Restoring the City's confidence MONEY
NICIIOLAS DAVENPORT
The stock markets, as I have said, can suffer bouts of hysteria but when they return to normal—as they have at present—they can generally be relied upon to present a truer picture of economic reality than the econo- metricians of Whitehall. This is because the trend of an open capital market is shaped by the net sum of investment decisions of thousands and thousands of intelligent people— some the professional managers of immense life, pension and unit trust funds and some the keen-witted businessmen managing industrial and trading companies—whose feet are very firmly planted on the commercial ground, whose minds are moved by a sense of practical proba- bilities and not by political dreams and wish- fulfilment. One of the most remarkable—and regrettable—trends which the capital market has recently developed is an expression of dis- belief in the ability of the Government to make a success of its devaluation policy at $2.40. Export shares which should have rocketed have shown only a modest improvement. Consumer shares which should have plummeted have been remarkably steady. Government bonds which should have attracted foreign as well as domestic buying have been miserably weak. Metal, gold and finance shares with large over- seas interests have been booming and the premium on investment dollars has soared to 35 per cent, which is equivalent to a pre-devalu- ation premium of 57 per cent_ Is the market being over-pessimistic or over-cynical or is the City generally being over-bloodyminded?
One simple explanation is that the market hates uncertainty and is merely expressing fear of Mr , Jenkins's coming budget (19 March). This anxiety has been intensified by the new 'roc Economic Review which gives the Chancel- lor advice on how to transfer wealth from the rich to the poor. It suggests, inter alia, a tax on wealth at the annual rate of 3 per cent on property above £20,000. No sane Chancellor could, of course, contemplate a capital levy bringing in around £2,000 million a year unless he wanted to kill all private investment and enterprise. No sane Chancellor would even contemplate a wealth tax of 1 per cent, the collection of which would cause a complete breakdown in the already overburdened tax collecting offices. But this Government has thrown so many bones to its left wing that the Fore suggestion of a wealth tax—perhaps even in the more reasonable form of a gift tax— could throw a capital market into panic and set in motion a flight of private capital to the far corners of the sterling area overseas. This would destroy any chance the Government might have of making a success of its devalua- tion policies unless it were prepared to turn the British economy into a siege economy (which it would not have the.political strength to do).
It is foolish for Ministers to say that the City is obsessed with hatred of socialism and all its works and has become a breeding ground for defeatism—the foot-and-mouth disease of the square mile. There are no doubt some
individual haters and purveyors of alarm and despondency but the mass of City managers in control of the vast flow of public savings— which now exceed £1,200 million a year—are reasonable men who would willingly collaborate with any government taking intelligent action to right the balance of payments. But Mr Callaghan never took these managers into his confidence. He did not seek their support for the improvement of government credit in the management of the gilt-edged market or for the improvement in the balance of payments by an agreed and limited policy of disinvest- ment. Instead he put their backs up by insisting on 25 per cent of the dollar premium.
It is surely tint to put an end to this negative policy of non-cooperation with the City. The Treasury may think that the 25 per cent grab justifies itself by bringing in some £80 million worth of dollars a year but it is a very bad advertisement for Britain to tell the world that our professional investors are willing to pay a premium of 35 per cent to get out of the country and exchange sterling equities for dollar. The Treasury is, of course, partly responsible for the soaring premium. It has cut down the supply of investment dollars in the pool by the 25 per cent grab and it has increased the demand by allowing the direct business investor to apply for investment dollars. I suggest that the Government should immediately withdraw this privilege from the businessmen and restore the investment dollar pool to its proper function—a pool in which only the portfolio investor can deal for the routine switching required to maintain or im- prove investment values. I am sure that the portfolio managers would agree to some posi- tive disinvestment over a period if they had their management freedom restored by the abolition of the 25 per cent grab. They would then be free to exercise their investment judg- ment and reinvest through the pool when they thought Wall Street was a `buy.' At the moment it is vulnerable. After a rise from the 1966 low of 733 to 9,45 in September 1967 the Dow Jones index has now fallen to 865. If the 25 per cent grab had been removed last September the Treasury might well have seen a disinvestment of $1000 million by March.
More intelligent cooperation between Treasury and dollar portfolio managers might be the first step towards the return of confi- dence in the City. The next would be to call in the managers of the life and pension funds to a conference at the Treasury at which the government strategy over borrowing and the
rate of interest could be discussed—confiden- tially and frankly—in the national interest. After that the next get-together should be a conference for the managers of the unit trusts into-whose coffers are now pouring millions of new money, for their ingenious equity-linked endowment life policies. There has been talk of the Treasury requiring a percentage of this new money to flow into government bonds if the privilege of income tax reliefs on the subscrip- tions is to be continued. Let this point be dis- cussed with a view to sustaining the national savings movement. •
What is the good of appointing Mr Harold Lever, an ex-banker and financier, to the post of Financial Secretary of the Treasury if his services are not to be used in the important job of cooperation with these City financial and investment managements? Mr Callaghan held fast to the old Treasury policy of secrecy and aloofness which in these critical days is com- pletely out of date. Mr Jenkins might well in- augurate a new policy of frank and friendly discussion with the financial interests of the City which still control 'the commanding heights of the economy.' Let the drawbridge to the citadel be lowered: let the shut doors of the Treasury be opened.
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