Thee flight from savings

CHRISTOPHER FILDES

This year and last seem already to have found their place in the economic history books: `1967-68: the Flight from Money.' The books will point to the steep rise in stock market prices throughout 1967, not justified by any improvement in company earnings. This can be seen in retrospect as signifying a general unwillingness to hold either cash or anything denominated in cash terms—anything that would lose value if the currency were devalued. Nor, when the so fully anticipated devaluation came, did it prove the straightforward cor- rective measure which many observers had hoped for. Partly because it was in truth a forced devaluation—will the books bother to note that the then Prime Minister called it `carefully planned'?—it made clear that there" were limits to the power of Chancellors and Governors, and for that matter of central bankers acting in concert. The collapse of the gold pool four months later underlined the point.

Thus the central bankers' credit, literal and metaphorical, was challenged, and the curren- cies dependent upon that credit were distrusted. An inevitable casualty was the hope that interest rates might start to turn downward. A high interest rate is the sign of a distrusted currency —it represents the necessary extra incentive to hold that currency, and is mirrored in the forward discount at which the currency stands.

To the extent that paper currencies are dis- trusted, all interest rates will be high. So the pound, though surely not overvalued, still finds itself buttressed by a Bank rate higher than what is the 'crisis level' of 7 per cent.

And so it is that, although interest rates on National Savings were already at record levels, the Chancellor chose to increase them as part of his budget measures; and the building societies, although their rates are also a record, are wondering how long they can hold them. It now looks probable that an increase will be recommended this month. The present level of building society rates-41 per cent net to depositors, equivalent to 7+ per cent gross to those who pay income tax at the standard rate—was established in December 1966. The societies had struggled with a government which was trying to hold prices down and had, therefore, referred the societies' proposals to the Prices and Incomes Board.

When the increase was approved, the crisis (the 1966 crisis, that is) was already past; and within a month Mr Callaghan began his attempt at 'monetary disarmament' which brought Bank rate down from 7 to 51 per cent. The societies were happy to let their rate stay where it was. Although it brought in funds at an unprecedented rate, the demand from borrowers kept pace. Indeed, the pace of

borrowing remains hot. In February, the last Month for which full figures are available, the societies lent £130 million to home-buyers: for February 1967 the figure was f82 million.

One glance at the societies' receipts makes clear that this cannot go on. In October 1967, with the devaluation crisis looming, the societies took in £196 million, and £89 million was withdrawn. By February receipts had fallen to £158 million and withdrawals to £118 million.

The societies express this in terms of net receipts per working day, and this figure looks even worse : £1.6 million for February against £4.1 million for October. And there is no doubt that the March figures, when they come, will make February's look positively healthy.

This leaves the building societies faced with some unpleasant guesswork. First they must decide how much of their setback in the first quarter of 1968 should be put down to a once- for-all 'spending spree.' Consumer spending has been very high, as was natural : everyone wants to buy at the old prices—pre-devaluation, pre- budget—while they last. How far has this demand anticipated spending that would normally have come later in the year? The Chancellor would like to know the answer to

Itself one, too. If demand proves to have burned Itself out, then the increase in withdrawals will stop: but that is only half the battle, since the money which has been committed elsewhere (to new cars or what not) is lost to the societies.

Then the societies must guess what chance there is of a fall in interest rates generally. And if they return gloomy answers to the first two questions, they must ask a third: how would the Government take an attempt to put rates up? In these matters the societies have encountered a certain schizophrenia, and may do so again. Higher prices are part of the logic of devaluation, but they don't exactly win by- elections. Last week regulations were laid before Parliament reducing the reserve ratios for the larger societies. At present all societies with trustee status need to keep reserves of at least 2-f per cent of their assets: for the biggest societies this will fall to 11 per cent. But this is more the removal of a brake on the speed of expansion than the release of hoarded cash to needy house-buyers.

Whatever the building societies decide, the Chancellor has made clear that he does not expect the existing interest rates to give him what he wants from the National Savings movement. He has re-vamped the National Development Bond, itself Mr Maudling's creation, into a British Savings Bond; and it now pays 6 per cent gross, with a 2 per cent bonus if the bond is held for five years. He has also increased the rate of return on Pre- mium Bonds from 4f to 41 per cent free of tax. Premium Bonds are more than ever the surtax-payer's friend. For if 41 per cent tax free was a healthy return to anyone paying nineteen shillings in the pound, consider what good news 41 is now that the top rate is over twenty-seven shillings!

With the 1967-68 accounting year almost over, two things are certain about the National Savings movement's performance: first, that it has been better than in 1966-67, and second, that it has been more expensive. Net new sav- ings for the first fifty-one weeks of the year were £209 million, almost double the compar- able figure for the previous year. But money still pours out of the cheap-to-run ordinary accounts of the Post Office and trustee banks (deposits down by £121 million). The Chancellor must be wondering whether the only way to keep the movement going is to bump up interest rates. The success of the Trustee Savings Bank unit trust (not included in these figures) and for that matter of unit trusts generally must have been instructive : from his point of view the impor- tant thing is saving, and whether it goes into equities or (via National Savings) into gilt-edged is secondary. January and February were record-breaking months for the unit trusts. Maybe what the Chancellor wants is another kind of saving; not just better-rewarded fixed- interest saving.

One new approach is suggested this week by Mr Brian Reading, in a Conservative Research Department pamphlet. He suggests a save-as- you earn scheme, available within certain income brackets. The saver could choose to have up to, say, £150 a year of his salary paid

into a special savings account, where it would be blocked for three years. After that he could collect it tax-free, and with accumulated interest. Mr Reading himself says that this scheme would give only a limited breathing space, and would then succeed or fail accord- ing to whether the individual saver thought he had been fairly treated.

But that is a test to which all forms of saving must submit, and which National Savings since the war have largely failed. It may well be that this year's 'spending spree' and last. year's equity boom are two sides of the same depre- ciating coin; that trust in currencies has been permanently eroded. A -new car or a holding of equity units are, on this argument, safer than conventional savings; in which case the building societies, the National Savings movement and the Chancellor have worse headaches coming to them than they know.