§ Before I relate the economic prospects which I have outlined to my objectives in the present Budget, I want to refer to monetary policy. To influence the economy, Governments, of course, use fiscal measures. They put the taxes up or— as many are, no doubt, fervently hoping— they put them down. They use, too, in varying degrees direct controls. But they must also use monetary measures, since no Chancellor can ignore the powerful effect upon the economy of what men borrow and what men save.
§ In this task, both the banks and the Exchequer have their part to play. So far as the Exchequer is concerned, we must clearly continue with our efforts to influence the monetary system by the maintenance of a satisfactory Budget balance, by vigorous national savings, and by full use of market opportunities for funding.
§ The monetary measures available are really the following. First, Bank Rate and the rest of the interest rate structure; secondly, the measures connected with Exchequer financing and open market operations; thirdly, the specific controls over credit exercised through the Capital Issues Committee and the statutory restrictions on hire purchase. Continued use has been made of these 983 measures during the past year and we can claim that they have been by no means ineffective in checking inflation. The question which must be asked, however, is whether they have been of themselves enough. I think that the answer to that question must be, "No."
§ These measures would not have been as effective as they have been without the active co-operation of the banks in restricting credit. Given the practical limits to the monetary pressure that could be brought to bear on bank liquidity, it has been necessary for the Government to inform the bankers from time to time of the continuing need for credit restriction and to ask them to respond to the national need. My predecessor met representatives of the banking organisations last July, and, as was announced at the time, they undertook to meet the Chancellor's wishes and the national needs, which were that the contraction of credit should be vigorously pursued and that there should be no relaxation in their critical attitude towards applications for bank finance.
§ I think that the figures show that, despite some recent increases in advances, the banks have lived up to their undertaking. Over the year to 20th February, 1957, advances to customers other than the nationalised industries showed a net increase of £25 million on a total of £2,000 million. But the detailed figures reveal big increases in bank accommodation for just those industries which play the leading part in the export drive and provide the national economy with its basic services, offset on the other side by substantial reductions in the credit given for less essential purposes. Thus, in spite of rising costs and heavy demands, the banks have succeeded both in keeping the total volume of bank credit in check and in distributing it in accordance with national needs.
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It seemed to me appropriate, before opening this Budget, to discuss the credit situation with representatives of the banking organisations and to indicate to them the directions in which I need their continued co-operation. They were forewarned when, on 7th February last, I said that the change in the Bank Rate was
… not a signal for bankers or others controlling sources of finance to relax credit or to ease restrictions on lending."—[OFFICIAL REPORT. 7th February, 1957; Vol. 564, c. 606.]
§ That statement holds good. The bankers cannot be expected to welcome such a statement implying, as it does, a continued restriction on their enterprise and competition. But they recognise it as an unpleasant necessity and I am glad to say that they have renewed their assurance that they will continue to maintain a restrictive attitude towards advances and will be particularly critical towards advances for the less essential purposes.
§ I recognise that some increase in the level of advances may result from the provision of bank finance for purposes of the highest priority, I am confident, however, that the banks will keep credit within bounds by their vigilance over the whole field and by strict control over lending for purposes that are not of first importance to the national economy. I cannot say for how long this effort will be necessary, but I intend to keep in close touch with the banks through the customary channels in order to meet their desire to respond promptly to the national needs.
§ I also intend to support the bankers' efforts by a change in the arrangements for the statutory control over borrowing exercised by the Treasury on the advice of the Capital Issues Committee. The banks are aware that, notwithstanding the statutory exemption of borrowings made in the ordinary course of business, bank advances should not in general be made for capital expenditure. Accordingly, it has been and will continue to be their practice to treat all applications from their customers for bank credit to finance investment in buildings, plant and other fixed capital as not being in the ordinary course of business and, therefore, as requiring Treasury consent under the Control of Borrowing Order.
§ In December, 1953, the Capital Issues Committee was asked to confine its attention to the purpose of such loans, leaving the terms to the discretion of the banks. I have decided to do away with that limitation and I propose to reinstate the previous practice by which the Committee also concerns itself with the need for bank finance and the period of such borrowing. I must emphasise that my reason for wishing to restrict bank finance for such purposes is not that an overdraft would be commercially unsound—the bankers, not the Treasury, must remain the judge of that—but 985 because of the danger that long-term investment financed from bank credit may add to the volume of investment without a corresponding increase in real savings.
§ That is why I have today written to Lord Kennet to ask the Capital Issues Committee that, in addition to examining the purposes of such borrowing, it should also consider whether bank overdraft is the appropriate method of finance. I have asked that it should not recommend consent, however good the purpose of the loan, unless it is satisfied either that there are exceptional features in the case which make it impossible for the applicant to raise the loan from non-banking sources, or that the proposed bank loan is a strictly temporary and short bridging operation, pending the completion of funding arrangements. My purpose in all this is to ensure that investment is matched as speedily and completely as possible by savings.
§ By this means I am hopeful that control over credit will be maintained. But the very fact that these arrangements have to be made is evidence that the monetary machine is working under great difficulties. I think that there is general agreement as to the objectives of monetary policy. This country stands determined to maintain a fixed and stable exchange rate. The primary requisite for this is that we shall be able and determined to avoid inflation at home. Equally, it is also agreed policy to avoid slumps and severe unemployment, if these perils should again confront us.
§ These objectives are not open to question. But there are the widest differences of opinion among those best qualified in this difficult field about how to attain them. These differences have little or nothing to do with political opinions. Examples of the various schools of thought are to be found right, left, and centre. We have in the Macmillan Report an authoritative exposition of the system as it worked before 1931. But the problem then was how to find a way to pump more credit into the system. That is not, to say the least, our main anxiety this afternoon. Moreover, much else has changed in this field since 1931. The problems of Exchequer finance, including the management of the vast debt so largely a legacy of war-time years, are altogether different in scale. There have 986 also been considerable changes in the structure of the banks' assets, making them less susceptible to monetary pressure.
§ Such changes in conditions have been widely recognised by critics both in this House and outside and for this reason suggestions for a committee of inquiry have been canvassed for the past year or more. My right hon. Friend considered them carefully last spring. He heard the views expressed to him by a small deputation led by my hon. Friend the Member for Aberdeenshire, East (Sir R. Boothby). He considered at that time that an inquiry would be premature until we had more experience of the application of Bank Rate and of the credit squeeze.
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In the last two months I have considered the matter afresh and have had the benefit of renewed interest which has been shown in it, in comment in this House, in a valuable debate a month ago in another place, in the Press, and in other quarters. I have now decided, after consultation with the Bank of England and with its full agreement, that the stage has been reached when an inquiry should prove useful and constructive. A committee will be set up with terms of reference:
to inquire into the working of the monetary and credit system and to make recommendations ".
§ The inquiry will be primarily directed to reviewing the working of the system in the conditions of today, taking particularly into account the great influence now exerted upon it by the public finances and the need to maintain a high level of savings and investment. It will be concerned with the achievement of the best possible system of money and credit, while observing to the full the international obligations, in the matter of the exchange rate and in other matters, which Her Majesty's Government have assumed and have every determination to honour. I am glad to say that Lord Radcliffe has consented to serve as Chairman. The names of the other members will be announced as soon as the appointments have been made.