FOREIGN DEPOSITS (INTEREST RATE). (Hansard, 14 March 1938)

§ Mr. G. Strauss
I would like to take this opportunity to raise a matter about which I have put several questions to the Chancellor, and to which I have received very unsatisfactory replies. That may not be the Chancellor's fault. I admit that the questions have involved considerable difficulty, and it may not have been possible for the Chancellor, in the course of an answer to a Parliamentary question, to give a reply which was full and satisfactory. But I submit that the point is of substantial importance, and deserves the close interest of the Government, because the financial stability of this country is involved. I maintain—and this view is shared by many experts in the city and many economists of note—that the interest rate paid by the banks, and particularly by the leading bank of the City of London, the Midland Bank, on foreign deposits is having a very serious effect on the balance of payments of this country. The banks of this country, and particularly the bank I have mentioned, pay on deposits which have been put with the bank a very much higher rate of interest than is paid on similar deposits in any other country. On deposits which are placed in Swedish banks one-half per cent. is paid; on deposits in Dutch banks no interest is paid; on deposits in American banks no interest is paid at all for one month, and thereafter only one-quarter per cent.; on deposits placed with Swiss banks a negative interest is actually charged; yet on deposits placed in London, and put with the Midland Bank—because many of the other banks refuse to follow the lead given by this particular bank—interest varying between one per cent. and one and a half per cent. is paid. This money is paid on very substantial sums. I do not know what the foreign deposits of this country amount to—that information is doubtless with the Treasury—but it is unquestionably several hundred million pounds.
When one seeks the reason why this exceedingly high interest rate is paid on these deposits, one can only come to the conclusion that the Midland Bank is anxious to take the lead in having higher 174 deposits than any other bank. Some figures have been quoted with pride of the vast deposits at the Midland Bank. In November, they amounted to over £500,000,000. They have increased since, and there is no doubt that this bank has succeeded in gathering far more deposits within its accounts than any other of the London banks. By doing so it has been doing serious damage to the national interest. It has been doing damage in two respects. This high deposit rate has the effect—not a decisive effect—in attracting to this country foreign deposits which otherwise would not come here; but these foreign deposits necessitate certain actions by the Exchange Equalisation Fund. These actions are sometimes involved, but they invariably lead in the end to raising money on the London market, usually for Treasury Bills, and the taxpayer has to pay the interest on those Treasury bills. The Midland Bank, by paying excessive interest on foreign deposits which come to this country, increases the amount of foreign deposits and necessitate the Exchange Equalisation Fund raising more money thus causing further taxation to be paid by the people of this country in interest on the Treasury Bills raised by the Exchange Equalisation Fund.
There is something far more important, and I hope the Financial Secretary will deal with this point. The Midland Bank and others who follow their lead pay out on these foreign deposits something in the neighbourhood of £2,000,000 a year which swells the adverse trade balance of this nation at the end of each year. We are paying, roughly, £2,000,000 more than is necessary. If the Midland Bank paid a smaller amount on these deposits, this £2,000,000 would not have to be paid, and the adverse balance at the end of the year would be £2,000,000 less. The action of the bank in this respect is equivalent to reducing our exports by £2,000,000 a year. If it is done as crudely and as bluntly as that, it is quite obvious that this action is having a serious adverse effect on the national interests.
I do not know with what concern the Government are viewing this matter, but it is being viewed with considerable concern in many quarters in the city. There has been much comment and adverse criticism of this state of affairs. 175 Many of the other leading banks of the country have said that they refuse to follow the Midland Bank in this action, and that they consider that the action of the Midland Bank is undesirable and contrary to the national interest. I would like to know whether the Treasury intend using their great influence to bring this state of affairs to an end. If it were in order, one might argue that this action of the bank, which is so obviously contrary to national interests, might be adduced as a very good argument for bringing the whole banking system of the country under public control.
I am not allowed to advocate legislation on this occasion, but I am entitled to ask the Chancellor of the Exchequer to take such steps as lie within his power, by administrative methods, to bring what appears to me to be a public abuse to an end. No national advantage, no sectional advantage, accrues to anybody by this payment of excessive interest. The bank itself does not gain financially. This additional money which it has to pay out is paid primarily by the customers of the bank, but that is the bank's own affair. I am not worried about that, but I am worried that the action of the bank in this matter is damaging the national interest and increasing our adverse balance of payments by approximately £2,000,000. That is a very serious state of affairs, and one which the Government cannot view with equanimity. We are entitled to ask the Government not only to take action in this matter, but to take action that lies within their power to prevent this bank continuing for its own ends a policy which is doing so much harm to the national interest.

§ The Financial Secretary to the Treasury (Lieut.-Colonel Colville)
I followed with interest the questions which the hon. Member asked my right hon. Friend the Chancellor of the Exchequer, and I think I am correct in the assumption, that he desires legislative action, although tonight he said administrative action. There is a different between the two, but at any rate, I am entitled to regard his request as one for direct interference.

§ Mr. Strauss
Yes.

§ Lieut.-Colonel Colville
First, I think the hon. Member's case is built upon certain assumptions which can hardly be 176 justified, according to my information. His first point was that the rate of interest paid on short term deposits is a predominating factor in their location. He indicated that the rate of interest paid by a certain bank or banks was an important factor in attracting deposits to this country. Beyond all question, the most important factor in attracting foreign money here is the confidence felt by persons abroad—

§ Mr. Strauss
That was not my case. I said it attracted some little money, but that it is not the dominating factor.

§ Lieut.-Colonel Colville
The hon. Member's case was that a certain bank or banks were attracting more money here by giving a certain rate of interest.

§ Mr. Strauss
I said it was a factor.

§ Lieut.-Colonel Colville
In my view, the predominating factor really is the confidence which foreigners have in institutions in this country including the banking institutions, with which we should be loth to interfere in such a way as to cause a diminution of confidence. Another assumption of the hon. Member is that the high rates of interest, as he termed them, adversely affect our balance of payments. There again, I say that payments of the order of which he was speaking—he has put a figure of his own on them—are relatively small, and could hardly be held to be a serious factor in regard to our balance of payments. In our view, the damage which would be caused by the disturbance of the banking system through direct interference in this case would more than counterbalance any possible disadvantages which there might be in the payment of this money abroad. I am not clear what the hon. Member means by the general term "foreign short-term deposits." Has the hon. Member in mind payments from other parts of the Empire to this country and payments from other countries in the sterling group—it is important to maintain the effectiveness of the sterling group—or has he in mind payments of foreigners' deposits placed with English banks by Dominion banks, or by foreign banks which operate through branches or subsidiaries in London? I do not deny the importance of the complicated questions, of which this is one, which certainly are matters for study by the City authorities. Where I differ from the hon. Member is 177 in the emphasis which he lays on this particular factor, and in the need he sees for direct legislative action.
The general objectives of monetary policy are, of course, a matter for the Government and the central banking authority, neither of whom will hesitate to exercise their influence when and where they deem it necessary. But it is a far cry from this function of general supervision to direct interference, for which I think the grounds on this occasion are not fully proved, in the detailed business of banking, in which I would include not only this, but the choice of assets, the acceptance of liabilities, the structure of interest rates, the rates of different assets to liabilities, and all the other incidents of banking. The sense of direct responsibility under which the British banks 178 operate in these matters for the multifarious decisions in their business have made for sound and efficient banking, and I should be very sorry to recommend any step which in any way operated in a reverse direction. Therefore, I say to the hon. Member that I have listened with interest to the points which he has made, that such matters are certainly matters for study by the appropriate authorities, but that I could not recommend on this question a degree of interference which I think would cause more harm than it would do good.