Fixed Interest Savings PROTECTION FROM INFLATION URGED IN SWEDISH REPORT

Press, Volume CIII, Issue 30553, 23 September 1964, Page 16

Fixed Interest Savings PROTECTION FROM INFLATION URGED IN SWEDISH REPORT

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"LOMBARD"

tn the "Financial Timet"]

("Reprinted arrangement.)

The fact that the cost of living has been rising in Britain at a rate of 3 per cent per annum since the opening of the 1960’5, shows only too clearly that, if the British authorities have devised a procedure for keeping inflation within bounds, they are still as far as ever from devising a cure for it. The only realistic conclusion that can be drawn from this is that persistent erosion of the purchasing power of money must now be regarded as a standard feature of the economic scene, whether we are operating in growth conditions or not.

So I would have thought that one of the first things to which the next Government ought to direct its attention is the matter of providing savings needed to support public sector development with the safeguards against depreciation value at present available only to savings financing private sector investment. Index-tied Loans Any lingering doubts in Westminster as to whether it would be appropriate to take this step could well be dispelled by examination of a recent report on the usefulness of index-tied loans prepared by a special committee of experts in a country that is rightly regarded as being one of the most progressive and enlightened in the world— Sweden. It is broadly true to say that hitherto official conversions to the principle of index-linking-for the capital and -interest of Government issue have taken place under duress, so to speak. Thus in most cases it has occurred because the public’s understandable reluc-

tance to invest its savings in monetary form in face of a rapid fall in the value of money produced by persistent inflationary excesses has become extremely marked—so much so that the governments concerned have simply had to offer some form of purchasing power guarantee on their securities if they were to stand any chance of raising the finance needed to support official spending. But the Swedish conversion is the result of a long cool look at the problem presented by the vulnerability of fixed interest saving to the inflationary fashion—an investigation that seems to have been prompted in the main by a desire to find the answer to the question of whether present arrangements strike a fair balance between those devoting their savings to the promotion of public sector development spending and those employing them in private sector activity. Experts’ Conclusion The conclusion these experts reached—and it can hardly be

regarded as a surprising one —was that safeguards against depreciation of value having been in use in other fields, there were no convincing arguments for not extending them to the credit market. It recognised that there were important practical difficulties in the way of the wholesale, application of the principle there, but argued that an experiment ought to be made forthwith to test the suitability of indexlinking in a Swedish context —the experiment to be limited initially to savings bonds and to loans suitable for investment by institution. Describing how this decision had been reached, the committee’s report made the obvious point that savings would be encouraged by the availability of purchasing power guarantees for money invested on a fixed interest basis and the much less obvious one that economy should proifit from the fact that their | advent would make it possible to determine interest rates policy independently of inflationary expectations—thereby making official economic management easier and more effective. But the outstanding feature of this report was its complete rejection of the argument the British authorities have largely relied upon in the past when resisting the suggestion that National Savers in this country should be afforded some protection against the continual erosion of the purchasing power of their investments in Government securities—that to countenance such an innovation would be tantamount to confessing to the inevitability of inflation. Public Confidence The Swedish experts took the view that the incorporation of stable value clauses in the State’s contracts with bondholders and other creditors was more likely to serve to strengthen public confidence in the authorities’ endeavours to defend monetary stability rather than to weaken

it and there was certainly no reason why it should be regarded as a surrender to inflation. I The truth of the matter, of 'course, is that in the great (majority of countries—including Sweden and Britain—inflationary processes have become such a well-established feature of the economic scene in spite of oft-repeated official assertions that the fight to Irestore monetary stability would be prosecuted with the greatest energy that the authorities do not have to confess to failure to resolve the problem. The writing is there on the wall in very large letters for all to see. Permanent Inflation? The point of greatest practical importance now is that it is going to be taken for granted by the public, whatever the authorities may be saying, that inflation will continue to erode the putchasing power of money in definitely until positive proof is available—that is through the maintenance of monetary stability over a period of several years—that a decisive answer to the problem has been found. After all, it is the case that the inflationary phenomenon has been with us now for a quarter of a century. So it can hardly be surprising if it is coming to be regarded as a permanency? It is idle, therefore, for the authorities to go on pretending that stability is just round the corner. Rather should they strive to neutralise the disincentive to saving implicit in the public's belief that a continuance of inflation is Inevitable by offering I National Savers an opportunity to obtain the security for their capital that they would get if official measures to reestablish monetary stability | were fully successful. Seeing that the Exchequer is going Ito be left no worse off that way if inflation persists than it would have been had the I Government fulfilled its promises to stabilise, this is surely not a lot to ask.

In this article “Lombard,” of the “Financial Times,” discusses a Swedish examination of a safeguard against depreciation, through inflation, of savings needed for the public sector of development.