WAR LOAN (REDEMPTION). (Hansard, 28 February 1910)

§ Sir F. BANBURY
This differs from the preceding Resolution, because it is absolutely necessary that the obligation of the country should be met, and that the War Loan should be paid on 5th April. The only question that arises is what is the best method of achieving that object. The right hon. Gentleman proposes to do so by means of Exchequer Bonds, which will amount to £21,000,000. I want to know, first of all, what is the amount of the Floating Debt at the present moment, because that is a very important question when one remembers that this £21,000,000 to be raised by Exchequer Bonds will be added to the Floating Debt, and especially in view of the fact that we, by the Resolution which we passed a short time ago, authorised the Government to borrow on short term sums of money up to £126,000,000. It is quite true, as the right hon. Gentleman said, that no Government would use the powers which were given in that Resolution. An hon. Friend here says, "Would they not?" I have not very much faith in this present Government, and I do not know in the least what they would not do. I think they are capable of doing anything if they got the power 674 to borrow £100,000,000. I can see that with hon. Gentlemen below the Gangway opposite the very mention of such a thing inflates their desire for social reform. [An HON. MEMBER: "Who placed them in the position?"] Evidently they are not in a very good position. I would ask the right hon. Gentleman what is the amount of the Floating Debt? Is it something like £37,000,000?

§ Mr HOBHOUSE
The total amount of the Floating Debt, including £21,000,000 which will not be added to the Floating Debt, is £66,000,000.

§ Sir F. BANBURY
Then it is much worse than I thought. I should like to point out that, as the right hon. Gentleman probably knows, if you have a very large floating debt you destroy the amount of money which is floating in Lombard Street, and which is available for carrying on the ordinary business transactions of the country. That is an axiom which anyone who has any knowledge of the City will admit to be true. A floating debt is all right if it is not too large, and if the rate of interest is reasonable. No doubt at present the rate of interest is low, and, from that point of view, there is no objection to the repayment of this loan by Exchequer bonds, but the other, and by far the most important consideration, is to calculate the effect on the money in Lombard Street if you absorb all the floating capital. I see one or two hon. Gentlemen opposite who have some experience of business, and I think they will agree with me that these short bonds are not taken up by the investing public, but by the bankers and merchants, or what we call discount houses in the City, and to a certain extent by France, and I am not sure if by Germany. If you issue such a large amount of those bonds as to take up a large proportion of floating capital you deal a very serious blow to the industries of tie country, because you prevent the ordinary person who wants to discount a bill in Lombard Street. That is a way to make money dear. I would commend it to Lord Swaythling when he prophesies again. I would point out that it is his own party who are going to make money dear by absorbing the floating money in the City. Why does the Government proceed to 675 repay debt in this way? I always thought that Sir Michael Hicks-Beach made a great mistake when, in the Boer War, he issued this loan for only ten years, and I wrote to the newspapers at the time suggesting that he would have done better to issue Consols, which he could have done at about 97½, because I did not believe that there was a favourable time in front of the country for the raising of capital. The only reason to my mind for providing for the redemption of the War Loan in this particular way is a hope that the credit of the country is going to improve, and that later on you will be able to issue permanent debt on better terms than you can now. No one would desire that the floating debt should be allowed to increase. Every financier of eminence whom I have known or whose life I have studied has held it to be necessary that the floating debt should be as small as possible, and that where obligations are likely to be permanent they should be put on a stable basis by their being made permanent at once. The reason is that you attract a very much larger class of persons to take up the debt than by the issue of short bonds, which are taken up by only a small section of the community. Has the right hon. Gentleman considered the effect on the money market of increasing the amount of the floating debt to such a large extent, in view of the fact that the Government must borrow by short bonds during the next five or six months? Is his reason for proceeding with the redemption of the War Loan in this manner that he hopes to be able to raise a permanent sum on better terms later on? If so, on what foundation does he build that hope?

§ Mr. HOBHOUSE
The hon. Baronet takes a very deep interest in these questions, and particularly, I think, about dinner time. He has laid down the proposition that the redemption of this twenty-one millions of War Loan, and its subsequent reissue to the public, is an addition to the floating debt. That is not the case. I told him just now that there were sixty-six millions of floating debt, which included the twenty-one millions which will be reissued. It is, therefore, not an increase, but a renewal, of a part of the existing debt. We propose to raise this sum of money by means of Exchequer Bonds rather than, as in the case of the loan negotiated in 1900 by means of Exchequer Bonds and Stock, because there is an increasing demand in the City for short-dated securities. Firms and businesses 676 were so hard hit by the depreciation in Consols that there is a great desire in the City for a security redeemable at a comparatively short date, such as five, six, or seven years, preferably five, issued at a price on which, although they cannot make more than a small profit, there is no possibility of loss. It is to meet that demand for what, I believe, are known in the City as "floaters," that we propose to issue the whole of this twenty-one millions in five years' Exchequer Bonds. It would be premature, at a time so comparatively distant, to state the exact proposals that we shall make to the market in connection with the issue of these bonds. I trust the hon. Baronet, in view of this explanation, will not put the Committee to the trouble of a Division.

§ Mr. WATSON RUTHERFORD
There are two grave objections to the course which the Government are pursuing. It is a very objectionable thing for a Government to take out of circulation such an enormous amount of the loose money available for the purposes of the City. The right hon. Gentleman, when asked the amount of the existing floating debt, said it was 66 millions, but he did not disclose the fact that that included the twenty-one millions of War Loan.

§ Mr. HOBHOUSE
I said specifically that it was included in the amount.

§ Mr. WATSON RUTHERFORD
I am sorry I did not hear it. At any rate, my objection is that the abstraction of £60,000,000 from the loose cash available for facilitating business in the City is a very serious matter. It is an amount out of all proportion to anything known in the past in connection with matters of this sort. I do not suppose that the Government of this country has ever before had much more than half of this amount represented by short loans in the City. There is another serious objection. Suppose anything unforeseen were to happen in the way of an European complication. Of course, we all hope that nothing of the sort will occur. But how serious it would be for the Government of this country if it found that it had £60,000,000 for which it was accountable at a very short date, and which it would then be practically impossible to replace with anything in the nature of a permanent security. What would be wanted in such an emergency would probably be to borrow a large sum of money. But the existence of over £60,000,000 of loose unfixed liabilities, represented simply by short loans, would be fatal to 677 the credit of the country. We on this side look upon the matter as one of the most serious description, which we are not justified in passing without making a most solemn protest.

§ Sir F. BANBURY
Before that Resolution was put I should just like to say a word or two in answer to the statement made by the right hon. Gentleman. He did not reply to my question, which was whether he considered that he would have a more favourable time in the future for putting this loan on a permanent basis than he has now. He merely said he was carrying out the repayment in the manner he is carrying it out, because there was in the City at the present moment a desire on the part of people who had lost through investing in Government funds, owing to the depreciation of Consols, a desire to have a short bond which should be depreciated because it was going to be repaid in a short time. I do not quarrel with that; I think it is a fact, and a very serious fact. But I am not at all sure that the Treasury ought to encourage that feeling. What is going to happen to Consols if he is going to ask people who used to invest in Consols to feed their appetite with something different? The result will be there will be no buyers of Consols, and the depreciation in Consols must continue. There will come a time when the Bank rate may be 6 or 7 per cent., and what is the right hon. Gentleman going to do then with £66,000,000 of money in the floating market? Lord Swaythling's prophecy of 6 or 7 per cent. Bank rate will come in. What is going to happen then? If the right hon. Gentleman had ever been in business he would not have made so successful a man of business as he is a politician if he did not look in front of him before he entered into a bargain. He is not looking beyond his needs now; he is just considering the six months during which he thinks everything will be coleur de rose. What is going to happen when there is a revolution, when the House of Lords is abolished? The right hon. Gentleman must remember that when he has driven capital out of the country there will not be these sixty-six millions available for him.

§ Mr. HOBHOUSE
There is no doubt that one of the advantages of a short-dated security of this sort is that you can take advantage of a falling in the general rate of interest if, and when, that very desirable state of things occurs.