§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Wills.]
§ 12.16 a.m.
§ Mr. F. M. Bennett (Torquay)
When I first heard that I had been allocated the Adjournment debate tonight on a highly technical and complicated subject, I somewhat sadly envisaged speaking at a much later hour than this. I am grateful for this opportunity to raise what is, particularly at this time, an extremely important subject when we are undergoing considerable economic difficulties.
In recent weeks and months we have had a great deal of controversy on the subject of Treasury bills and their inflationary or other effect. In my humble opinion, those who have attacked the Treasury bill most savagely as being directly inflationary are just about as wrong as those who have defended it too hotly and said that by the provision of cheap money for the Government it is, on the contrary, the reverse of inflationary. To my mind, whether the use of the Treasury bill is inflationary or not depends upon the purpose for which it is used and the circumstances in which it is used.
If it is to serve its proper purpose, the Treasury bill should be used in exactly the same way as a commercial bill, for it is intended to provide for the Government the same sort of money as the commercial bill provides for private trade, both internal and overseas.
What are the normal uses traditionally associated with a bill drawn on London? The first is that it should essentially be short-term, and the second is that it should be self-liquidating as regards the purpose for which the money is obtained. As the subject is a wide one and I have only a short time to cover it, I will content myself by giving three brief examples of how I consider the Treasury bill should be used in its proper rôle, in which it should not suffer criticism.
2477 First, there are seasonal revenue trends and movements. At the beginning of the year there is a shortfall of revenue, and during this period, while Government expenditure must continue, it is entirely proper for the Government to issue Treasury bills until the revenue shortfall is cured in due course, when the bills can be paid off. In this instance, both conditions—short-term and self-liquidating—are fulfilled.
Secondly, in these days when the Government are making overseas purchases of commodities, a good example of the proper rôle of a Treasury bill arises when the Government, in purchasing overseas a commodity such as sugar, are able to obtain a good bargain during the spring or early part of the year. It would be quite right for the Government to buy the commodity and raise the money by Treasury bills, which would mature later in the year when the commodity was released to meet demand in this country.
Thirdly, in the case of a Government bond or other loan issue reaching maturity—this is one of the few instances in which a Treasury bill might have even a disinflationary effect, if only temporarily—the Government could use the bill to absorb an excess of money when the issue reached maturity and was encashed.
Those are three examples of how the bill ought to be used. In my opinion, they are unhappily in marked contrast with recent developments. I am afraid that in post-war years the tendency has grown up—through a belief that by borrowing day-to-day money more cheaply the Government are saved higher interest rates—to use Treasury bills for something for which they were never intended and ought not to be used, such as long-term finance for the building of roads, schools and undertakings of that sort. The use of the Treasury bill for such purposes tends to produce an inflationary effect unless other circumstances, to which I will refer in a moment, coincidentally mitigate against it.
I suggest anyhow that it is an illusion that to borrow short and to lend long, which is the classic thing one should not do either in private or public business, you really save money. The legend has grown up that by borrowing at a time when day-to-day money rates are cheaper 2478 than the Government could obtain on the market, we have been saving money. Although that was so on the face of it, it was only temporarily so for two reasons; first, because by its contribution to the inflationary effect the value of the money which the Government thought they were saving was lowered, and, secondly, when the process ultimately comes to an end, higher rates of interest have to be paid than if the transaction had been launched on proper lines for its proper purpose in the first place.
There is ample proof of what I am saying in the Government's recent—overdue, in my submission, but nevertheless welcome—5 per cent. 15-month loan issue which was floated within the last few days, I do not think that the Economic Secretary to the Treasury or any other Minister would deny that had this step been taken in the lush days of 1952 we could then easily have obtained the same money at 3½ per cent. for twenty years whereas now the Government are having to pay 5 per cent. for fifteen months. If in those happier days the Chancellor had done what we asked, the Exchequer would now have to pay the rate now payable. So the illusion that by the use of Treasury bills for long-term finance when day-to-day money is cheap the Government save money is wrong on every count.
Such methods are wrong, too, on a variety of grounds, theoretical and practical, and hence I can only hope that the recent change of heart on the part of the Treasury is due not only because day-to-day money is at the moment just as dear, or even dearer, than long-term borrowing, but because it really is a change of heart and not merely due to the belief that this idea of saving interest rates cannot even be valid in the temporary effect at present.
The Government nowadays have gone into business and finance. They ought to behave ethically in business and finance in precisely the same way as they expect private enterprise to abide by the code which they lay down. I know only too well that where commercial bills are concerned, the Bank of England and the Treasury regard this question of short-term equality and self-liquidation as all-important. I have heard all this before. In the last Parliament I pressed the Minister to extend the ordinary commercial bill from ninety to 120 days. It is astonishing how difficult it was to 2479 obtain even that concession. We were not suggesting that there should be any long-term finance by bills but simply that there should be an extension of thirty days on a genuine self-liquidating bill.
I well remember the Minister's answer in which he pointed out that the bill on London was only suitable for really short-term self-liquidating purposes. Yet at the same time, the Government have blissfully gone on over the years using Treasury bills for financing precisely the sort of projects which the Bank of England would never look at so far as commercial bills are concerned; which would never rediscount if private enterprise tried to use day-to-day money.
I will now explain why I think the economic effect of an excessive or improper use of Treasury bills is also bad. In 1952, after the Conservative Government had been returned to power and public confidence in our economic stability had been restored, there was a great increase in savings and deposits in the banks. While savings rose, they concealed the inflationary effect which, in the mounting volume of Treasury bills, would otherwise have shown itself sooner.
For the moment savings are not rising in that way, nor are deposits, and for the first time we have been seeing the real effect of a constantly mounting volume of Treasury bills. I put it to the Economic Secretary that if he followed my suggestion too literally tonight, steered away from Treasury bills and converted into long-term loan issues all outstanding bills which were financing long-term projects, he would be as horrified as the rest of the country at the illiquidity of the banks which such a situation would demonstrate to exist.
Why do I think that bills are wrong in their effect on the banking system? This is a highly technical aspect, and I could argue for some time with illustrative figures, but I will cut it down to the barest minimum. Since the banks can only meet increasing demands for Treasury bill finance by drawing on cash deposits, and yet have to maintain the cash ratio at 8 per cent., this can only be done by banks, in one way or another, obtaining more money to restore the 8 per cent. ratio from the Government and thus adding to the inflationary pressure.
2480 If we contrast the long-term loan, in this context, we see the complete difference in its effect on the banking system. If we are properly to float long-term loans, for long-term financing purposes, rather than resort to Treasury bills, then there is a totally different effect as to public subscriptions to such a loan: the deposits in the bank which the public use to buy the long-term loan are really removed from the banks instead of it being only a paper transaction, as is the case with subscriptions to Treasury bills. In due course, then, when the money comes back from the Government and is spent and returns to the banks, the liquidity ratio and the ratio of cash and other deposits are restored.
As for the banks' subscriptions to such a long-term loan, it is of course true that the investment sector of their deposits rises, and immediately, without any credit squeeze being imposed or requested by the Chancellor, the banks will take the appropriate steps to curtail advances so as to restore their own liquidity ratio.
I should like, finally, to mention three general points to show why I welcome recent signs that the Government are determined to steer away from Treasury bill finance. If we continue to develop Treasury bill finance, it should be clearly understood that we are doing great harm to London as a world financial centre. If we constantly reduce the amount of short-term money which is available for the financing of international trade in this country, by drawing off that money for the internal financing of Treasury bills, we must lessen the amount of overseas trade which this country can finance. That does great harm to London as a financial centre, not only for the sterling area but for the world.
In that event, too, we lose not only the amount of commission on the commercial bills, since we no longer have money to devote to them; we lose the other things for which people come to London—shipping and insurance, for instance. If they do not come to London for their bills they will not come to London for the ancillary purposes either.
Second, when the Chancellor wishes to use Bank Rate as the flexible weapon it is meant and purported to be, I hope he will remember that the field in which it has the most immediate effect—the commercial bill is now, I believe, down to only about 14 per cent. of the whole at 2481 the moment, with the rest of short-term money tied up in Treasury bills outside the most effective scope of a high bank and discount rate. Thirdly only if we have in good, boom times real orthodox, long term, steady financing in these conditions have we means in reserve against the time when the slump comes along. We can help best to face a deflationary situation and a slump only if we have in reserve the means at such a time to pour out Treasury bills to get money flowing in the country again. We cannot do so if we have used up in boom times all that power which the Government one day will want to have at their disposal, if there should be—what we hope will not occur—serious deflation.
I have tried to speak constructively and not to be critical. As far as one can see the Government are showing welcome signs that now they believe that relying too much on Treasury bills for internal financing has gone far enough, if not already too far. 'The very action they have taken in their new issue is evidence of their determination to return to more orthodox methods of long-term finance for long-term purposes. After that recent evidence one does not want to be recriminatory about the past, and I welcome the new steps they have taken, and I urge them to carry on the good work.
§ 12.32 a.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
I know how much the House wants to hear the Economic Secretary, who is always extremely interesting, but particularly on this subject which he has made so very much his own, and I shall not intervene between the House and my hon. Friend for more than a moment or two. I appreciate very much my hon. Friend's kindness in allowing me these few moments in which to speak.
I would draw attention to the fact that with a high Bank Rate and Treasury bill financing we have an estimated amount of about £300,000 million of foreign money here on which we are paying interest at the Treasury bill rate, which means an annual outgoing in hard foreign exchange of about £150 million at current rates. The recent changes in Bank Rate in the year have about doubled the figure. A year ago it would have been about £75 million. Now it is £150 million.
2482 I urge most strongly that, in considering what must be done to build up the requirements of British industry, and the effort it must make to make up £75 million in exports, we should see how important it is for our national standard of living and our balance of payments to make some real effort to get the Treasury bill rate down. Historically, there should be no reason at all why the Treasury bill rate should be, as it is now, higher than the long term rate. I do hope that in the consideration of these matters the Economic Secretary will—as I am sure he does—consider that the management of our short term debt is one of the major items on the road to recovery. If it is properly handled we shall be a long way along towards achieving the results we desire.
§ 12.33 a.m.
§ The Economic Secretary to the Treasury (Sir Edward Boyle)
I would assure my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) that I fully realise the effect of the higher Bank Rate and the higher Treasury bill rate on our balance of payments. I am sorry that the right hon. Gentleman the Member for Bishop Auckland (Mr. Dalton) and the right hon. Gentleman the Member for Battersea, North (Mr. Jay), who would have been particularly pleased to have heard his remarks, are not here tonight. Although I do not want to mitigate its effect, all I can say is that I think a high Bank Rate and high Treasury bill rate have mitigated the danger to this country and the sterling area from devaluation. I strongly believe myself that the recent increase in Bank Rate has done something to convince opinion overseas that we intend—as we do—to hold the £ sterling at its present parity. However, I do take the point my hon. Friend has made.
I am sure the House is grateful to my hon. Friend the Member for Torquay (Mr. F. M. Bennett) for raising this matter tonight. As the hon. Gentleman has not said it, I cannot resist saying that it is perhaps suitable on this evening, when we have been debating the Navy for some time, that we should be discussing the floating debt.
The operations of the Exchequer involve the flow of very large sums in and out of circulation and are therefore of course of the greatest importance to the 2483 execution of our monetary policy. The Exchequer must borrow to replace maturing debt and to meet such outlay as is not covered by the Revenue surplus and other receipts.
The point of immediate importance is the question of the effect of bill borrowing on the control of credit and on the money supply. Let me begin with one or two points on which I think we should all be agreed. When the Exchequer borrows from the public, in the widest possible sense of that term, it takes money out of circulation. I think the hon. Member for Torquay would agree that it makes no difference whether the borrowing is by issue of stock, by issue of bills, by issue of tax reserve certificates or by issue of Savings certificates.
Indeed, from this point of view, Treasury bills have been of value already as witness the big transfers from bank deposits into bills in the early part of 1955, and should be of value again if we may judge by the number of non-market applications for bills at, for example, the tender on 25th February of this year. I think the effect on a bank's finances is the same whether the bank buys a bill or any other security. Therefore, it is all one whether the Treasury borrows by issue of bills or otherwise, but the point which I think hon. Members have in mind, as have other people outside this House, is this: the difference comes when the bank is the lender, because to a bank a bill is a liquid asset and other investments are not.
As I understand it, the point which is frequently made is that the more bills the bank holds the higher the bank's liquidity ratio and therefore the higher the bank's ability to act. This point was put very clearly by Mr. Wilfred King recently when he said that bill borrowing is inflationary because in the end—and these are his words—the banks will lend up to the limit of their liquidity ratio. As I see it, the point that is frequently advanced is that bill borrowing in itself is not inflationary but bill borrowing from the banks can be inflationary if the banks operate on their conventional liquidity ratio.
Let us examine this thesis in the light of what actually happened in 1955, because I think that the events of 1955 show very clearly that it is wrong to 2484 assume that the issue of Treasury bills must add to the money supply and cause inflation. In fact, the opposite occurred in the early months of 1955, when companies and other investors were attracted by the high rates offered by Treasury bills and transferred their liquid savings from bank deposits into bills. Nor, indeed, need an increase of bills in the assets of the banks result in an increase in the money supply. In the period June to November of 1955, the clearing bankers' holdings of floating debt rose by £325 million, but net deposits went down by £53 million.
Also, of course, exactly the same story is seen if we look at advances. The banks, moved partly, I admit, by the special request of my right hon. Friend the Lord Privy Seal on 25th July, but partly by fear of pressure on their liquidity after the turn of the year, operated what was in effect a liquidity ratio of 34 per cent., to 38 per cent. instead of the conventional 30 per cent. and reduced advances during the latter half of 1955 while adding to their bill holdings.
While I suggest that the figures which I have quoted show quite clearly that an increase in Treasury bills need not be inflationary—and as a matter of historical fact in the latter half of 1955 was not inflationary—at the same time it is, I think, common ground that an increase in Treasury bill borrowing must relax the monetary pressure on the liquidity of the banks. Hence I entirely agree, if credit policy is to be supported by pressure on bankers' liquidity, everything possible must be done to reduce the volume of the Floating Debt, or at any rate arrest its increase.
Now, what is being done? Here our first object is to reduce the requirements of the Exchequer by using the Budget revenue surplus to redeem debt, and by doing all that is possible to reduce the capital outlay, both of the Government and of public boards, that is financed by Exchequer borrowing. It is also our aim to reduce Exchequer borrowing by diverting the local authorities from the Exchequer as a source of capital to the stock and mortgage markets where they can attract savings by borrowing on their own credit. Hon. Members will recall this policy was inaugurated on 26th October last, and I remember defending it. I remember too, a very able speech 2485 in its defence by my hon. Friend the Member for Oldham, East (Sir I. Horobin). Furthermore, this policy has been more successful than anyone could have expected in the markets we have experienced during the last five months. During this period, three local authorities have raised £11 million in the stock market, while in the mortgage market loans raised and already arranged are approaching £100 million, and I can assure the House that this policy will continue.
Having done what we can to reduce the amount of Exchequer borrowing we next attend to the methods by which we borrow so as to reduce the amount that is financed by bill borrowing and an increase in the floating debt. A good deal has recently been said in the Press and elsewhere about the virtues of "funding,"—if I might use this expression funding which "is rather the rage" just now. It would, of course, impede the effectiveness of the Treasury's loan operations if I were to give advance indications of the form and timing of what is proposed, but I would assure the House that the critics are wrong if they think that what is, as a general term, called "funding"—that is to say, Exchequer borrowing by sales of Government securities—has not been taking place in the past year and will not continue during the present year. I can assure the House, and my hon. Friend for Torquay in particular, that the Treasury will not fail to take all suitable opportunities to reduce the Floating Debt and attract savings by such operations. I think that the issue of £300 million worth of 5% Exchequer Stock, 1957, on 7th March—that is to say, yesterday—is evidence of the authorities readiness to act whenever opportunity offers. I can also assure the House—and I hope this will be taken note of, both by the House tonight and outside, if by any chance anyone should read the report of this debate—that this issue is not in any sense of the word the end of our operations.
There are just two things I should like to add in the last two or three minutes. There has been a tendency, I think, recently in the Press and in some financial quarters to suggest that we could deal with the problem of inflation quite easily if we went back to the classical monetary 2486 methods of the 'thirties. I have myself a classical education, but I am always a little nervous when this adjective "classical" is used, in rather an emotive way, as what some philosopher rightly called an adjective of persuasive defence.
I would make just these two points. As a guide to 1956, I think the experience of 1955 is of more practical value than the experience of 1930. People who assume that what worked in 1930 will work today sometimes ignore the complete change in technique that must follow from the change in the size of the Exchequer's dealing with the money market. Apart from any loan operations, the Exchequer revenue account today may in a single week have a surplus or deficit on the market of over £100 million, whereas the corresponding figure in 1930 would be only £15 million or £20 million. Similarly, the bills offered at the market tender today run up to £300 million compared with only £40 million to £50 million some twenty-five years ago.
My last point of all is this, and I make it to the House seriously. There is, I think, an idea that a reduction in bank advances is somehow more meritorious if the banker does it from monetary pressure. But after all, in practice the banker has to make exactly the same decision—that is to say, which advances to cut—whether he is asked to bring down the level as a result of initiative taken by the Chancellor of the Exchequer or whether he does it simply to right his liquidity ratio. I think the House will agree with me that either process must inevitably be equally painful to the customer, and while I entirely agree with my hon. Friend for Torquay that this question of the management of the floating debt is of great importance, do not let us imagine that we can solve our problems of inflation by some, as it were, mystical monetary means that will not involve some pain to somebody.
§ The Question having been proposed after Ten o'clock on Thursday evening and the debate having continued for half an hour, Mr. SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at fourteen minutes to One o'clock.