§ Order for Second Reading read.
§ Motion made, and Question proposed, "That the Bill be now read a Second time." —[Captain Crookshank.]
§ 4.0 p.m.
§ Mr. Dalton
My right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence) on Tuesday made an exceptionally interesting speech on the Financial Resolution and covered all the ground so far as controversy may exist on matters covered by this Bill. I do not propose this afternoon to go over so large an area of ground, but rather to offer a few observations on certain of the points raised and to go into a little more detail than was then developed. My right hon. Friend the Member for East Edinburgh dwelt with great emphasis on the fundamental importance of securing not only a low rate of interest on any Government loans that may be raised under this Measure, but also upon securing that the rate of interest, in contrast with what happened in the last war, shall fall rather than rise as the war proceeds.
It is perhaps worth while to recall to our attention the very great change that has taken place since the period of the last war regarding the relation of the Government and the Treasury to the money market and the City of London. Without going into great detail I think it may be laid down, and no hon. Member will contradict the statement in this general form, that as compared with the last war the control by the Government and by the Treasury over the Bank of England and over the whole financial machine in the City of London, has developed to a very great extent, indeed to an extent which is very seldom frankly admitted and is not always generally recognised. I think that as between the Treasury and the Bank of England in particular the relationship has been completely revolutionised, and that the Governor of the Bank of England is to a much greater extent than is openly admitted or legally recognised, to-day the agent and servant of the Treasury rather than an independent financial dictator, as 458 has been the case in the past. Sometimes perhaps the Treasury does not use its power of dictatorship with sufficient ruth-lessness, but none the less the powers are there. And for this reason. I think it will be generally agreed—the financial papers have indeed accepted the position in the last few weeks—that the Government has enormous powers so far as the settlement of rates of interest and other terms of borrowing are concerned.
I am going to submit that at the present time the prices at which various Government securities stand are too low and that steps should be taken by the Government in the near future, having regard to the operations contemplated by this Bill, to raise the prices of certain classes of gilt-edged securities so as to lower the yield and enable borrowing to proceed on more advantageous terms from the point of view of the Government and the community. It is, of course, long since established that what are called open market operations can have a very great effect indeed upon the level of gilt-edged prices; and I hope that the Government, which I think has been encouraging some open market operations, in the form of purchases by the Bank of England of Government securities in the last few weeks—probably such rise in prices as has taken place is largely to be explained by such purchases by the Bank —I hope that the Government and other agencies under Government control will pursue that policy vigorously in the next few weeks and months, particularly in the next few weeks, so as to lift the level of gilt-edged prices above what they have now reached.
We on this side of the House regret the vast scale on which borrowing must now take place. At an earlier stage in this year's financial discussions we made certain proposals which were not accepted. They were designed to reduce the amount of new borrowing required and to substitute therefor a special annual tax on capital. I am not going to re-debate that now, but since it was rejected we are now committed to a very much larger volume of borrowing than would have been necessary if our proposals had been accepted. Given this very large necessary borrowing to finance the war, it is clear, I think, that there will be a considerable expansion in bank credits. Indeed, an authority in the City of London whose opinion I asked on the 459 matter said he thought it would be well within the mark to say that during the first 12 months of hostilities Bank credits would be expanded, by reason of the Government borrowings, by more than £250,000,000, and later on, in the further stages of the war, by even greater quantities. A very large expansion will undoubtedly take place in Bank credits, and we shall therefore have a situation in which the banks will be, to use a common phrase, creating new money on which the Government will be paying them interest.
Much might be said on the point of principle in objection to such a situation —that privately-owned institutions, paying high dividends to shareholders, should be enabled by this Government policy to create, free of charge to themselves, large quantities of new money on which they receive interest from the Government, itself responsible for the financial operation. In principle such arrangements are objectionable. But this is not the time to develop that argument at length. I merely wish to say that, in so far as the banks are going to benefit largely by reason of the mode of finance adopted by the Government, I hope that the Government will consider the propriety of, in some way or another, fixing the net profits of the banks, putting them as it were in the same position as the railways taken over by the Government, and not permitting them to go above a certain standard income," and in the second place, as the banks themselves and other financial houses will be subscribing on a considerable scale to the loans proposed to be floated, that is another reason why the rate of interest should be kept at the lowest possible point. In the Debate on the Financial Resolution on Tuesday the Chancellor of the Exchequer said:It is obviously not in the public interest that the terms of a future loan should be the subject of debate and discussion before the issue is made."—[OFFICIAL REPORT, 7th November, 1939; col. 94, Vol. 353.]In a certain sense that may be true, but in another sense I think it is profoundly untrue. It is of very great importance that Members in all parts of the House should express their view before the form of the issue is determined upon, in the hope of influencing the decision of the Government regarding the terms of the issue to be made. This is a moment when debate can do no harm and may do 460 much good I therefore wish for a moment or two to make reference to various classes of Government securities, to comment upon the yield and to offer some suggestions as to the method by which, in the very near future, the Government can most advantageously in the public interest issue new loans to the public.
The yield on long-term Government securities is still disappointingly high. Taking the figures of yesterday's quotations given in the Press to-day I will refer to two typical long-term issues, the 3½ per cent. Conversion Loan and the 4 per cent. Funding Loan of i960 to 1990. Both stand at figures which give a yield of about 3¾ per cent. and I suggest that it would be quite outrageous if the Government at this stage were to issue a new long-term loan carrying a yield of 3¾ per cent. I trust, therefore, that so long as the prices of the long-dated securities stand approximately where they do the Government will not make any attempt to issue a new long-dated loan. It would be most extravagant to the State. Nor is it, of course, the only alternative open to the Government. If on the other hand we take a relatively short-term issue, for instance the National Defence Bonds of 2½ per cent. of 1944–48, these stand at round about 98 and they yield therefore round about 2¾ per cent., a much more satisfactory figure from the point of view of yield. That is due to obvious causes, the assurance against capital depreciation in the near future and so on.
But it appears to me that here we have an indication of the type of issue on which the Government may for the moment concentrate a large part of their attention. If the Government were to issue a short-term bond, say five to eight years, I think it could within a few weeks, if it applied some Bank of England purchases and other open market operations to these classes of securities on the Stock Exchange, get the yield on such short-term bonds down to 2½ per cent. It is by no means out of reach to get down to 2½ per cent. and to get ¼per cent. off in the next few weeks, and at the end of the month to issue short-term bonds at 2½per cent. at par. I hope that the Government will not issue any securities in the near future at a substantial discount, which would be only deceiving the public and storing up additional charges later on. I suggest 461 that 2½ per cent. at par is realisable for a short-term issue within the next few weeks.
The Government are planning for a war of three years, and in five, six or seven years' time we shall be in a war aftermath, which no doubt will present many difficult problems. To whatever else we look in that future there should surely be no doubt at all about a policy of cheap money being pursued with even greater rigor than it was before the war. In the aftermath of war, when all will be impoverished, one of the most intolerable positions would be that moneylenders should be allowed to raise their prices compared with what they have charged for money in the near past. Therefore, if we may assume that in the aftermath of war there will still be a deliberately contrived cheap money system, there is no reason to fear the possibility of converting these bonds, when they mature, on at any rate equivalent terms, and thereby removing the chief argument against short-term bonds, namely, that conditions may have moved adversely to the borrower and that a new loan may have to be raised on more disadvantageous terms.
Therefore, I hope the Government will, in the first instance, concentrate upon a short-term issue, postponing any idea of a long-term issue until steps have been taken to reduce quite substantially the present high yields which I have quoted, on Government securities running for 20 or more years before maturity. The present yield is about 3¾ per cent. on Government long-term stocks, and I think it would not be regarded as a fair apportionment of sacrifices between the different sections of the community if on a gilt-edged long-term British Government investment those who had lent the money were to get more than 3 per cent. in this time of trouble. I say "not more than 3 per cent."; perhaps it should be not more than 2½per cent.
Therefore, we set the Government initially the task of reducing the yield on long-term securities by appropriate means, some of which I have hinted at, from something in the neighbourhood of 3¾ per cent. to something certainly not above 3 per cent., and preferably even lower. Until that has been done I think it would be a grave miscalculation for the Government to embark upon any long-term issue, including, as I have already suggested, what I may call a camouflaged 462 long-term issue in which the stock being issued at a substantial discount, the realities of the situation were concealed from inexpert eyes. All I wish to say further on this matter is that, since we are confronted with a position in which there is a need for very large new borrowing powers by the Government in order to finance the war, I think that it is proper to ask that the Government shall do their best to accustom the public, particularly those sections who are able to subscribe to loans, to new standards of cheap money. At a time like this it is important that public opinion should not attach even the suspicion of profiteering to these financial transactions and rates of interest, which in the light of past experience may seem to the City of London to be very modest but may none the less appear to be extortionate to a wider public.
I have particularly concentrated on this one matter of the rates of interest and the terms of the loans to be issued under this Bill. The Bill itself is largely technical and does not lend itself over-much to debate. At any rate, I have not found in it any matters particularly worthy of further comment beyond what was said on Tuesday last. But the terms of the Bill do not give us any indication of the terms of the issues to be made by the Government under the authority of the Bill. It is upon that matter that I have concentrated my observations, and in view of the fact that the Chancellor of the Exchequer said very little on Tuesday in reply to the speeches from all parts of the House on this subject I hope that the Financial Secretary to the Treasury will, although we are not asking him for advance information as to the terms of the loans, feel able to give some rather more definite assurance that the Government is fully alive to the arguments which have been put forward not only by my right hon. Friend the Member for East Edinburgh and other hon. Members on these benches but also by some of his own supporters who follow these financial problems.
§ 4.20 p.m.
§ Mr. Boothby
I do not intend to make a speech but I should like to say one word in endorsement of the speech of the hon. Member for Bishop Auckland (Mr. Dalton). I think it is the feeling among all parties in the House and among the community as a whole that one thing 463 which we must avoid under this Bill is saddling posterity with too great a burden of interest. I think that is the united opinion of everybody, and while the hon. Gentleman went a little far perhaps in his suggestions—although one hon. Member sitting behind him evidently had the view that he did not go far enough—we are absolutely united on the general principle that in order to finance this war the Government must borrow at the minimum possible rate of interest, and that until and unless they can get Government long-term securities up to a point where they can borrow at a rate of interest, I should say, under 3 per cent., it would be very much, better for them to continue to finance this war upon a short-term basis. That is the short but fundamental issue. I think I am expressing the opinion of many Members on this side of the House and of the country, and would endorse the arguments just addressed to my right hon. and gallant Friend by the present leader of the Opposition.
§ 4.22 p.m.
§ Mr. John Wilmot
Nothing is more noticeable and more salutary in the discussions on the many-sided aspects of the war which we are having from day to day than the fact that on all sides of the House there is a determination to learn the lessons of the last war, and, as has been said by my hon. Friend the Member for Bishop Auckland (Mr. Dalton), no lesson is more important than the necessity of holding down the rates of interest for Government borrowing, not only because that will effect tremendous economy, but because of the far-reaching effects in every branch of national enterprise. As Mr. Keynes pointed out in a letter to the "Times" a little while ago, the saving to the nation of borrowing at, say, 3 Per cent. instead of 4 per cent., or 2½per cent. instead of 3 per cent., would be of tremendous magnitude. According to the figures which Mr. Keynes brought forward, the saving by borrowing at 2½per cent. instead of 3 per cent., on the scale of borrowing which we are contemplating, would be equal to twice as much as the yield of all the new taxes which have been imposed. It becomes clear, therefore, that it is much less disturbing and will create far less hardship to economise on the rate of interest than to seek to raise further revenue 464 with which to meet a higher rate of interest.
Since the last war, as my hon. Friend has pointed out, a very important new mechanism of Government and public control of the financial machine has been devised. To quote an eminent authority who was writing the other day in the "Financial News," the Government can, in fact, now make the rate of interest what it likes. The writer said:There is still time for the Government to make up its mind to use its control of the entire capital market and of the credit system in order to put the rate of interest exactly where it wants it to be.The Government has complete control of all the mechanism necessary to fix the rate of interest at a given point and to keep it there. It has already taken the most important preliminary step. It is in complete control of the foreign exchanges and has completely closed the monetary system round this island. It needs, of course, the co-operation of the banks, and although there seems to be a peculiar and entirely unnecessary reticence about the matter, I understand that there has been set up in the Clearing Bankers' Committee what is, in effect, Government control, willingly acquiesced in by the banks themselves, of the banking institutions. Accordingly, the banks are cooperating with the Government. The Bank Rate has already been reduced by I per cent., and many believe that it should never have been raised. The Chancellor of the Exchequer seems to disown any share of the credit for its reduction but I find it very difficult to believe that the Government itself is not at this time really in command of the mechanism to fix the Bank Rate. I would suggest that these controls should now be used to reduce the Bank Rate to I per cent., and that the control over the clearing banks be exercised to take the next step, namely, the limitation of bankers' advances, in order to check that form of inflation and its effect on the rate of interest.
Further, I would suggest for the consideration of the right hon. and gallant Gentleman that it would be proper severely to limit the rate of interest on bankers' deposits, in fact, that it would be a wise step completely to eliminate payment of interest on deposits with banks, and allow those funds to flow into 465 Government loans when the time comes. With these steps should be coupled a cooperation with the banks to limit the price they are prepared to pay for Treasury Bills. Circumstances may arise in which the banks will be rather inclined to bid up the price of Treasury Bills. A control by means of the Clearing Bankers Committee could be used to put a top to the price to be bid for Treasury Bills. That would be a most important step in holding down the short-term rate as a preliminary to holding down the rate for the long-term issues which will have to come. I suggest with all respect that 2 per cent. should be the maximum rate paid during the war for short-term money and that a maximum of 2½per cent. should be put to long-term money.
There would be very great advantages if the Government came forward openly at this stage with these plans of financial control. The nation is in a mood to cooperate to the full in this kind of control in order to prevent usury arising from the war. and it seems to me that no good purpose is served by maintaining the old-fashioned atmosphere of hoodoo and mysticism around these operations. If the Government issued an authoritative statement that 2 per cent. for short-term money and 2½per cent. for long-term money would be the highest rates of interest which would be paid for any Government borrowing, that action, with the steps which I have ventured to suggest must accompany it, would enable us to avoid all the errors which we made in the financial field in the last war.
§ 4.30 p.m.
§ Mr. Benson
All sides of the House are fully agreed that the rates of interest at which the Government must borrow must be very different from those at which Government loans were borrowed during the last war. We may fix in our minds an ideal of 2 per cent., 2½ per cent., or 3 per cent., but whatever the ultimate figure arrived at by the Government may be, it is certain that the House will insist upon that figure being very moderate. My hon. Friend has just pointed out the enormous difference of the burden between borrowing at 2 per cent. and 3 per cent. We must cut down rates of interest, but let us remember that, if we allow a 25 per cent. rise in prices, that is equivalent to paying 25 per cent. more 466 for our money in the market. It does not matter whether you borrow £100 at 3 per cent. or £125 at 2¾ per cent.; the amounts are practically the same.
We have to guard against the danger of inflation. There is a possibility of our running that risk by attempting to rig the money market for the purpose of obtaining cheap rates of money. My hon. Friend the Member for Bishop Auckland (Mr. Dalton) has suggested that there has been a certain amount of open market operations in the past and he hoped that they would be pursued vigorously. He pointed out that the Bank of England had been buying Government securities, and that that was one of the main reasons for the recovery in prices. The effect of open market operations of that kind is to throw a very large amount of money into the hands of the banks, and that allows a very large credit expansion. Though it might be necessary that there should be some expansion of bank credits in order that the loans might be financed, there is a possibility of going too far in expanding bank credits. The only sound form of borrowing is that which absorbs actual savings, or which deflects to the Government the general volume of credit on which our industrial system at the present moment runs.
When the Government absorb savings and take larger than the normal share of bank credits, we get no inflationary effect, but if the Governments borrowing comes out of freshly-created money, which can be easily done as a result of flooding the banks with money as a consequence of open-market operations, there is a great possibility that we shall get inflation and a rise in prices. Although we may get loans borrowed at a low nominal rate, we may have to borrow considerably more money on account of the rise in prices of the commodities which the Government have to buy. We should not look at this matter merely as one of low rates of interest. We have to look at it through the dual spectacles of keeping interest rates low and, at the same time, keeping prices low. We cannot do that if we allow borrowing to come, as it did in the last war, almost entirely out of bank-created credits.
I notice in the Bill a reference to foreign loans. I suppose it is inevitable that we should have to raise foreign loans 467 where we can. Certainly, Government purchases abroad will be enormously high. In the last war our imports jumped up by leaps and bounds. The visible adverse balance in 1913 was approximately £134,000,000; the visible adverse balance in 1918 was over £700,000,000, a difference almost entirely due to Government purchases. Our imports doubled in value during the last war, but our exports remained stationary. We must not allow that to happen again. Every step must be taken to see that our imports are paid for by exports.
Many things have happened in the last 20 years. We have evolved an entirely new system of banking. Other countries have also been active. Germany has evolved an entirely new system of overseas trading, by bulk barter. There is no reason why we should not adopt it. We have already adopted it in regard to two countries. We have arranged to exchange American cotton against Empire rubber, and negotiations are already going on, I believe—
§ Mr. Speaker
That is hardly relevant matter to the Second Reading of this Bill. There is nothing in the Bill about international exchange of commodities.
§ Mr. Benson
Perhaps I am getting rather wide of the mark, but as the Bill contemplates the raising of foreign loans I suggest that we must realise the importance of maintaining our balance of trade. I leave that. We have always to watch the dual point, that we must borrow at low rates of interest and that our financial manipulations must not overshoot the mark and allow inflation and rise of prices.
§ 4.37 p.m.
§ The Financial Secretary to the Treasury (Captain Crookshank)
The House will, no doubt, be willing to let us have this Bill now, as there is other business to come before us. I must first apologise to the House on account of the view taken by my hon. Friend the Member for Colchester (Mr. Lewis) that the Bill has been rushed upon it. We did have a Debate on Tuesday, and an opportunity for Debate yesterday. Moreover, this is very little more than a formal stage, being the introduction of a machinery Bill.
§ Captain Crookshank
Yes, but it deals only with machinery and is, we think, adequate for that purpose. It is not a policy Bill. It is concerned with the taking of powers by the Government, and not with the exercise of the powers that have been granted by this House. It is a description of what powers are necessary as a result of bringing up to date, in a modern Bill, powers which, as I explained the other day, are now scattered about in a whole lot of statutes.
§ Mr. Wilmot
May I point out to the Minister that the next time we consider this matter the loans will have been made and then it will be too late for this House to express its view on policy?
§ Captain Crookshank
Oh, yes, I am not taking any exception to what has been said, and if anybody thinks that this stage comes too soon after our discussion on Tuesday, I am sorry. Of course, we had to get on with this business, and there will be the subsequent stages in the middle of next week, by which time hon. Members will have studied the Bill in greater detail than they have had a chance to do to-day. Hon. Members will not expect me to say anything this afternoon, and I do not think they will be disappointed at that. When winding up the Debate on Tuesday my right hon. Friend said:It is equally clear that I cannot say anything about it, because if I uttered a single phrase, who knows what inferences might not be drawn and what consequences might not ensue?"—[OFFICIAL REPORT, 7th Novembet, 1939; col. 143, Vol 353.]Where so cautious a man as the Chancellor of the Exchequer feels that he cannot venture, the poor Financial Secretary to the Treasury has to be like "Brer Rabbit" and say nothing at all.
To those hon. Members who seemed to take exception to what the Chancellor of the Exchequer said, to the effect that it was desirable that there should be no discussion during the Debate, I would suggest that what he probably had in mind was that it takes two to make a discussion, and that while it might be useful for the House for their part to express their private opinions it would be very wrong for him as Chancellor of the Exchequer to give any replies on points which were raised on such matters as the rates of interest at which loans might be raised and so forth. The House as a 469 whole may be assured by the statement which my right hon. Friend did make in the concluding sentences of his speech on Tuesday when he said:I shall consider carefully everything that has been advanced in the Debate."—[OFFICIAL REFORT, 7th November, 1939; col. 145, Vol. 353.]I would add that that assurance extends to the speeches which have been made by hon. Gentlemen this afternoon. To-day's business is in effect only a continuation of the discussion that we have already had. If any information is desired on the Committee stage as to the details of the actual machinery, my right hon. Friend or I will, of course, be only too happy to assist hon. Members in regard to it. I do not think there is any need to go into detail as regards the machinery, in the Bill as it stands this afternoon, so I would ask hon. Members to let us have the Bill now.
§ Question, "That the Bill be now read a Second time," put, and agreed to.
§ Bill read a Second time.
§ Bill committed to a Committee of the whole House, for Tuesday next.