L 7 pecb.0 or Ma y 3 1975
ECONOMICS
AND THE CITY
Planning agreement for the City?
Nicholas Davenport
It is proper to remind my colleague Skinflint that he was sceptical of the strength of this year's bull market on the Stock Exchange, Which I was not, and that he was even prepared to bet me that the FT index would not rise from its low of 146 to between 300 and 350 as I said it would. Last week it touched 3551/2. Actually I am not crowing. I Was rather shocked at its jump of nearly 20 points in two days because I thought that it showed traces of panic or madness. It was associated with a fall in the sterling exchange to a 221/2 per cent discount on the weighted average of currencies fixed in December 1971 (by the Smithsonian agreement) and with a rise in the dollar investment premium of 13 points to over 100 per cent (equivalent to 801/2 Per cent allowing for the fact that the premium is based on the fictitious exchange rate of $2.60 to the £). In other words, the stock market jump seemed to be reflecting a panicky flight from sterling — Krugerrands also rose to a 20 per cent premium on the gold price — Which is not a proper basis for an investment boom in British equity shares.
Last week I gave the sound reasons why Mr Healey's budget Speech justified a further select investment of institutional funds in the equity markets. Nothing has happened since that speech to Justify a panic-stricken flight out of money. The inevitable final collision between a 'national' government — Mr Healey's present Posture — and the militant breakers of the 'social contract' is no nearer. Mr Wedgwood Benn is no madder (I deal with his new paper on industrial policy later). There is therefore no special reason to account for the money madness of last week. I am therefore inclined to think that it was due to two causes — natural and technical.
The natural cause was a belated recognition that the budget strategy, which was good for industrial • recovery, and for a switch from the manufacture of consumer goods to the manufacture of export goods, implied that sterling would be likely to fall with government connivance until the rate of inflation had been brought down. Indeed, the weakness of sterling may be due to the fact that foreign holders had anticipated this fact and had come to the conclusion that sterling depreciation would
probably extend from 221/2 per cent to 25 per cent. The continued fall in interest rates — marked by the further cut in our 'Bank rate' to 934 per cent on April 18 — indicated that this was probably government policy. The technical reason is the volatility of the dollar investment premium. Under existing rules a speculator can 'buy premium' for a rise because he does not have to give evidence of investment or return it to the Bank of England for six months. The market in dollar premium has become extremely tight and narrow. There has been little activity in South African and Australian shares, whence the supply of 'premium dollars' usually comes, and as the premium rises sharply on quite a small speculative demand the holders of premium dollars become emotionally less likely to sell because when they have to give up 25 per cent to the Treasury their 'Ioss' is larger. I have always said, but the officials will not listen, that the 25 per cent grab should have been imposed on purchases, not on sales. This would have slowed down investment in 'dollar securities and would have made for a less volatile market. I must add that speculation in premium is mad speculation. One can buy a British investment trust holding nothing but dollar stocks and not pay any premium at all — and perhaps buy the dollar stocks at a discount on net asset value.
As regards Mr Benn's 'madness', the paper which he has presented to the Labour Party's Industrial Policy Sub-committee, entitled 'A Ten-Year Industrial Strategy for Britain', is no madder than many I have seen from academic economists. (Mr Francis Cripps is his personal economic adviser.) In order to achieve 'full employment' it seeks to double the amount of our annual investment in manufacturing industry without putting forward any criterion for profitability. (The rumour is that Mr Benn does not .understand a profit and loss account but that surely does not apply to clever Mr Cripps.) The paper abounds with the non sequitur. Had the authors seen Sir Monty Finniston's £4,500 million investment programme for British Steel? He claims that he could produce 37 million tons of steel with a workforce of 50,000 against the present 220,000. Japanese steel works have annual production rates of 750 tons
per man against British Steel's rate of 150 tons per man. What makes nonsense of these planning papers is that British trade unions have never been interested in increasing productivity per man out of new investment. They formed the British Labour Party to destroy capitalism and they are not interested in increasing its profits. If investment in manufacturing industry has been running down in this country it is for that profitability reason. Investment abroad, and investment in many service industries, has not only been more profitable but has enlarged our net invisible income, which Mr Benn seems to ignore. To quote Samuel Brittan, who would have been a better adviser than Mr Cripps: "Nothing that has emanated from any Minister or adviser gives us the slightest reason to suppose that a State body will be successful in finding worthwhile investment which the private sector has missed. All the evidence is that it would be highly susceptible to constituency pressures (and TUC?) and be leant on heavily to preserve existing jobs, irrespective of profitability." As Lord Plowden told his TI shareholders, British management can be improved but it is far more up-to-date than our antiquated TUC structure.
What has upset the City is Mr Benn's proposal that the life and pension funds should be compelled to invest a proportion of their net annual increase, which he over-es timates at £3,000 million, in manufacturing industry, either as loans to the National Enterprise Board or as contributions to other company funds approved under the planning agreements. I have been expecting such a proposal for a long time. For forty years I have been calling attention to the absurdity of allowing the life and pension boards to invest their huge surpluses just as their fancies took them without any guide-lines from the Treasury or the Bank. I was never in favour of dictation by the state but advocated a voluntary planning agreement. I could never get Labour Chancellors interested. So I am not surprised at Mr Benn getting angry and accusing "a small financial community" of ignoring manufacturing investment, which would benefit the economy, and concentrating "on heavy speculation in land and property" which would only benefit their funds or shareholders. (Of course it didn't) Mr Benn exaggerates, as usual, but the City fathers had it coming to them.
It is not likely that Mr Benn's authoritarian proposals will be accepted by Mr Wilson as government policy. The Government's huge investment commitment to British Leyland will cause them to go slow over Mr Benn's paper. But if we eventually arrive at some sort of planning agreement between the City fund managers and the Chancellor it will be good for all of us, particularly for the City.
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