In the City
Controlled dividends uncontrolled dollar
Nicholas Davenport
The blatant cynicism of the Government's attempt to force through an extension of divided control was not lost in the City. The pretext that rich men get rich out of dividend control was not lost in the City. The pretext that rich men get rich out of dividends raised a very big laugh. The highest tax bracket in the world 98 per cent on investment income in the top bands could not leave anyone rich. As gross dividends account for less than 3 per cent of all personal incomes the idea that dividend control is necessary for the blind pursuit of egalitarianism is a deceit put upon an ignorant public to make them vote Labour and agree to the 5 per cent pay guide line for the next round of pay settlements. The market quite rightly ignored this political gerrymandering and kept on its 'bull' tack. The equity chart, showing a recovery in the index from 433 in March to 484 this week, certainly suggests a pre-election or 'Thatcher' bull market. But the volume of trading is so small that it is not very convincing.
Dividend control, which has been keeping down the market value of equity shares, has had a long history but no one in the City can forget that a dividend freeze (excluding investment trusts) was actually imposed in 1972 by a Conservative government under Mr Heath. It was followed by a 5 per cent limit of increase except where new capital raising was involved. Mr Healey raised the limit to 12+ per cent and from 1974 reduced it to 10 per cent. But under the new Bill. which may or may not pass this week, there is a slight amelioration. A permit is granted to companies whose dividend cover is raised above the highest level recorded since December 1972 to increase their dividend in line with the increase in their profits, but it is restricted to companies whose financial year ends after 31 July. According to stockbrokers Phillips and Drew about 30 per cent of leading companies will be able to raise their dividends on these grounds and the market has been tipping the prosperous store companies. The average increase in dividends last year was 13 per cent and a slightly higher increase is expected this year. A bull market should be able to feed on such dividend expectations.
My objection to dividend control is that it distorts the capital market, making equity shares take on the appearance of fixed interest stocks. The raising of risk capital by companies wishing to expand and take on more workers is therefore frustrated. Dividend control is thus against the active workers' interests. It is also against the interest of retired workers whose pension funds rely upon the dividends received on their predominantly equity assets. The fact that a dividend control Bill is considered necessary by Mr Callaghan's government is therefore a measure of their contempt for the intelligence of the average voter and of their disregard of what makes a mixed economy tick.
The gilt-edged market has lately been improving, which is a steadying influence for equities in this unsettling political phase. The money supply is well under control and sales of gilt-edged stock to the non-bank public have been more than enough to finance the public sector borrowing requirement without inflation. The 'long' tap stock, Exchequer 12 per cent 2013/17, was exhausted this week £1000 million
had been issued and as there should be little or no increase in the Treasury bill issue the market is expecting a cut in Bank rate, now 10 per cent. The only reason why this has not already been made is the fear of a further rise in American interest rates. The dollar is plunging into another crisis. Gold is rising to a new peak over $200 an ounce as the only possible remaining store of value recognised by increasingly nervous holders of dollars.
The new slump in the dollar has been caused by the expectation that the huge deficit on the American balance of payments will not be reduced this year but increased and that President Carter has no hope of getting Congress to pass his EnergY Bill. This dollar crisis is undoubtedly making the traditionalists at the Bank of England nervous about the future of interest rates. The sharp recovery in the American economy in 1976-77 was fostered bY cheaper and more plentiful money, which is the normal capitalist panacea. The US Treasury bill rate fell from 94 per cent to under 6 per cent by March 1975. The resulting rise in industrial output was remarkable. The output index rose frail, 105 in the first quarter of 1975 to 124 in the first quarter of 1977 and to 129.8 in the first quarter of 1978. Cheap money generally does the trick in a capitalist economy. The Federal Reserve, however, began to get worried about the growth in the moneY supply twelve months ago and raised their discount rate from 4.6 per cent to 6+ Per. cent by the end of 1977. It is now 6i Per. cent and looks like moving to 7i per cent. It is even being talked up to 8+ per cent or 9 per cent which would push commercial prime rates up to 10 per cent. Are we really going to allow dear money in America to bring dearer money here? It would be madness. Mr Callaghan should have told President Carter that there is only one way to steady the dollar without upsetting interest rates at home or abroad and that is to issue gold convertible dollar bonds, say, 3 per cent five-year bonds convertible into gold at under $200 an ounce. The present American holding of gold bars would enable an issue to be made of about $50 billion worth of bonds. They would be a rage in the market. The present over-supplY c/f, unwanted dollars would vanish in a week. have personally written to Mr Robert Strauss, the President's man in charge 0f inflation, to suggest this obvious way out f01. a government which hates gold and believe; in 'the almighty dollar' but I have so far had no response. Purveyors of good ideas are often ignored. Whether it is a good idea for the Lab°ar Party to enter into a social contract with thde trade union movement regarding pay an ignore Parliament is certainly not I.": ognised in the City. It has never accepted Mr Callaghan's idea that Labour is now thet natural government for Britain. Witt seems to be becoming is the natural non' parliamentary government.
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