MONEY AND CREDIT BRITISH INQUIRY HAS WIDE FIELD TO COVER

Press, Volume XCV, Issue 28263, 29 April 1957, Page 8

MONEY AND CREDIT BRITISH INQUIRY HAS WIDE FIELD TO COVER

[Bv '

"LYNCEUS”

of the "Economist"]

[From the “Economist" Intelligence Unit]

London. April 12. —The major non-fiscal announcement that emerged from Mr Thorneycroft’s first Budget was the decision to institute another detailed inquiry into the working of the monetary and credit system. Like its famous predecessor, the Macmillan Committee which reported in 1931, this inquiry will be presided over by an eminent lawyer, Lord Radcliffe. There is a vast field for the committee to investigate and on which to make recommendations.

The authorities responsible for monetary and credit policy -' in Britain have shown ominous signs of groping in recent years. Massive mistakes were unquestionably made immediately after the war when a policy of ultra-cheap money built into the economy a great deal of the inflation, suppressed at the time by specific controls, which has been emerging disconcertingly since 1951. And since the country turned its back on controls in 1951 and began to discover the long discarded weapons of over-all credit control, there have been all too many signs of uncertainty of touch, loss of familiarity with the old techniques, and inability to devise new and workable substitutes.

Open admission of this lack of certainty and self-confidence has been provided by the fact that the Treasury and the Bank of England have had to resort to appeals and exhortations to the commercial banks to implement their policy of restricting credit. Many commercial bankers, for their part, have resented this attempt by the authorities to pass the responsibility to them. Basic Techniques

The acrimonious debate on this subject has been enlivened by controversial discussion of the basic techniques of credit control: whether it should or should not include resort to variable cash and liquidity ratios for the commercial banks, whether the Bank of England should have its authority over the commercial banks reinforced by making statutory what is now enforced by the pull of tradition and informal consultations; whether, in fact, the mechanism of bank rate should have any part to play in the present-day world of credit control.

If differences of opinion can be entertained by the members of the banking community itself on such fundamental subjects as these, it is certainly high time the whole scene was reviewed with the authority and comprehensiveness that the committee of inquiry can give it. The Macmillan Report did its work excellently; some might say rather too well, for it will be recalled that it was this document which first told the world authoritatively that the short-term banking liabilities of the London market to the rest of the world exceeded the immediately available assets in gold and short-term claims on foreign centres. This was one of the factors that led to the run on sterling in the summer of 1931 which in the autumn of that year caused the abandonment of the gold parity. No Secrets There are no such dire revelations to be made this time. The sterling liabilities have grown immensely since that time and, in relation to them, the reserves are more inadequate than ever. But it is the prerogative of any banker to be technically insolvent at any particular moment of time. Moreover, the facts of this situation hold no terror today. They are revealed every six months in the balance-of-payments White Papers which the British Government now publishes with the wealth of detail that was never vouchsafed when the position to be revealed was so much stronger than it is today. The Macmillan Report gave a clear exposition of how the system worked before 1931. It was no sooner published than much of the background to it was changed by the departure of sterling from the gold standard. That event, important as it was, must fade into insignificance compared with the changes that have since supervened in the realms of credit policy. The national debt has been enormously enlarged as the result of financing a second world war; the structure of bank assets has been changed beyond recognition; wide segments of the industrial system have been nationalised and now depend for their finance on the Exchequer; above all, a new political climate prevails in which the categorical imperatives of economic policy are full employment and social security. Swing of the Pendulum It is this last factor that should dominate the new inquiry and that should differentiate it most clearly from its predecessor. The problem at the time of the Macmillan inquiry was how to pump more credit into the economy. It was set up at a period of grim underemployment of the country’s resources, human and material. Nor was this a phenomenon peculiar to Britain. The whole world was in the grips of a depression which seemed to demand of it every economic absurdity: the burning of surplus crops when people in the same or neighbouring countries were hungry; the rotting of men in compulsory idleness when there was so much that needed to be done.

The pendulum has swung far during the ensuing quarter of a century; and it has swung largely by reason of the teaching of Keynes, who was one of the members of the Macmillan Committee. It has, in truth, swung too far. The problem today is not to find credit to fill the so-called “Macmillan gaps” but to prevent the country from trying to do too much with the resources available to it and so setting in motion a vicious circle of inflation. The major problem of the second half of this twentieth century will be to reconcile full employment and all that it implies with stability in the purchasing power of the currency. Admittedly the solution of that problem will call for political rather than economic decisions, for moral courage on the part of our leaders rather than technical expertise on the part of our central bankers and Treasury officials. It will be well to have this said without ihe pulling of any punches by a committee of such authority as that which is about to be set up. Beyond this supremacy of the political factor in the proper con-

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duct of our monetary affairs there lies a field of vast importance in the study of credit techniques and their applicability in the world of today. The danger of an inquiry of this kind is that it fosters in all too many minds the comforting thought that some new technical device, 'some credit “gimmick”—whether it be Social Credit, or- compulsory liquidity ratios for the commercial banks, or interest-free Treasury Bills—will achieve the miracle. It is right that the witch doctors and the odd fringe, however lunatic, should air their views and give their evidence. The committee members are unlikely to be taken in, though it is unfortunate that there will be no Keynes among the members to confound the currency cranks and prick the pomposity of the austere and orthodox, tycoons of the banking world.

Among the main questions that will have to be answered by the committee is why the British economy has become. much more sluggish than others in its response to the touch of credit discipline. Is it because the burden of taxation diminishes the net tax-free impact of high rates of interest? Is it because too large a slice of the economy is in the public sector and, therefore, largely insulated from credit discipline? Is it because the timing is wrong and because the statistics on which decisions are made are out of date? Is it because the technique of informal central banking control ure also out of date? Or, to come back to an earlier point, is it because the moral courage required to make really effective use of the available weapons is lacking?

For its answers to these and related questions, the Radcliffe Report will be eagerly awaited. It is to be hoped that the inquiry will not be too leisured and that the membership of the committee will be chosen for the technical qualifications of the people concerned and not for their representational attributes. Let us hope for a real experts’ report and not for a series of minutes of dissent, each bleating the “baa” of some vested interest.