bank. In my view the Governor failed to do what even Monty Norman would have regarded as his duty. A lot of bad blood has now been roused. I hope that the Chancellor will not allow it to go to his head and drive him into an act of spite towards the City. In July the dividend control, now limited to 10 per cent increases, is due to end. If Mr Healey keeps it on just to annoy the City and placate the Marxist left of his party it would be an unworthy act of an over-strained and overanxious Chancellor. A restoration of dividend freedom would help the revenues of the life and pension funds, which are held for no one's benefit but that of workers, and would encourage the managers to co operate more readily with the Treasury in their funding operations. Let us hope that the prospect of an early election is not going to drive everyone out of their native common sense and humour.
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