Clause 32.—(PROVISIONS AS TO PERMANENT ANNUAL CHARGE FOR THE NATIONAL DEBT AND AS TO THE OLD SINKING FUND.)

HC Deb 22 June 1953 vol 516 cc1488-525

Motion made, and Question proposed, "That the Clause stand part of the Bill."

3.46 p.m.

Mr. Douglas Jay (Battersea, North)

This is an important Clause in the Finance Bill. It so happens that at no other stage of the Bill do we examine the question of Government expenditure. Every other Clause, of course, is wholly concerned with taxation. I think it is no bad thing that at one stage in the Finance Bill we should give our minds for a time to the question of expenditure as well as of taxation. It is, after all, the shadow, as it were, of Government expenditure which leads to all taxation which we talk about for the whole of the rest of the proceedings.

The expenditure contained in this Clause is a very large item in the total. The figure is £615 million and that is a considerable part of our total expenditure. It is actually 50 per cent. greater than the expenditure on the National Health Service. It is more than twice our expenditure on education. It is actually more than the total expenditure out of the National Insurance fund, and incidentally it is almost exactly equal to the total revenue from the Tobacco Duty.

Indeed, it is still true that our total expenditure on the National Debt and defence together are equal to about one half of the total spending in the whole Budget. Moreover, the expenditure on the Debt has very materially increased in these last two years. There was an Amendment on the Paper which, as it happens, has not been called, in which we sought to substitute in page 33, line 12, the figure of £535 million for the £615 million contained in the Bill. The significance of that figure—I hope I may just mention this—is to draw attention to the fact that two years ago the figure corresponding to this one of £615 million was £535 million. That has been the increase in expenditure over the last two years.

Mr. F. Beswick (Uxbridge)

On a point of order. I wonder whether it would be possible to reduce the number of private meetings now going on in the chamber?

The Chairman

I beg the hon. Gentleman's pardon; my attention was distracted for a moment.

Mr. Jay

I am sure that, as time goes on, the atmosphere will quieten, as it usually does.

I was about to ask how much, in fact, the Chancellor's new policy of higher interest rates has cost us over these last two years. I ventured to give the estimate in the very first week of this Government's life, when the Chancellor announced the first increase in the Bank rate, that the higher interest rates which he was then initiating would, in the end, cost more than all the reductions in administrative expenditure which he proposed to make.

The Chancellor himself, in his Budget speech, made a remark on this question which seems to me to be highly misleading. He was talking about expenditure in the last Budget year—1952–53—and he said: Expenditure on Consolidated Fund Services was £667 million, an increase of £42 million on the Budget estimate. The principal reason is, of course, the higher level of interest rates, particularly on our short-term borrowings, which followed the rise in Bank rate from 2½ to 4 per cent."—[OFFICIAL REPORT, 14th April, 1953; Vol. 514, c. 39.] The Chancellor said that the £42 million was not a negligible figure, but rather less than what he called the somewhat imaginative figures which had been suggested from time to time. I thought that that remark which was a calculated statement in the Budget speech, would have misled any inattentive listener into thinking the £42 million was the measure of the increase in the expenditure on the National Debt due to the Chancellor's policy. But, of course, it is not that at all. What he was talking about was the amount by which actual expenditure in 1952–53 exceeded the estimate for that year; and that figure measures nothing at all except the inaccuracy of the estimate which the Chancellor had made at the time of the 1952 Budget. It shows that he was not able to foresee clearly the effect of the change which he was then making.

We do not get the true measure of the increase due to the change in policy, even if we compare the actual expenditure in 1952–53 against the actual expenditure in 1950–51 and 1951–52. It was, of course, in November, 1951, that the first rise in interest rates was made, and the second was about the beginning of 1952; so that some of it was already included in the year 1951–52. If we ignore for a moment the Sinking Fund charge, which is included in the figure in this Clause, and if we look simply at the figure for debt interest, it is quite clear that the truest measure which an outsider, with the aid of published figures, could get of the rise in interest rates consequent on the change in policy would be to compare the estimates for debt interest in 1951–52 with the estimate in the present year 1953–54.

I do not think that the Financial Secretary would disagree with that method of argument. I do not take the previous year—1950–51—because it did not include the interest on the American and Canadian debt, which is in no way due to the policy of this Government, but which was included in the figure for 1951–52.

If we make the comparison in that way, we find that the rise in the interest bill has been from £515 million in 1951–52 to £580 million, which is the estimate for the present year. That increase is not one of £42 million, but one of £65 million. I do not say that that is precisely the right figure to the nearest £100,000, because, no doubt, there have been conversion operations and changes in the total of the Debt, and so on. I should think that the true figure would be rather higher, but the figure I have given is substantially correct.

It follows from that, therefore, that the effect has turned out as I ventured to predict—that the increase in the expenditure on the Debt has exceeded all the administrative savings in Government expenditure which the Chancellor has been able to make in these last two years. The right hon. Gentleman claimed in 1952–53 that he was going to make savings of £50 million, but, in fact, he failed to do so. This year, he claimed a total saving of between £60 million and £70 million, but practically the whole of that, as far as I have been able to make out, and the Chancellor has not denied it, can be accounted for by reductions in the holdings of stocks by the Ministry of Food.

Therefore, we discover the remarkable fact that the increase in debt interest indicated in this Clause has greatly exceeded all the genuine savings in expenditure which the Government have been able to make in these two years. It is partly because of this rise in debt interest and partly because of the admitted rise in defence expenditure that the total of Government expenditure above the line today is about £200 million higher than it was two years ago, and I think that that is a fact which, whether hon. Members like it or not, we should bear in mind throughout our discussions on both taxation and expenditure.

It is also the fact, of course, that part of this extra £65 million which has been paid on debt interest is a burden not merely on the Budget but also on our balance of payments. Perhaps the Financial Secretary can tell me what it is, because I have heard it stated at something like one-third, for, obviously, quite a proportion of the short-term debt is held by banks and Governments in the sterling area in the shape of the sterling balances that we talk about, and, to that extent, the rise in interest rates has become a burden on our balance of payments as well.

Nor should we forget that this increase has been made in payments which go to financial institutions of one kind or another at the same time, and in the same two years, as the Government imposed charges in the National Health Service, made large cuts in food subsidies, and, finally, carried out a campaign of economy in education which we shall no doubt discuss at some other time.

The Chancellor, I am sure, would not dispute any of these figures. He would argue that all this has been worth while, because of some economic effect which it has produced. We have never been told very clearly just what it is that the higher interest rate policy is supposed to have done. We have never had explained just how it is supposed to have worked. Perhaps the Government may explain today, but both the Chancellor and the writers in the financial Press who defend this policy always take refuge in metaphors and vague generalisations about it. If only for that reason, perhaps I might make clear very briefly what is our attitude to this question of interest rates policy.

We have never been opposed to a rise in interest rates—we have said so very often—if it can be shown that it will have a useful and desirable effect. But presumably, the purpose of a rise in interest rates is to influence the borrower, and it seems to me that that must mean in practice to restrain the private borrower, whether private industry, a private person or whoever it might be. For it can hardly be argued that the Chancellor had to restrain himself by charging himself higher interest rates in order that he should spend less. The rise in interest rates, so far as it was justified, could have restrained the private section of the economy, if it was thought that it was showing an inflationary tendency, while making no rise in the rates for Government borrowing. If that had been done, we should have been saved something like £65 million for the taxpayer.

4.0 p.m.

I know that hon. Members will argue, though it has never been explained how, that it would have been impossible for the banking system to exert a restraining influence on the private borrower unless it was being given this enormous inducement by the Government. It always seems to me very unfair to the banks to suggest that it was necessary to hand them this large bribe in order that they should be restrained in their lending and exert that restraining influence on the economy which the Government wished. I do not believe that that is true.

I believe that it is obviously possible for the banks to do that in response to a request in the national interest, and that it is possible for them to do it without their being handed this large sum of money. I also believe that if the request had been made to the banks to act in that respect in the national interest, to exert the necessary restraining influence on grounds of public policy and in response to a request from the Chancellor, we would have had no need to fear that they would not have acceded to it.

If that is so, the whole of this enormous increase in public expenditure and the burden on the taxpayer could have been avoided. We feel that no case has been made out. We believe that this is perhaps the most significant example in the whole field of public expenditure at the present time of outright waste and enormous expenditure of public money to no purpose and of a very large increase in expenditure over these last two years. We cannot, therefore, give our approval to the inflated figure in this Clause.

Sir Edward Boyle (Birmingham, Handsworth)

In the course of his interesting speech the right hon. Gentleman the Member for Battersea, North (Mr. Jay) managed to avoid reciting two facts which I can well understand he wished to forget. The first was that in the corresponding Clause in the Finance Bill last year, he estimated the rise in the Treasury bill rate to 2¼ per cent. would cost the taxpayer £80 million. The second fact was that, according to the financial statement for 1953-54, the total rise in debt interest, so far from being £80 million was, in fact, something like £36 million. I can quite understand that an error of rather more than 100 per cent. in the right hon. Gentleman's estimate was something to which he did not want to draw attention again this afternoon.

Mr. Jay

I maintain that before we have the final result of Government policy it will rise to that level.

Sir E. Boyle

A whole year has gone by since the debate on that Finance Bill and the right hon. Gentleman's expectations have not been borne out so far. In view of the charge made in this year's Budget debate against the Chancellor's incorrect Budget estimates last year, the Committee should realise that those errors were by no means confined to one side, and none was as great as the error which the right hon. Gentleman the Member for Battersea, North made on 27th May last year.

I do not want to delay the Committee because there is such a lot of business to be done; but I want to say that I believe that the present Government's monetary policy has been one of the most important features of the Government's policy. Indeed, it has had all the good effects that we claimed for it, but not the bad effects which hon. and right hon. Gentlemen opposite foretold.

All the aspects of the Government's monetary policy were equally important. The funding operation, the rise in the Bank rate and the policy of ceasing to peg the Treasury bill rate all helped to damp down inflationary pressure. The curbing of inflation not only helped the financial situation, but also strengthened the whole moral basis of Government in this country. Indeed, I believe that the conquering of inflation this last year was one of the most important achievements of the present Government since they assumed office. If inflation was to be conquered it was vital to cease pegging the Treasury Bill rate through the activities of the special buyer.

I do not always agree with the Chairman of Lloyds Bank in his annual report and, if I may say so, I think that his annual statement last year was more convincing than that which he made this year. But I think that he was absolutely right at the beginning of 1951 when he pointed out that, through ceasing to peg the Treasury bill rate it would at last be possible to regulate the base on which the whole pyramid of credit is erected. This policy was well worth the cost of an extra £40 million to my right hon. Friend, who was able to produce a hopeful Budget and to give away a good deal of money, only because inflation had been conquered and because the volume of business savings was so much greater than had been expected. The policy of ceasing to peg the Treasury bill rate has been cheap at the price and we ought not to pass from this Clause without pointing out that this price has been very much cheaper than hon. and right hon. Gentlemen opposite expected it to be.

Mr. John Strachey (Dundee, West)

The issue on this Clause is that the Chancellor has used the Bank rate and other devices for increasing the interest rate which has just been incorporated as one of the economic regulators of the economy. The hon. Member for Hands-worth (Sir E. Boyle) has expressed it very clearly. He has pointed out the traditional view that this is by far the best method of conquering inflation, that is to say, damping down the economic activity of the country at one particular point, that point being specially and chiefly the creation of capital assets by private industry.

I do not think that anyone on this side of the Committee would disagree that if one wants to do that as part of decreasing and damping down the economic activity of this country, this is one of the instruments that one could use. It has advantages, and the not very drastic use which the Government has made of it has undoubtedly had a strong effect. I do not think that anyone on this side of the Committee would doubt that. But as my right hon. Friend the Member for Battersea, North (Mr. Jay) pointed out, it is an instrument which is bound to rouse serious objections in present conditions.

Today, when Government borrowing and the National Debt and the like are such an enormous part of the economy, the sheer extra burden which the use of this regulator of the economy entails is, I do not say a prohibitive consideration, but a consideration which hon. Members opposite should not skate over and neglect as if it was not there at all. It is so wildly inconsistent with their general point of view about the appalling deleteriousness of Government expenditure. They calmly put on £65 million and do not turn a hair.

The interest to this side of the Committee is what is the net redistributory, or what I ventured to call counter-redistributory, effect of the transaction. We want to know where the money goes. I do not quarrel about the amount. We will call it £65 million for the sake of argument. Our interest is in to whom it goes and from whom it is taken. No doubt it is a very difficult transaction to follow out in detail. I take it that, generally, there can be no doubt that it goes to what one can only call the property-owning interests and classes in general. Those institutions may or may not increase their distributions as a result of it, but, broadly speaking, it must go directly or indirectly to persons of property.

Where does it come from? It comes out of the general Treasury purse, so it comes from taxes in general. It is true to say that, to some extent, it also comes from the very same class to whom it goes. It is part of a circular transaction, but, of course, indirect taxation is also a very large element in our Budget, and in so far as the money is drawn from that it is counter-redistributory because, it is taken from the general population and given to the property-owning section of the population. I do not know whether anyone has calculated what would be the net effect on the distribution of the national income, but it must be counter-redistributory to some extent.

Sir E. Boyle

The right hon. Gentleman is talking about the counter-redistributive effect of higher interest rates. Surely he would agree that an immediate consequence is that the wealthier section of the community have a much smaller opportunity of making actual profit by the buying and selling of shares.

Mr. Strachey

Yes, but I should have thought that the stronger argument was that there is a depressing effect on entrepreneurs; it is more difficult for them to set up new businesses or to extend their present businesses. Indeed, that is the object of the exercise. It is intended to damp down the general amount of spending, in this case investment spending. That is what the hon. Member values so much as a means of conquering inflation. We on this side, of course, fully follow that argument, and it certainly has some effect—indeed, rather more than might be expected. But it must be pointed out that it has these serious disadvantages.

The budgetary one, the sheer transfer of money is, I think, the most speculatory, and the one we are bound to throw at hon. Members opposite, because it involves this large increase in public expenditure, which, for any other purpose, they would be the first to oppose. But that is not the most serious disadvantage. To my mind the most serious is that it damps down the national economic activity just at the point when it ought not to be damped down.

Although, no doubt, there is a case for preventing inflationary tendencies, it is a great pity that one should have to apply deflationary pressure at the very point of the creation of new capital, assets, because, as has been pointed out so often, there is nothing clearer than that if the country's economy is to progress, there must be a great deal of investment of all kinds, both public and private.

That, I should have thought, is the worst side of the use of this particular economic regulator of which the Government have made use. Dear money is quite an effective lever to use, but it has these grave disadvantages. It is a much more convenient and politically attractive lever for a Government to use than the rather heroic economic regulator, which Sir Stafford Cripps used, of a very high budgetary surplus, which, of course, means a painfully high level of taxation and a lower level of Government expenditure. But I should have thought that in its effect on the economy it was a sounder way of conquering inflation, because it does not involve applying the pressure just at the crucial point of investment, where it ought not to be applied, and it does not have this counter-redistributory effect.

For these reasons, I think the Government were very short-sighted indeed in taking such credit to themselves for the use of this regulatory instrument. No one doubts that one must have instruments and levers for regulating the economy, and, indeed, that is our chief case. While I can quite see its political attractions, I am sure that in a time not very far ahead it will be found to be a costly and clumsy instrument to use for this purpose.

4.15 p.m.

Mr. Ian Horobin (Oldham, East)

I do not intend to intervene for very long on a subject which could, of course, involve a very lengthy debate, but it is of such great importance that I feel that one or two observations in answer to the speeches we have heard from the benches opposite would be appropriate. While I shall not spend any time arguing about the exact figures, I think that the figures offered by hon. Members opposite are much too high, and, of course, none of them has taken into account the fact that a substantial proportion of any figure like that comes straight back to the Exchequer by way of Income Tax, and that the net figure is much less.

I do not want to say more than a word or two on some observations which have been made and which, I hope, were not intended to confuse the issue by suggesting that this is a version of the bankers' ramp, and that they are getting the money. Nothing could be further from the truth, and only one reminder to the Committee is necessary on that. The direct result of this dear money was that for the first time in living memory only one of the joint stock banks was able to continue its certificate unchanged owing to the enormous losses incurred on their capital investments. So, whoever made money out of this process, it was not the banks.

Mr. Jay

In fairness the hon. Gentleman ought to add that the profits of most of the banks, and the dividends of at least one of them, rose during the period.

Mr. Horobin

That may well be, but the net result was that they made enormous losses owing to dear money. Do not let us confuse the issue by suggesting that if they merely wanted to make large sums of money they would have liked dear money, because they were doing very well from the inflation which was going on in previous years owing to the shortsighted policy then adopted. I think we can put those two points aside.

I do not think it worth while spending much time in trying to prove the obvious, that, in fact, by and large the policy adopted by the Government in the last 18 months in regard to inflation has succeeded. It has not entirely conquered inflation, but it has brought about a drastic and surprising change in the situation. It is difficult to see what other policy of the Government, if not their monetary policy, has been responsible for the change.

The Government have made a start, though not much more than a start, in savings in Government expenditure, and they have not entirely succeeded in stopping the wages inflation. If the present position is not due to the change in the Government's monetary policy, then it is difficult to see how it has happened.

Mr. Beswick

Would the hon. Gentleman say that the recent fall in the price of raw materials in world markets follows from this monetary policy?

Mr. Horobin

Very largely, that is so, and not only in this country. Under the leadership of this country, very similar measures have been taken all over the world, and inflation is being brought to an end. Hon Members opposite may be glad to know that this country is still watched very closely by those who have charge of the finances of the world, because, as a consequence of the sad lapses of recent years, they have come to the conclusion that Her Majesty's present Government know what they are about.

Over the whole world in recent years there has been a very marked change in monetary policy, not due solely to our example but partly, and strengthened and fortified by it. It is hardly a matter open to serious dispute that the falling away of the raging inflation with which the world was faced a couple of years ago has been due to what has been done here and to similar action elsewhere.

That is not the most useful point to which we can direct our minds, but it is not possible to deny it. Hon. Gentlemen opposite may attempt to deny it, but everybody all over the world knows that inflation has been either conquered or drastically reduced ever since my right hon. Friend the Chancellor of the Exchequer had the courage to take the decision he did on coming into office of putting into operation the old, traditional and long-tried method which has brought to an end every previous inflation.

That is not the point. It is that the Committee and the country are entitled to ask hon. Gentlemen opposite how they had intended to bring inflation to an end themselves, if not in this way. Ever since the war, and all through the time of the Socialist Governments in varying conditions year after year, there was a raging inflation which nobody was able to do anything about. That is a mere statement of fact.

It is true that in one year one section of the inflationary problem did take on a drastic change, contrary to what happened in all the other sections, but that was not due to anything that happened here. It was due to the enormous change in the wool situation in Australia and the effect of Korea on other parts of the sterling area. This country during those years was never in a healthy position.

It was only by enormous assistance from the United States that we came through, and at the cost of perennial crises, one after another, with ever-rising prices, resulting in the highest range of prices ever recorded in the history of this country. The raging inflation continued. It was destroying the value of savings and was beginning to destroy the incentive to saving. There was endless distortion of the economy by a whole array of controls, rationings and restrictions, which were bringing business and everything else to a state of chaos. That was the situation from which hon. Gentlemen opposite fled 18 months ago. It was the situation which confronted us when we came into power, and that we have very nearly put right.

The Committee is entitled to know from hon. Gentlemen opposite, and the country will want to know at the next General Election how they would have brought inflation to an end if they would not do what we did, and whether they think that what we did was too expensive. They never did it. They left England in a state in which our foreign affairs, our monetary affairs and our internal price affairs were rapidly leading to a complete destruction of confidence here and abroad and our currency was becoming completely valueless. From this we were only saved by the change of monetary policy by the Government.

Mr. Roy Jenkins (Birmingham, Stetchford)

In following the hon. Member for Oldham, East (Mr. Horobin), I must say that whatever else he is he is never dull, although he is sometimes rather bewildering. One does not know quite where he stood. Let me start by taking up one of his more surprising points, which was his claim that the changes in the internal trade of this country and in world prices which have taken place recently were largely due to the counter-inflationary policies of the present Government.

That was a rather sweeping statement and is rather difficult to reconcile with the fact that the peak of the inflationary movement in world prices came in June, 1951. That was actually the worst point in the movement of the terms of trade, but at any rate the inflationary peak was over several months before the present Government came into power and a still greater number of months before their policies could have had any effect. Therefore, I do not understand how they could have had that result.

The hon. Gentleman became very heated, as he always does, and the point at which he got most heated was when he asked what hon. Members on this side of the Committee would have proposed to do to cure inflation. There is a real difference between the hon. Member, with other hon. Gentlemen on that side, and the Opposition, as to what they mean by inflation. I would not for one moment deny that the year 1950 had many of the characteristics of an inflationary situation. It is easy to describe 1950 as a year of raging inflation, but to do so is to equate inflation with full employment.

In 1950, wages went up very slowly and there was only a very small movement in the price level, in contrast to what has happened in the past 12 months. In our external balance, we were in a healthier position than we had been in any year since 1913. In what year since 1913 did we have a surplus on our foreign balance of £300 million, as we showed in 1950? It is not possible to argue very usefully what we should have done to cure inflation, because the hon. Gentleman has an entirely different definition of inflation from that which is accepted on this side of the Committee.

The hon. Member for Handsworth (Sir E. Boyle) made a very interesting contribution, but he could have made it still more interesting. He expressed his faith in the efficacy of the Chancellor's monetary policy, but he did not tell us exactly how that policy had worked itself out. We have heard many similar expressions of faith from even more distinguished people than the hon. Baronet. What are the precise benefits he claims have resulted from that policy and what is the machinery by which they have been achieved.

Sir E. Boyle

I confined my remarks deliberately to what I conceived to be the consequences of the rise in Treasury bill rates. On other occasions, in general economic debates, I have described how the increase in the Bank rate had helped OUT balance of payments and our economy generally, but this afternoon I did not want to be out of order.

Mr. Jenkins

I agree that the hon. Baronet has sometimes been more precise than many of his hon. Friends. I am sorry that he was not able to tell us a little more about it this afternoon. There is no doubt that the general effect of the dear money and credit restriction policy must be the damping down of investment. What sort of investment? Fixed investment or investment in stocks? In regard to fixed investment, I do not think that the rate of interest has, directly, much to do with it. In any event, the Chancellor says that the great problem he was facing in this Budget was to get more fixed investment. So we seem to have come in a circle.

In regard to stocks, the effect of the increased rate of interest may be more definite. I would certainly agree that one of the problems of a year like 1951 was to control the volume of stocks and that one should not throw out of the window without close consideration any weapon which would enable us to do so.

What is claimed for the policy of dear money, in its effect upon stocks in the last year or so? At the time of his Budget the Chancellor was very touchy when we suggested that stocks had been reduced by £100 million. He said, "Not a bit," and that it was a most scandalous accusation to make. Exactly what does he claim has been the effect of this dear money policy?

4.30 p.m.

Even if he were assuming that there had been a run down of stocks, has the bill which we have to meet today been necessary? I come back to the point which was made by my right hon. Friend the Member for Battersea, North (Mr. Jay)—the effect on the banks' credit policy. During the past year the banks have admittedly been rather more reluctant to make loans to private customers than they were previously, but that is not because private customers have been choked off by the higher interest rate.

The hon. Member for Handsworth quoted Lord Balfour of Burleigh. I rather think it was he who said, in his report, that the reason why advances to private customers had gone down was not because they were not still queueing up, but because the banks themselves were being more selective. It is the banks themselves which have decided to advance less money. It is well to ask why they could not have done that before. If the banks were loyally carrying out Government policy and obeying Government directives, why did they not themselves revise the interest rates? Why wait for a change of policy to do what was perfectly in their power to carry out at any time?

We must remember that during the past year the decline in the advances to private customers has been to a large extent offset by an increase in advances to the Government. If the hon. Member for Oldham, East (Mr. Horobin) wants to make some more denunciations he can say that there has never been a Budget— certainly not in the time of a Labour Government—where estimates have gone so wildly astray and surpluses turned out so much smaller than was intended. The result has been a lot of very heavy borrowing from the banks, which has to a large extent neutralised the savings which have been effected through a reduction in advances to private customers. Part of the reason is the additional charge we are being called upon to meet this afternoon. Before we decide about this we need a more detailed explanation as to exactly how this policy has worked out and what are the exact benefits which are claimed, and not just general expressions of faith from the Financial Secretary or the Economic Secretary.

Mr. Ralph Assheton (Blackburn, West)

I want to put one or two considerations before the right hon. Member for Dundee West (Mr. Strachey), to whose speech I listened with great interest, as I did to all the others. He mentioned three important matters. The first was that the increase in the Bank rate, had, he said, tilted the redistribution of wealth in favour of the owners of capital. He qualified that statement to some extent, but it is not unfair to say that that was his suggestion. He also suggested that it checked investment and, thirdly, that it added to the cost of the Budget.

As far as the redistribution of wealth in favour of the owners of capital is concerned, he will recognise the very heavy fall in value of investments which resulted from the rise in the Bank irate. We notice that 2½ per cent. Consols are now at about 60, as compared with 100 at the height of the Dalton period. The owners of capital have suffered a very large reduction in their capital. But the very act of increasing the Bank rate encouraged the formation of new capital. It encouraged that class of the community who are willing now to withhold some of their purchasing power and put it aside for the development of our trade and industry in future. That is a section of the community which should be encouraged and, therefore, though investment may have been checked in one sense, the means to make investments—our savings—have increased as a result of the higher rate of interest, which is of the greatest possible benefit to the community.

His third point was that it adds to the cost of the Budget. I do not dispute that in any particular year when such a change is made the cost of the National Debt service rises, but will the Committee imagine what would have happened if this change had been made several years before, by the Socialist Government? An immense increase in the cost of Government expenditure would have been saved. The very high level of Government expenditure now is due to the very high cost of goods and services. Though there is an immediate increase in the cost of the service of the National Debt there is a long-term saving by the reduction of the general level of costs.

There is not the slightest doubt that if that position had been allowed to go on unchecked, as it was under the Labour Government, there would have been a continuing inflation and a continuing increase in the cost of expenditure and, consequently, the need to meet it by taxation. There are many things I could say about the Bank rate, but the three points to which I have referred were the ones I wanted to make.

Mr. Frederick Mulley (Sheffield, Park)

I venture to intrude in this debate because I do not think I have ever heard so many economic heresies from hon. Gentlemen opposite in so short a time. I am sorry that the right hon. Member for Blackburn, West (Mr. Assheton) ventured to say that there had been inflation under the Labour Government, after the very effectual reply which was made by my hon. Friend the Member for Stechford (Mr. Roy Jenkins) to the hon. Member for Oldham, East (Mr. Horobin).

How can it be said that there was a raging inflation in 1950 when our balance of payments position was stronger than it had ever been, and the increase in the cost of living index was very small? I would remind hon. Members opposite—despite their Election promises and posters—that the cost of living has risen by about 14 points since they had been in office. No doubt the Financial Secretary will tell us exactly by what amount it has gone up.

I was very surprised to discover, as the right hon. Member for Blackburn, West said, that when people realised that the capital value of their savings was being consistently reduced it was a great incentive to save further. He said that the fact that Consols had dropped from 100 to 60 was a very great incentive for people to save, but they may be clever enough to realise that if this Government put up the rate of interest a little more they will lose even more of what they may have saved.

Mr. Assheton

The hon. Gentleman is, deliberately misrepresenting me, though he may be doing so with a smile on his face. The point is that the higher rate of interest prevailing under the new Bank rate encourages savers who are more willing to save with a higher rate of interest than with a lower rate, and are more willing to buy such Government securities as exist if for example, they are standing at 60 than if they are standing at 100.

Mr. Mulley

The right hon. Gentleman must be speaking of a period before the advent of Lord Keynes. The common sense view is that one saves only if one has a surplus from which to save. If one's expenses are very much in excess of one's income one does not save. It is only when the financial climate is such that money is available that people can afford to make savings. The rate of interest is a secondary consideration.

Facts can be documented to show that the actual volume of total savings is in inverse ratio to the height of the rate of interest. If we look back over the years we find that when the rate of interest was very high the volume of savings was very low. It is absolute nonsense to say that the addition of 1 per cent. to the rate of interest makes any difference to one's capacity to save. I think hon. Members opposite realise that. No business man who is thinking of making an investment pays very much regard to the rate of interest per se. He is much more concerned with the state of expectations than with the current price at which he can borrow money.

I shall not bore the Committee by going into this matter in great detail, but I recommend the right hon. Member for Blackburn, West and his hon. Friend the Member for Oldham, East to read the first number of the "Oxford Economic Papers," published in 1939. Statistics which were collected from business men showed how ineffective was the rate of interest in influencing entrepreneurial decisions. With that advice I will leave that particular point.

The other point I would take up with the hon. Member for Oldham, East is the rate of interest and its effect on the balance of payments position. He would, no doubt, give credit to the rate of interest and the increase in the Bank rate for the fact that the terms of trade have turned, as we all very happily noted, so much in our favour in the last 18 months. Actually, the turning point was about two years ago. However, it is obvious nonsense to give any credit to the rate of interest for the fact that the terms of trade turned, as they did, up and down three or four times during the term of the Labour Government. It is quite absurd to suggest that to spend an extra £36 million—I think that is the figure—on short term rate of interest costs in order to cut stocks in this country by £100 million is anything but a very extravagant use of Government money. For that is really what it amounts to.

The balance of payments position was improved by cutting the stocks which the previous Government had carefully built up—despite the criticism of hon. and right hon. Gentlemen opposite that the Labour Government were not able to build up big enough stocks. I remember that the present Minister of Materials opened a debate on that subject in the House, and wrote many times to the newspapers saying that it was a scandal that we did not build up the strategic stockpile to a greater extent. Yet the present Government sought to improve the balance of payments position by running down the stocks we had built up.

However we may look at rate of interest, and the Bank rate in particular, it must be admitted that it is a very clumsy economic weapon. In the 19th century it was of great importance because of the gold standard. By a change in the Bank rate one could affect movements of foreign capital to flow inwards or outwards in a very short time. The world at that time was exceedingly sensitive to movements of money, and a small change in the Bank rate could have very great influence on our payments position. Clearly, that is not the case today. There is very little foreign money likely to move because of a change of several per cent. Certainly, a small movement of 1 per cent. or 2 per cent. would not have an appreciable effect, when the consideration is not one of interest yield but one of political security and of security against devaluation and considerations of that sort.

I do not think that, in those circumstances, it can be argued by any sane person that we should subject, not only the national Exchequer but the exchequers of local authorities, who are greatly dependent on rates of interest in their housing and other investment policies, to this burden. In the 19th century this course might have had some validity, although whether it was ever right or wrong to subject the internal economy to the consequent stresses and strains and ups and downs is open to some doubt. Certainly, today there is no connection between a change in the Bank rate and the balance of payments position. I hope that we shall have a more plausible defence of the Clause from the Government than we have had so far from their back bench supporters.

4.45 p.m.

The Financial Secretary to the Treasury (Mr. John Boyd-Carpenter)

The right hon. Gentleman the Member for Battersea, North (Mr. Jay) has, quite legitimately, made use of this Clause as a convenient peg on which to hang his now annual dissertation on monetary policy, and I shall have a word or two to say about that in a moment; but, strictly, what the Committee is being asked to discuss is Clause 32 of the Bill, and I think I must, in order to get the matter into proper proportion, point out that the very important topics to which the right hon. Gentleman devoted the greater part of his speech are by no manner of means the only factors affecting the provision which we are asking the Committee to make in this Clause.

For example, the total provision that is to be made in respect of the annual debt charge is affected by, among others, such considerations as the extent to which the floating debt is funded, the extent to which it is necessary from time to time to meet Exchequer deficits by borrowing, and, of course, as hon. Gentlemen opposite are aware, paradoxically enough, by the improvement in our overseas balance of payments position.

All these factors affect the figure which it is reasonable to ask the Committee to agree to in this Clause, and there was, therefore, a somewhat unreal oversimplification of this question when the right hon. Gentleman sought to suggest, as he did, that the figure and the increased provision over last year, which I shall come to in a moment, in this Clause was connected apparently only with the change in monetary policy from that of the previous Administration.

Mr. Jay

I said "mainly."

Mr. Boyd-Carpenter

It is no part of my argument to dispute that the policy of dear money will involve some increase in the annual debt charge. It is not the purpose of my argument to argue contrary to that, but it is, I think, important for the Committee to appreciate that it is not possible with statistical precision to isolate that part of the provision which it is necessary to make in any particular year so as to show up that factor as compared with the numerous other factors, to several of which I made reference a moment ago, which are involved in this far from simple issue.

Let me take the figures involved. Last year, as the right hon. Gentleman correctly stated, the provision in the corresponding Clause of last year's Bill was £575 million. In fact, the out-turn for the year was £611,600,000. I would in that connection recall to the attention of the Committee the fact that it was indicated during last year's debate on the corresponding provision that although the figure in last year's Bill had taken account of the change in money rates of the previous November it did not purport to take into account any change which might flow from the change announced in the Budget.

The provision in this Clause, as the Committee will observe, is very close to the actual out-turn of last year, and as things stand today it is submitted as a reasonable calculation as to what will be required on the assumption that both the volume of debt and the rates of interest remain pretty well as at present.

The debt charge for 1953 to 1954 was, in fact, calculated on the basis of the debt as it stood at the beginning of the financial year and on the general hypothesis that, as the Chancellor of the Exchequer said in his Budget speech: It appears to me that conditions in 1953 as we now see them will require broadly a continuation of the monetary measures in operation now."—[OFFICIAL REPORT, 14th April, 1953; Vol. 514, c. 52.] Those words clearly neither foreshadow nor preclude changes in the size and composition of the debt or in the structure of interest rates that may occur during the year. The figure of £615 million represents about the same charge on the Budget as was actually incurred last year, and is, therefore, the best forecast which could be made of the cost during the present year with a flexible monetary policy.

That brings me to the somewhat broader issues affecting this figure and by which this figure is affected, to which reference has been made during the debate. I do not propose to take up very much of the time of the Committee in seeking to argue with the right hon. Gentleman the Member for Dundee, West (Mr. Strachey) on the precise and ultimate distribution of these moneys. I do not propose to attempt to prejudice a serious argument upon what is one of the most serious matters in the whole of our national affairs by prejudicial efforts of that kind. Nor do I propose to follow the right hon. Gentleman the Member for Battersea, North in his pleasantry of describing an increase in the Education Estimates of £20 million as a cut. A very curious kind of cut.

Mr. Jay

I did not say "cut." I said the Government had been economising on education. I do not think that the hon. Gentleman would deny that that is true.

Mr. Boyd-Carpenter

It is an interesting and perhaps, as regards the late Government, revealing indication of the right hon. Gentleman's idea of economy that he so regards an increase of £20 million in a budgetary contribution. So far as concerns the banks, to which the right hon. Member for Dundee, West referred, the matter is far from straightforward. Clearly, they gain by obtaining increased interest payments, but there is, as one of my hon. Friends pointed out, the loss of a consequential fall in the value of the securities they hold. The matter is nothing like as straightforward or clear, one way or the other, as the right hon. Gentleman thinks.

The point I want to make is that those aspects of the matter, be they accurately stated or be they not, are really no more to do with the merits of the policy we are discussing from the national point of view than if I were to comment that the financial policy of right hon. Gentlemen opposite had brought large capital gains to a number of stockbrokers. Neither consequence was the main effect of the policy. I hope that the Committee will allow us to discuss the matter on its merits from the national point of view.

Mr. Strachey

I wish to correct a statement which was made earlier by a right hon. Gentleman opposite, that I said that the £65 million, or whatever the figure is, goes to the banks and the bankers. I believe I was careful to say that, in so far as one could trace it at all, it went to the property-holding classes in the broadest sense. It would be wrong to say that it went only into the banks. It is much broader.

Mr. Boyd-Carpenter

The right hon. Gentleman is saying exactly what I attributed to him. He is seeking to introduce that sort of element into this discussion, and that is, I suggest, no more pertinent to this than the benevolence of his right hon. Friends to stockbrokers during the previous Administration. The issue between us is whether it is right to do as the late Government did—from the highest of principles, I am sure—and adhere to a cheap money policy regardless of circumstances, or whether to use the monetary instrument together with and in co-operation with others in order to achieve one's financial and economic ends.

I know that cheap money has a kind of theological significance for a certain number of right hon. and hon. Gentlemen opposite. It is more a matter of faith, faith in the Shavian sense of believing in what one knows is not true rather than relying on reason. By that very fact hon. Gentlemen opposite deprived their last Government, as they indicate they would like to deprive a future Socialist Government, of the capacity to use this instrument by insisting that, whether the economy be deflated or inflated, there must be cheap money in all circumstances.

The hon. Gentleman should study the policy document of his own party which has just been issued. There, after a very clear statement to which no one could take exception, to the effect that both budgetary surplus and monetary policy are instruments for affecting the economy in the direction in which one wishes it to go, the document rejects the monetary instrument and then uses the remarkable words that Labour's Budgets were planned to keep down spending so that enough investment could take place without inflation and that steps were taken to ensure that the right amount of investment was not held up either by lack of credit from the banks or by interest rates being too high.

I am sure that Labour's Budgets were planned to keep down spending and inflation. The only thing is that they did not check inflation. The reason why I am suggesting that, with the best will in the world, they failed to check inflation was because they fought inflation with one hand behind their back, with one instrument, the monetary instrument, voluntarily not used. That is the reason why all the devotion, skill and thought that went into successive financial proposals by successive Labour Chancellors of the Exchequer failed to check the general inflationary tendency. They were righting inflation with one hand behind their back, and inflation won.

It is clear that we have here a difference between us which as I said—I said it in no offensive sense—amounts almost to a difference in doctrine or faith. There is a refusal by right hon. Gentlemen opposite to use the monetary instrument, in whatever circumstances it may be. We, on the other hand, concede that this is a flexible instrument and that there are deflationary circumstances in which cheap money is of great advantage and inflationary circumstances when dearer money is of great advantage. But hon. Members opposite stick to cheap money in all circumstances. They resemble the gentleman who went for a walk without a mackintosh and got caught in the rain, and then walked about in a mackintosh through a long heat wave so that he should not be caught again, to the detriment of his health and comfort.

I am content to leave the question to be judged by the results. It is a fact that my right hon. Friend's policy, of which this is an important part, has broadly achieved the purpose for which it was conceived by, first of all, rescuing our economy from the grave balance of payments crisis which we found, and, as part and parcel of that process, by checking the steady inflationary process which, broadly, had continued since the war. It is on those facts that I suggest that this policy should be judged.

I do not wish to weary the Committee with figures with which most hon. Members are probably familiar, but it is a fact that, whereas the cost of living indices during the term of office of the late Administration rose in all by 40 per cent., in the 14 months which have elapsed since the Bank rate was raised to 4 per cent., the increase has been only 4 per cent., and hon. Members on both sides of the Committee will be glad to observe that the latest figure shows a decrease of one point.

Surely it must occur to hon. Gentlemen opposite that this is not merely coincidence. The fact that our overseas balance has been so immensely improved and the inflationary process so conspicuously checked, despite their most devoted efforts without this instrument to do the same, must convince them that this instrument is in contemporary circumstances part and parcel of the sensible management of the economy. Once one concedes that argument, most hon. Members must agree with the budgetary element here as money very well spent. It is money spent on getting the whole economy of this nation into better trim and on dealing with the most practical and urgent problems that face the nation. That surely is the justification.

But if one looks at it even from the narrow budgetary point of view, which it is quite proper to do during the Committee stage of the Finance Bill, one has at once to admit that the narrow budgetary consequences are not to be limited or confined to the effects of the Clause. Had this provision and this policy not succeeded in checking the inflationary pressures in this country, it is clear that other parts of my right hon. Friend's financial provisions would, as a result of rising prices, have had to be much ampler than is, in fact, necessary. The provision in this Clause clearly saves expenditure in others.

It is equally a fact—I agree with the right hon. Member for Dundee, West— that the alternative to the use of monetary policy in this way is a much bigger Budget surplus. We can argue—and it is an interesting intellectual argument—whether a larger Budget surplus and no use of the monetary instrument is better than a smaller Budget surplus and the use of the monetary instrument. But it only obscures that argument to say that the method which we prefer, and which is embodied in this Bill, is, from the budgetary point of view, much more expensive, because if by putting this provision in this Clause we diminish the necessity for so large a budget surplus, we have to that extent relieved the economy of the taxation to be imposed in order to secure the surplus.

On that score, therefore, the budgetary point of view as I put it in support of the argument for this provision is very strong.

5.0 p.m.

Mr. Jay

But would the hon. Gentleman not agree, if he uses that argument, that the deflationary effect of the higher bank rate would reduce the revenue from both indirect and direct taxation and the matter would, therefore, have to be raised?

Mr. Boyd-Carpenter

I would agree with the right hon. Gentleman that the inflationary situation over which he hopes to preside has most happy consequences from the public revenue point of view. Our policy has a significance in restoring a more normal balance in our economy by taking out of the revenue that inflationary creating element. Here we are dealing, as I have said, with the national budgetary point, and I would suggest that the need for higher expenditure owing to higher prices in other parts of our national expenditure would have been inevitable if that expenditure had not been undertaken. At least I carry with me the right hon. Gentleman the Member for Dundee, West in saying that if we had not done it then a much larger budget surplus would have been necessary.

I come back to the consideration which I put before the Committee, that though we have properly and rightly discussed this matter in Committee stage on this Bill in the closest connection with the actual financial provision which it is necessary to make in Clause 32, it is necessary to recall that the expenditure which we are here asking the Committee to agree to is expenditure which is an essential part of my right hon. Friend's measures whose effect upon the economy of our country and the vast improvement that they have brought about is now part of history.

Mr. Hugh Gaitskell (Leeds, South)

I should like to express my thanks to the Chancellor of the Exchequer, as well as my regret that he is not able to be here, for having agreed to our having this debate at a reasonable hour this afternoon instead of at a late hour last week. Both sides of the Committee will agree that we have had an extremely interesting and useful debate, and they would also agree with me that the subject is one worthy of the attention of the House of Commons. It is perhaps unfortunate that we do not get more opportunities for discussing these extremely important matters, which, though technical, nevertheless, directly or indirectly have an effect on the life of everybody in the country.

I am sorry that I cannot couple with my expression of thanks to the Chancellor any expression of agreement or even of gratitude to the Government spokesman on this occasion. I feel that the Financial Secretary did himself less than justice, because he seemed to me to be speaking from a prepared brief and making no attempt to answer the arguments put forward by this side. Indeed, he seemed to have a completely false idea of what the Opposition's view was on this matter. In the course of the few remarks I make I will endeavour to enlighten him on that, though I do not suppose there will be an opportunity of getting him to reply at any further stage of these proceedings.

The Clause which we are considering involves a charge on the whole of the National Debt. In this debate we have confined ourselves almost entirely to the question of the interest on that National Debt, and in particular to the interest on the floating Debt and the increase which this interest on the floating Debt amounts to in the last two years. There was some discussion earlier about the exact amount that was involved, and I think the hon. Member for Handsworth (Sir E. Boyle) said my right hon. Friend the Member for Battersea, North (Mr. Jay) had been widely out in his estimate. My right hon. Friend, when putting forward his estimate, in which he had no assistance from the Government, was expressing what he believed to be the increased cost to the Exchequer of the new policy. It was not merely the narrow issue of 1952–53 expenditure that my right hon. Friend was concerned with, but the actual increase from the point at which the new policy began.

I have no reason to believe that what he said this afternoon, that that increase amounts to £65 million, is wrong. I do not think the Treasury have ever denied it. I agree with the Financial Secretary that the gross figures are confusing and involve many other changes. But my right hon. Friend made the same point himself in his estimate, and we make from the figures available an increase of some £65 million. That is not very far from the figure of £80 million which my right hon. Friend gave last year. At any rate, we can agree that this is a substantial amount.

The first point I want to make is, there seems to be a substantial difference of attitude on the part of hon. Members opposite on the question of the amount of interest on the National Debt. The £65 million is treated as nothing much to worry about, but when it comes to £15 million or even £5 million of other items of Government expenditure, particularly the social services, then there is a tremendous row. The right hon. Gentleman the Member for Blackburn, West (Mr. Assheton) is continually upbraiding us, and the Government Front Bench, for not doing enough to reduce Government expenditure. I was very surprised to hear he said no word of reproach about this particular increase.

Mr. Assheton

I have been saying that, in my opinion, it does, on balance, save the Government money rather than cost the Government money.

Mr. Gaitskell

I think it would be difficult to sustain that contention, and I have heard no argument to that effect except one of a very vague kind. And once one gets into that field—of the particular items of expenditure which indirectly save the Government money—it could be expanded fruitfully over a large part of Government expenditure.

The justification put forward by the Government for this substantial increase —an increase which in our opinion should be most carefully examined—is that the rise in the debt charge was necessary for economic reasons; and, secondly, that it was not only necessary over the past year but is necessary for the next year. In other words, the policy must be continued, and the Financial Secretary this afternoon confirmed that that was the attitude of the Chancellor.

We do not agree that the rise in the debt charge of £65 million was a necessary element of a policy of credit control. That is the first point, and the second is that we at least have the gravest doubts as to whether, even assuming that the Government policy had been right at the time, it should now be continued in existing circumstances. It is to these two propositions that I want now to address myself.

I will try to explain to the Financial Secretary what our attitude is. He kept on speaking about cheap money and dear money, and though I admit that many people use these phrases they are apt to be misleading. Is cheap money, for instance, to cover not merely the 2 per cent. Bank rate, but the policy of trying to reduce the long-term rate to 2½ per cent.?

That would be possible from one point of view, but if that was his interpretation it could hardly be said to be the policy of Sir Stafford Cripps, because under Sir Stafford Cripps' Chancellorship the long-term rate of interest rose quite substantially. I would suggest to him that we are concerned not with the long-term rate of interest but with the short-term rate of interest, and it is better to confine ourselves primarily to that.

I only mention, in passing, that the argument that the banks have a business loss on the value of their investments because of the dear money policy is correct only if we are speaking of the long-term rate of interest. It is equally correct to say that the fall in the value of those stocks and investments largely took place before the Government came into power and introduced the new monetary policy. The major effect has undoubtedly been on short-term rates.

My second point is that so far as the short-term rate is concerned—I have already explained that the long-term rate had already risen—it was our view, and still is, that we ought not to have to burden the Exchequer in this manner in order to exercise effective credit control. The argument on the other side is a familiar one; that if the Government are borrowing, if they want to exercise credit control, then they must obviously exercise that control over the banks. It is, therefore, impossible to peg the Treasury bill rate, because if you do, the banks can always re-borrow from the Bank of England at ½ per cent. or whatever figure is chosen.

I was interested in the point made by the hon. Member for Handsworth (Sir E. Boyle) that one had to take out that peg in order to have effective control over credit. That is true, on the assumption that there is no co-operation from the banks at all. If the hon. Member is saying to us, "You were very silly to expect any such co-operation. What you should have done was to exercise your powers of control by removing the peg long ago," that is a point of view, though it is not one to which I subscribe.

Sir E. Boyle

I suggest that physical controls or exhortations are much more likely to be effective if monetary policy is, at the same time, going in the same direction.

Mr. Gaitskell

It is not a question of monetary policy going in the same direction. The monetary policy, so far as its effects on the country are concerned, starts from the point of the banks' lending or the banks' purchasing or selling securities or bills. If, in fact, the banks are prepared to collaborate, they should be able to carry out whatever policy the Government ask them to carry out. I do not believe that it is impossible to secure that collaboration over, for instance, the extent of advances and that, therefore, it is necessary to exercise this ultimate sanction, which I agree has been in the past the traditional sanction.

I believe that the control of credit can and should be exercised in a more direct manner by the Treasury over the banking system. If the hon. Gentleman says to me, "Well, you cannot do that, it is no good. Whatever the banks may say, they do not carry out this policy and you have to exercise the other system, the traditional system of control, whether by bank rate or open market policy," I would say that, even so, I am not satisfied that we need to resuscitate the policy of the Bank rate itself.

If the Government are giving any serious consideration to this matter, I ask them to consider the example of some other countries where the control over the banking system is exercised far more through the direct fixing of liquidity ratios—the ratio in which the banks may hold different forms of assets—-than through movements of short-term interest rates. Sweden is a particularly interesting example and, of course, though there is a relative difference, America herself has far more direct control.

Mr. Horobin

This argument is becoming a trifle technical but, as I understand, the right hon. Gentleman is endeavouring to found his argument upon the possibility, not over a short period but in perpetuity, of completely divorcing long-term from short-term rates. He quoted America. The American Federal Reserve Board have been trying, at the expense of a prolonged war with the Federal Reserve structure, to carry that out and it has broken down completely. Is the right hon. Gentleman suggesting to the Committee the view that we can in perpetuity keep long-term rates and short-term rates entirely divorced from one another?

Mr. Gaitskell

No, I am speaking about the rate on Treasury bills. It is my view that with the size of the present Government debt some policy must be found under which Treasury bills are taken out of the rest of the market for bills, and the rate of interest on those pegged, as in the war and for a long time afterwards, so that changes in the credit structure can take place without burdening the Exchequer. I believe that in course of time we shall come to such an arrangement, and my criticism of the Government is that, far from making any attempt to find it, they are simply reverting to the traditional policy. I am not saying it is there waiting for us because there would have to be investigations and discussions. However, I do not want to spend much time on this because, as the hon. Gentleman said, it is a highly technical matter.

5.15 p.m.

My third point is the economic effect of the change in the Bank rate and I couple with that the change in the credit structure of the banking system. Looking at it objectively I think there is considerable doubt as to precisely how much effect those policies have had on the economy. I can see that there may have been some influence through these policies on the level of stocks which firms hold. That has come about, incidentally, simply because of the banks restricting— in effect, rationing—credit to firms plus a certain psychological effect which the rise in interest rates may have had.

At any rate, I think it is possible that that may be so, and I would not deny it. I would say, however, that even if there had been no change in monetary policy, it is extremely likely that firms would have ceased building up stocks for the simple reason that world commodity prices were already falling. After all, there is a point at which people do not want to hold any more stocks in any case.

My hon. Friend the Member for Stetch-ford (Mr. Roy Jenkins) dealt effectively with the argument of the hon. Member for Oldham, East (Mr. Horobin) that this policy had itself had an influence on the commodity markets. As my hon. Friend said, the fact is that the break in prices came six months before this policy was introduced——

Mr. Horobin

It had already been introduced in the U.S.A.

Mr. Gaitskell

Nobody would deny that what happens in the economy of a big and powerful buyer affects the rest of the world. Of course, any change in policy in the United States is likely to affect world markets, but it is our contention that changes in policy here affect them very much less.

Mr. Horobin

The change in policy in America was a change towards dearer money.

Mr. Gaitskell

We are not contesting that. In so far as it is true that a dearer money policy there had an influence in the ways I have indicated, it might have an influence there. That might be true but, so far as this country is concerned, it is extremely difficult to say that it was anything like the sole factor which induced the change in stocking up and led to the fall in prices.

The truth is that hon. Gentlemen opposite will persist in talking in this rather ridiculous way about a raging inflation here. I would ask them, the hon. Member for Oldham, East and the Financial Secretary, some time to think out exactly what they mean by inflation. Do they mean a deficit in the balance of payments? If one takes 1951 then there was an inflationary condition, but it is equally clear that there could not possibly have been an inflation in 1950 if that is the case because we had an immense surplus in that year.

Nobody can possibly contend that any change in the internal monetary situation occurred between 1950 and 1951 which could explain the difference between the balance of payments between the two years. I do not want to go into all that again. We have argued it out here during the debate on the Budget and I have explained fully how I believe that change took place, and also how the change in 1952 took place. I do not think that monetary policy had much to do with it one way or the other.

As to the movement of prices, the fact is that in this country we are tremendously affected by world prices. The most important fact since the Government came into power is that while prices elsewhere have been falling—and I mean the cost of living—or rising slightly, they continued to rise here and to rise faster than in other countries. That is the really important difference.

I turn, finally, to the present situation. I leave the arguments about doctrine, interesting and important as they are, and come to the question of what ought to be done now. It is not denied that we have had a flagging of production lately. The Chancellor himself has used the words, "under-production." We all know we are only now producing about as much as we were two years ago. It is admitted on all sides—there may be dispute about the causes—that the situation is rather deflationary than inflationary, or at any rate that there has been a marked change. I should say that there has been a change in the whole world situation.

It is admitted, further, that because of the stretching out of the defence programme we ought now to make a great effort to increase the level of investment in this country. I ask the Government and hon. Members opposite whether they really believe they are likely to get a big expansion in investment—if they agree with us that that is necessary—on the basis of the present Bank rate policy? I find it extremely hard to believe that that would be so.

I admit, here, that the distinction between short-term and long-term rates has to be borne in mind. It would obviously be foolish to expect an increase in investment as a result of reducing short-term rates if long-term rates were unaffected. If it is the case that the major influence of the Bank rate has been a psychological influence because, however irrational, people regard a rise as a signal for deflation and a fall as a signal of expansion if they want expansion, I would have thought that they should think seriously about putting the policy into reverse.

It may be said that that would mean building up stocks and that the balance of payments will not stand that. There might be some such effect, but I think it most unlikely that changes in the short-term rate, coupled with tighter or looser credit by the tanks themselves are decisive in this matter. I would have thought that at the moment there was no very serious danger that the consequences would be an increase in stocks, but if there were, is not that a risk that ought to be taken? Are we not so anxious to build up our competitive position and to improve our equipment in our industry that we should give every possible incentive to do so? If, in fact, the Government are sincere about efforts to raise investment I am bound to say that I find it hard to see how they can continue with their monetary policy as it is.

Mr. A. C. M. Spearman (Scarborough and Whitby)

Can the right hon. Member think of any instance where a manufacturer has been deterred by high interest rates from investing and improving his equipment, knowing that it will produce immediate results? Is not a high rate of interest policy going to deter only long-term plans which, although they are excellent, we cannot afford?

Mr. Gaitskell

If the hon. Member is right that is something of a criticism of Government policy earlier. Presumably it works both ways, or does not, and the hon. Member is saying, in effect, that it does not. If so, where is the case for the policy of 1951? I would not agree entirely with that. I have admitted that it is extremely difficult to be sure in this matter. I think that is the only honest point of view I can adopt and I believe that the psychological effect of the higher Bank rate did have a seriously discouraging effect on investment. It led to boards of directors all over the country saying, "We had better be careful. We were thinking of building that extension, or buying those machines which we thought were so good "——

Mr. Frederick Lee (Newton)

Or new ships.

Mr. Gaitskell

Or, as my hon. Friend says, they may be thinking of having new ships.

Mr. Spearman

Manufacturers base their long-term policy on this and that is what we want so much to encourage now. Steady interest rates influence manufacturers on their long-term projects but not on those urgent ones that we want so much to encourage now, that is why I think the dear money policy has freed money for vital investment purposes.

Mr. Gaitskell

I wish I had more time to discuss this matter. Very long-term investments are now mostly in the hands of the Government, whether they be for housing or generating stations and, in so far as they are not, ships have been mentioned, where I should think there would be a great deal to be said for encouraging production. Indeed, I was not aware that hon. Members opposite had taken any other line in recent debates.

I would sum up our position like this: We do not believe that the old fashioned traditional policy of the Bank rate is, in present circumstances, a very effective weapon of control. We do, of course, believe that credit control is an instrument of economic planning. The Financial Secretary to the Treasury was good enough to quote from the recent policy statement. It is perfectly plain that that statement sets out very clearly that of course monetary policy is one of the instruments of control. But we believe that instrument can be used in a way which does not involve this heavy burden on the Exchequer. That is our first charge against the Government.

Our second charge against the Government is that in existing circumstances we believe their use of the Bank rate is having damaging consequences. We believe that it is inconsistent with what they say and profess in other fields and on other occasions. In view of the fact that this is the only opportunity of giving and recording our views on this important

policy, for the reasons I have given, I suggest to my hon. Friends that we should now divide against the Clause.

Question put, "That the Clause stand part of the Bill."

The Committee divided: Ayes, 219; Noes, 189.

Division No. 195.]	AYES	[5.30 p.m.
Aitken, W. T.	Gridley, Sir Arnold	Noble, Cmdr. A. H. P.
Allan, R. A. (Paddington, S.)	Grimond, J.	Nutting, Anthony
Alport, C. J. M.	Grimston, Hon. John (St. Albans)	Oakshott, H. D.
Arbuthnot, John	Grimston, Sir Robert (Westbury)	Odey, G. W.
Ashton, H. (Chelmsford)	Hall, John (Wycombe)	O'Neill, Phelim (Co. Antrim, N.)
Assheton, Rt. Hon. R. (Blackburn, W.)	Harris, Frederic (Croydon, N.)	Ormsby-Gore, Hon. W. D.
Astor, Hon. J. J.	Harrison, Col. J. H. (Eye)	Orr-Ewing, Charles Ian (Hendon, N.)
Baker, P. A. O.	Harvey, Air Cdre. A. V. (Macclesfield)	Osborne, C.
Baldock, Lt.-Cmdr. J. M.	Harvey, Ian (Harrow, E.)	Partridge, E.
Baldwin, A. E.	Harvie-Watt, Sir George	Peake, Rt. Hon. O.
Barber, Anthony	Hay, John	Perkins, W. R. D.
Baxter, A. B.	Head, Rt. Hon. A. H.	Peto, Brig. C. H. M.
Bell, Philip (Bolton, E.)	Heath, Edward	Peyton, J. W. W.
Beach, Maj. Hicks	Higgs, J. M. C.	Pilkington, Capt. R. A.
Bennett, F. M. (Reading, N.)	Hinchingbrooke, Viscount	Pitman, I. J.
Bevins, J. R. (Toxteth)	Hirst, Geoffrey	Powell, J. Enoch
Bishop, F. P.	Holland-Martin, C. J.	Price, Henry (Lewisham, W.)
Black, C. W.	Holmes, Sir Stanley (Harwich)	Prior-Palmer, Brig. O. L.
Bossom, Sir A. C.	Hopkinson, Rt. Hon. Henry	Raikes, Sir Victor
Bowen E. R.	Horobin, I. M.	Redmayne, M.
Boyd-Carpenter J. A.	Howard, Gerald (Cambridgeshire)	Rees-Davies, W. R.
Bayle, Sir Edward	Howard, Han. Greville (St. Ives)	Remnant, Hon. P.
Braine, B. R.	Hulbert, Wing Cdr. N. J.	Renton, D. L. M.
Braithwaite, Sir Albert (Harrow, W.)	Hurd, A. R.	Roberts, Peter (Heeley)
Braithwaite, Lt.-Cdr. G. (Bristol, N..W.)	Hutchinson, Sir Geoffrey (Ilford, N.)	Robertson, Sir David
Bromley-Davenport, Lt.-Col. W. H.	Hylton-Foster, H. B. H.	Robinson, Roland (Blackpool, S.)
Brooke, Henry (Hampstead)	Jekins, Robert (Dulwich)	Robson-Brown, W.
Buchan-Hepburn, Rt. Hon. P. G. T.	Johnson Eric (Blackley)	Rodgers, John (Sevenoaks)
Bullard D. G.	Joynson-Hicks, Hon. L. W.	Roper, Sir Harold
Bullus, Wing Commander E. E.	Kaberry, D.	Ropner, Col. Sir Leonard
Burden, F. F. A.	Keeling, Sir Edward	Russell, R. S.
Butcher, Sir Herbert	Kerr, H. W.	Ryder, Capt. R. E. D.
Butler, Rt. Hon. R. A. (Saffron Walden)	Lambert, Hon. G.	Salter, Rt. Hon. Sir Arthur
Campbell, Sir David	Lancaster, Col. C. G.	Sandys, Rt. Hon. D.
Cary, Sir Robert	Law, Rt. Hon. R. K.	Savory, Prof. Sir Douglas
Channon, H.	Leather, E. H. C.	Scott, R. Donald
Clearke, Col. Ralph (East Grinstead)	Legge-Bourke, Maj. E. A. H.	Scott-Miller, Cmdr. R.
Clarke, Brig. Terence (Portsmouth, W.)	Legh, Hon. Peter (Petersfield)	Simon, J. E. S. (Middlesbrough, W.)
Cole, Norman	Linstead, Sir H. N.	Smithers, Sir Waldron (Orpington)
Conant, Maj. R. J. E.	Lloyd, Rt. Hon. G. (King,'s Norton)	Soames, Capt. C.
Cooper-Key, E. M.	Lloyd, Rt. Hon. Selwyn (Wirral)	Spens, Rt. Hon. Sir P. (Kensington, S.)
Craddock, Beresford (Spelthorne)	Lockwood, Lt.-Col. J. C.	Stanley, Capt. Hon. Richard
Crookshank, Capt. Rt. Hon. H. F. C.	Low, A. R. W.	Stevens, G. P.
	Lucas, Sir Jocelyn (Portsmouth, S.)	Steward, W. A. (Woolwich, W.)
Crosthwaite-Eyre, Col. O. E.	Lucas, P. B. (Brentford)	Stoddart-Scott, Col. M.
Grouch, R. F.	Lucas-Tooth, Sir Hugh	Storey, S.
Crowder, Petre (Ruislip—Northwood)	McAdden, S. J.	Strauss, Henry (Norwich, S.)
Davidson, Viscountess	McCorquodale, Rt. Hon. M. S.	Studholme H. G.
Davies, Rt. Hn. Clement (Montgomery)	Macdonald, Sir Peter	Summers, G. S.
Deedes, W. F.	McKibbin, A. J.	Sutcliffe, Sir Harold
Digby, S. Wingfield	Mackie, J. H. (Galloway)	Taylor, Charles (Eastbourne)
Dodds-Parker, A. D.	Maclean, Fitzroy	Taylor, Wiliam (Bradford, N.)
Donner, Sir P. W.	Macleod, Rt. Hon. lain (Enfield, W.)	Thomas, Rt. Hon. J. P. L. (Hereford)
Doughty, C. J. A.	Macpherson, Niall (Dumfries)	Thomas, Leslie (Canterbury)
Drayson, G. B.	Maitland, Comdr. J. F. W. (Horncastle)	Thomas, P. J. M. (Conway)
Fell, A.	Manningham-Buller, Sir R. E.	Thorneycroft, Rt. Hn. Peter (Monmouth)
Finlay, Graeme	Markham, Major Sir S. F.	Tilney John
Fisher, Nigel	Marples, A. E.	Touche, Sir Gordon
Fleetwood-Hesketh, R. F.	Maude, Angus	Turner, H. F. L.
Fletcher-Cooke, C.	Maudling, R.	Turton, R. H.
Ford, Mrs. Patricia	Maydon, Lt.-Comdr. S. L. C.	Tweedsmuir, Lady
Fort, R.	Medlicott, Brig. F.	Vaughan-Morgan, J. K.
Foster, John	Mellor, Sir John	Wakefield, Edward (Derbyshire, W.)
Fraser, Hon. Hugh (Stone)	Molson, A. H. E.	Wakefield, Sir Wavell (St. Marylebone)
Fyfe, Rt. Hon. Sir David Maxwell	Moore, Lt.-Col. Sir Thomas	Walker-Smith, D. C.
Garner-Evans, E. H.	Mott-Radclyffe, C. E.	Ward, Hon. George (Worcester)
George, Rt. Hon. Maj. G. Lloyd	Nabarro, G. D. N.	Ward, Miss I. (Tynemouth)
Godber, J. B.	Nicholls, Harmar	Waterhouse, Capt. Rt. Hon. C.
Gough, C. F. H.	Nicholson, Godfrey (Farnham)	Webbe, Sir H. (London & Westminster)
Gower, H. R.	Nicolson, Nigel (Bournemouth, E.)	Wellwood, W.
Graham, Sir Fergus	Nield, Basil (Chester)	Williams, Rt. Hon. Charles (Torquay)
Williams, Sir Herbert (Croydon, E.)	Wilson, Geoffrey (Truro)	TELLERS FOR THE AYES:
Williams, Paul (Sunderland, S.)	Wood, Hon. R.	Mr. Drewe and
Williams, R. Dudley (Exeter)	York, C.	Mr. Richard Thompson.
Wills, G.
NOES
Acland, Sir Richard	Hannan, W.	Reid, Thomas (Swindon)
Albu, A. H.	Hargreaves, A.	Reid, William (Camlachie)
Allen, Scholefield (Crewe)	Harrison, J. (Nottingham, E.)	Rhodes, H.
Anderson, Frank (Whitehaven)	Hayman, F. H.	Roberts, Albert (Normanton)
Attlee, Rt. Hon. C. R.	Henderson, Rt. Hon. A. (Rowley Regis)	Roberts, Goronwy (Caernarvon)
Awberry S. S.	Hewitson, Capt. M.	Robinson, Kenneth (St. Pancras, N.)
Bacon, Miss Alice	Hobson, C. R.	Rogers, George (Kensington, N.)
Bartley, P.	Holman, P.	Royle, C.
Bellenger, Rt. Hon. F. J	Holmes, Horace (Hemsworth)	Shackleton, E. A. A.
Benn, Hon. Wedgwood	Houghton, Douglas	Shinwell, Rt. Hon. E.
Beswick F.	Hudson, James (Ealing, N.)	Short, E. W.
Bevan, Rt. Hon A. (Ebbw Vale)	Hughes, Cledwyn (Anglesey)	Silverman, Sydney (Nelson)
Bins G. H. C.	Hynd, H. (Accrington)	Simmons, C. J. (Brierley Hill)
Blackburn F.	Irvine, A. J. (Edge Hill)	Skeffington, A. M.
Blenkinsop, A.	Irving, W. J. (Wood Green)	Slater, J. (Durham, Sedgefield)
Blyton, W. R.	Isaacs, Rt. Hon. G. A.	Smith, Ellis (Stoke, S.)
Bowles, F. G.	Janner, B.	Smith, Norman (Nottingham, S.)
Brockway, A. F.	Jay, Rt. Hon. D. P. T.	Snow, J. W.
Brook, Dryden (Halifax)	Jeger, George (Goole)	Sorensen, R. W.
Broughton, Dr. A. D. D.	Jeger, Dr. Santo (St. Pancras, S.)	Soskice, Rt. Hon. Sir Frank
Brown Thomas (Ince)	Jenkins, R. H. (Stechford)	Sparks, J. A.
Burke, W. A.	Johnson, James (Rugby)	Stewart, Michael (Fulham, E.)
Burton Miss F. E.	Jones, David (Hartlepool)	Strachey, Rt. Hon. J.
Callaghan, L. J.	Key, Rt. Hon. C. W.	Stross, Dr. Barnett
Castle, Mrs. B. A.	King, Dr. H. M.	Summerskill, Rt. Hon. E.
Champion, A. J.	Lee, Frederick (Newton)	Sylvester, G. O.
Collick, P. H.	Lewis, Arthur	Taylor, Bernard (Mansfield)
Corbet, Mrs. Freda	Lipton, Lt.-Col. M.	Taylor, Rt. Hon. Robert (Morpeth)
Cove, W. G.	MacColl, J. E.	Thomas, David (Aberdare)
Craddock, George (Bradford, S.)	McKay, John (Wallsend)	Thomas, Ivor Owen (Wrekin)
Crosland, C. A. R.	McLeavy, F.	Thomson, George (Dundee, E.)
Daines, P.
Dalton, Rt. Hon. H.	McNeill, Rt. Hon. H.	Tomney, F.
Darling, George (Hillsborough)	MacPherson, Malcolm (Stirling)	Turner-Samuels, M.
Davies, Ernest (Enfield, E.)	Mainwaring, W. H.	Ungoed-Thomas, Sir Lynn
Deer, G.	Mallalieu, E. L. (Brigg)	Usborne, H. C.
Dodds, N. N.	Mason, Roy	Viant, S. P.
Donnelly, D. L.	Mayhew, C. P.	Webb, Rt. Hon. M. (Bradford, C.)
Ede Rt. Hon. J. C.	Mellish, R. J.	Weitzman, D.
Edelman, M.	Messer, Sir F.	Wells, Percy (Faversham)
Edwards', Rt. Hon. John (Brighouse)	Mitchison, G. R.	Wells, William (Walsall)
Evans Edward (Lowestoft)	Morley, R.	White, Mrs. Eirene (E. Flint)
Evans' Stanley (Wednesbury)	Morris, Percy (Swansea, W.)	While, Henry (Derbyshire, N.E.)
Fernyhough, E.	Morrison, Rt. Hon. H. (Lewisham, S.)	Whiteley, Rt. Hon. W.
Fienburgh, W.	Mort, D. L.	Wigg, George
Finch, H. J.	Moyle,, A.	Wilcock, Group Capt. C. A. B.
Follick, M.	Mulley, F. W.	Wilkins, W. A.
Foot, M. M.	Murray, J. D.	Willey, F. T.
Fraser, Thomas (Hamilton)	Neal, Harold (Bolsover)	Williams, David (Neath)
Freeman, John (Watford)	Noel-Baker, Rt. Hon. P. J.	Williams, Rev. Llywelyn (Abertillery)
Gaitskell, Rt. Hon. H. T. N.	Oldfield, W. H.	Williams, Ronald (Wigan)
Gibson, C. W.	Oliver, G. H.	Williams, W. R. (Droylsden)
Glanville, James	Orbach, M.	Williams, W. T. (Hammersmith, S.)
Gordon-Walker, Rt. Hon. P. C.	Paling, Rt. Hon. W. (Dearne Valley)	Wilson, Rt. Hon. Harold (Huyton)
	Paling, Will T. (Dewsbury)	Winterbottom, Richard (Brightside)
Greenwood, Anthony (Rossendale)	Plamer, A. M. F.	Wyatt, W. L.
Grenfell, Rt. Hon. D. R.	Pannell, Charles	Yates, V. F.
Griffiths, David (Rother Valley)	Pearson, A.	Younger, Rt. Hon. K.
Griffiths, Rt. Hon. James (Llanelly)	Peart, T. F.
Hale, Leslie	Price, Joseph T. (Westhoughton)	TELLERS FOR THE NOES:
Hall, Rt. Hon. Glenvil (Colne Valley)	Proctor, W. T.	Mr. Arthur Allen and
Hall, John T. (Gateshead, W.)	Pursey, Cmdr, H.	Mr. John Taylor.
Hamilton, W. W.	Reeves, J.

Clause ordered to stand part of the Bill.

Clause 33 ordered to stand part of the Bill.