§ 10.3 p.m.
§ Mr. John Cronin (Loughborough)
I beg to move,That an humble Address be presented to Her Majesty, praying that the Fiduciary Note Issue (Extension of Period) Order, 1958 (S.I., 1958, No. 326), dated 28th February, 1958, a copy of which was laid before this House on 4th March, be annulled.I think that it would be of some value if I said a word or two about the nature of the Order, because it is not absolutely obvious at first glance. The House will recollect that before the war the note issue consisted of two varieties; one backed by the gold coin and bullion held in the issue department of the Bank of England, and the other backed merely by Government securities, and known as the fiduciary issue.
With the advent of the war, the gold coin and bullion were very largely transferred to the Exchange Equalisation Account and, as a consequence, the whole of the note issue was, for all practical purposes, the fiduciary issue. There is, as I am sure the Paymaster-General will agree, a small part of the note issue that is still backed by gold coin and bullion, but that amounts only to about £400,000, as compared with the £2,000 million, roughly, of the full note issue.
This Order refers to the Currency and Bank Notes Act, 1954. It was then agreed by the House that the note issue should not exceed £1,575 million. It was arranged, however, that the note issue could exceed that figure by a Treasury direction, but that if the continuous increase of the note issue went on for more than two years it required a Statutory Instrument, annullable by Resolution of the House. That Order was passed in 1956, and this one now comes up for consideration this evening.
It is interesting to notice the trend of the note issue. Although fixed at £1,575 million in February, 1954, when the Currency and Bank Notes Act received the Royal Assent, it increased and continued to remain at an increased level ever since the month after that Act received the Royal Assent. It was formally fixed by the Treasury on 22nd January at £2,000 million, which is nearly £500 million more than was originally intended by the Act.
1161 The effect of annulling this Order would, at first sight, seem to be that it would require the withdrawal of £500 million from circulation. I see that the Paymaster-General nods assent, but I do not think that that is quite correct, because I believe that the Government have full powers to restore gold coin and bullion from the Exchange Equalisation Account back to the issue department of the Bank of England, and, therefore, to increase the note issue based on gold coin and bullion to a very large extent.
I mention this only because the obvious purpose of this Motion is to receive certain assurances and the answers to certain questions from the Paymaster-General, hut, at the same time, I do not want the right hon. Gentleman to think that, if his assurances are unsatisfactory, I shall hesitate to advise my right hon. and hon. Friends to divide the House. I should say, en passant, that I am very pleased to see the Paymaster-General in his place. I believe that he has made a rather arduous train journey to be here.
It is rather unsatisfactory in some ways that the Paymaster-General has to carry such a heavy burden. Normally, this would be dealt with by the Economic Secretary to the Treasury, but the Paymaster-General has several Ministries to cope with simultaneously, and rather has to play the part of Pooh Bah in "The Mikado", which is not very satisfactory even if, perhaps, there is some affinity with comic opera in the Government.
I want the Paymaster-General to feel that we intend to be helpful tonight, and that our whole purpose is to have a constructive debate about this rather important issue. The Government have made a point of keeping bank advances stationary. In fact, the right hon. Member for Monmouth (Mr. P. Thorneycroft) adopted a most bellicose attitude towards bank advances, and I think that the present Chancellor of the Exchequer has also adopted a somewhat aggressive attitude. It seems very important to keep bank advances absolutely stable, and, of course, they have been stationary for quite a long time. In fact, the average total of bank advances has been about £4,000 million since 1949. Since the Currency and Bank Notes Act was passed, there has been an increase of about £500 million in the note issue.
1162 I am fully aware of the fact that modern economic thought tends to place more emphasis on bank advances than on the actual notes in circulation, but I do not think that notes in circulation should be completely ignored; and that has rather been the tendency. The actual note issue is a very useful gauge of inflation. It is worth pointing out that the note issue in 1946 was £1,332 million, on the average, and that in 1951 it had actually decreased to £1,291 million, but that since then it has gone up enormously. The reason was that, under the Labour Government, inflation was largely due to external causes, and under the present Government we cannot quite adopt the same explanation.
I suggest to the Paymaster-General that it is desirable to give much more attention to the note issue as a thermometer indicating the amount of inflation or deflation taking place in the country. While dealing with the note issue, may I ask him to assure us that the Government will pay more attention to the problem of the velocity of circulation? We had an assurance from the right hon. Member for Monmouth last September that the Treasury would pay attention to it, but there was never any attempt to quote figures or to put the House completely in the picture on the subject, and I do not feel quite happy about the situation.
The note issue is based upon Government securities, and the Paymaster-General is aware that Government securities have declined substantially in value during the last two years. I hope that the right hon. Gentleman will not refer to the decline in the 2½ per cent. Treasury issue some years ago, because, obviously, anyone who purchases a low interest stock must in the nature of things expect it to decline. Low interest stock must, by its nature, go down. It cannot go up. What is very unsatisfactory is that quite high interest stock has declined seriously, causing considerable loss of money and suffering to people and to sterling area countries.
§ The Paymaster-General (Mr. Reginald Maudling)
When the right hon. Member for Bishop Auckland (Mr. Dalton) introduced the 2 per cent. stock he did not point out that fact to the potential holders.
§ Mr. Cronin
It is possible that when any Chancellor of the Exchequer introduces stock he does not make a selling point of the fact that it will decline, but anybody with an elementary knowledge of financial affairs knows that low interest stock is more likely to decline than anything else. I hope that the Paymaster-General will give us some reassurance about the future of Government securities generally.
If one refers to the Currency and Bank Notes Act one finds that changes in the total note issue can be made only if there is agreement between the Bank of England and the Treasury. Under the curious constitution of the Court of the Bank of England, there is no direct representation of the clearing house banks, and I want the Paymaster-General to reassure us about what happens. Are the clearing house banks consulted when there are changes in the note issue?
What happens to the profit which is made when the note issue is increased? Presumably there is a very substantial profit of about £500 million. How does that appear in the Government's accounts? Under miscellaneous receipts? When the Government increase the note issue the profit made is the value of the note issue minus the cost of printing the notes. Where does this profit appear in the accounts?
Before we agree to any further increase in the note issue we should like to hear from the Paymaster-General whether we are now dealing with an inflationary or a deflationary situation. This is the important and interesting question. We all know that so far the United Kingdom has gained from the American recession. There has been a big drop in the prices of primary products and as a consequence we have had improved terms of trade, but I am sure that the right hon. Gentleman will agree that it is inevitable that, eventually, we shall suffer from this fall in the prices of primary products because the people who produce primary products are our best customers. Inevitably, the cycle will turn and they will not be able to purchase our exports to the extent that they have purchased them in the past. As all hon. Members know, the exporters of primary products are having rather a bad time.
Will there be a serious recession in this country shortly? I have a great 1164 respect for the views of the Paymaster-General, and I think that he could help us considerably this evening. There is no doubt that industrial development is levelling off. In stocks, which normally represent about 2 per cent. of the national income, there was no increase at all in the last quarter of 1957. Everything rather points to the fact that we are to have a serious recession in the near future.
What are the Government's plans, in view of the possibility of a recession? The Prime Minister spoke at Halifax last night. I should have thought that the Prime Minister, after having held the office of Chancellor of the Exchequer for about a year, would have kept rather quiet about financial matters from that time onwards; but, nevertheless, he spoke at Halifax and said thatIt is the Government's intention to steer a middle course between the dangerous rocks of inflation and the shoals of deflation.Is the Paymaster-General really satisfied that we are on that middle course, or are we pointing straight towards deflation?
One factor, probably the most important, which can either drive us straight to a severe recession or not, is confidence.
§ Sir Lancelot Joynson-Hicks (Chichester)
Would not the hon. Gentleman's proposal to eliminate this vast quantity of the fiduciary note issue tend to accelerate any probability of deflation?
§ Mr. Cronin
I do not think that the hon. Gentleman has listened to what I said earlier. I pointed out that that would not necessarily cause a drop in the actual number of notes in circulation. Bullion could be transferred back from the Exchange Equalisation Account to the Bank of England, and notes issued just as before. There could be no difficulty about that at all. I feel that I have to point these things out because the Paymaster-General may not be adopting a sufficiently grave attitude towards this Motion.
I believe that the most important factor in determining whether we are to have a severe recession or not is confidence, the confidence of businessmen, industrialists and the general economic community in the country. What grounds have people for confidence? They see a Government moving towards its 1165 demise at a rather rapid pace, a Government which is still pressing ahead with measures against inflation. We have a 6 per cent. Bank Rate when we are menaced almost inexorably by a threatened recession. One could hardly have a more deflationary fiscal policy. That is obviously causing a great deal of loss of confidence, and confidence is the dangerous element for the Government.
I hope that the Paymaster-General will tell us what the Government intend to do about a possible recession. Does he think that we are in a deflationary situation or an inflationary situation still? I hope that he will give the House the reassurance it requires.
§ 10.18 p.m.
§ Mr. Niall MacDermot (Lewisham, North)
I beg to second the Motion.
I should like, first, to express the gratitude which I am sure we all feel for the initiative of my hon. Friend the Member for Loughborough (Mr. Cronin) in moving the Motion and giving us the first opportunity since the Act was passed, in 1954, to discuss in the House the fiduciary note issue. The Act provides the machinery whereby the state and level of the issue can be discussed once every two years. When the opportunity arose last, in 1956, there was no Motion of this character, and the large increase in the fiduciary issue passed by without discussion at all.
I understand that it was the object of the provision in the Act to increase to some extent at least the degree of Parliamentary supervision and control over the fiduciary issue.
I confess I find that any belief that there is any kind of Parliamentary control is illusory. My hon. Friend has suggested that if this Order were annulled the Government could retrieve the situation by transferring the bullion from the Exchange Equalisation Fund back to the vaults of the Bank of England. I doubt whether that is a practical measure. The Minister is able to sit with an air of calm confidence on the Government Front Bench in the knowledge that this House would probably not dare, whatever it might feel, to annul the Order for the simple reason that it would plunge the country into economic and financial chaos. We are blackmailed, in a sense, into accepting the status quo. 1166 All we can do is to seek to review what is happening and to discuss the position.
It is through the fiduciary issue that, according to orthodox economic ideas, it is possible primarily to control the supply of money. I see a puzzled expression appearing on the Minister's face. I do not profess to have his economic ability or knowledge, but in the most elementary researches that I have made into the science of economics, I have understood from the beginning that the control of the quantity of bank credit ultimately rests on the fiduciary issue, because the limitation on the amount of credit which the banks can create at any moment is the necessity for them to preserve their cash ratio, which, before the war, was 10 per cent. and is now about 8 per cent.
In fact, any belief that it is possible effectively to control the quantity of bank credit in that way is, again, illusory. The reason is that in an inflationary situation, where there is a demand for more cash, more notes and more coinage, it is impossible for the Government to say, "We refuse to print any more money", because, owing to the structure of our financial situation, if they attempted to do that when there was a real need and demand for that money, it would again provoke a financial crisis.
In an inflationary situation in which wages are rising and increased quantities of bank notes have to be drawn out of the banks every Thursday or Friday to pay the wages of millions of people on the following pay day, if the Government said, "We are so fed up with this inflation. We shall print no more bank notes or allow the Bank of England to issue them.", there would be a panic situation and there would be, in effect, a run on the banks to try to obtain the cash which is being limited. The whole of our financial system, built up as it is on the structure of bank credit, has as its Achilles heel the fact that no action can be taken which might in any way provoke a run on the banks.
It is for this reason that I would like briefly to review the fiduciary issue and to consider what is and what is not the amount of control, either by Parliament or by the Government, which exists over the volume of money. The total volume of money consists, first, of the actual cash, that is to say, bank notes and coinage, 1167 and, secondly, of bank credit. And, of course, bank credit or bank deposits represent far the larger quantity of our total money. The fiduciary issue, the actual cash in circulation, represents only about one-quarter of our total money. Bank deposits at the moment are around £6,000 million and the fiduciary issue is about £2,000 million.
It is interesting to compare the prewar figures. In 1939, the total was only about £2,000 million, of which the fiduciary issue represented about £600 million. That is the measure of the inflation. What kind of control is there, either legally or in fact, over the quantity of this expansion of bank money which has taken place since 1939, so that we now have bank money of the order of £6,000 million where before the war it was some £1,500 million?
As I have said, in theory there is the control of the fiduciary issue but, as I have pointed out, that is not a practical control. There is also the control that the banks have to preserve their liquidity ratio, which is about 30 per cent. and which, according to their own practice, they find is a wise and prudent measure. Again, indirectly it is said that the Government have a measure of control over that, since a very large part of the liquid assets of the banks consist of Government securities, above all in the form of the floating debt.
Again, we may question the extent to which, particularly in an inflationary situation, the Government, from a practical point of view, are able to limit the floating debt in a way which would enable them effectively to control at all the supply of money by that means. What is significant is that there is no direct legal way in which the Government can compel the banks to maintain their advances or their deposits at any given level. This is, apparently, the official advice given to the Government, and this was confirmed by the speech made by the right hon. Gentleman the Member for Monmouth (Mr. P. Thorneycroft) at the time of our debate on the alleged Bank Rate leak. He said that the Government… had also agreed at that time to limit bank advances over the next twelve months to the same level as the previous year's… An operation such as that upon which we were engaged would have been impossible without seeing the clearing bankers.1168 The right hon. Gentleman was explaining why he had called them in to consult them. He went on:There is no legislation which can order the level of their advances."—[OFFICIAL REPORT, 3rd February, 1958; Vol. 581, c. 864.]I think that the advice given to the then Chancellor of the Exchequer was correct and that there is no legal way in which the Government can control the level of advances.
I find it a remarkable state of affairs that not only this Parliament, but also the Government of the day have no legal way of controlling the level of what constitutes three-quarters of the volume of our money in this country. It is a remarkable surrender to private interests of something which derives originally from the Royal prerogative, and I should have thought would have been of the very essence of executive power.
When we turn to the fiduciary issue itself, with which this Order is directly concerned, there is some legal power in the Government, but, again, it is remarkably restricted. The position is that the Bank of England is limited, as my hon. Friend pointed out, to the figure of £1,575 million, except to the extent that it is authorised by Treasury directions to increase the fiduciary issue beyond that amount for periods of six months at a time.
What is significant is that the Treasury can issue such directions only if it has received representations from the Bank of England. It cannot take the initiative for an increase itself. Equally, the Treasury can alter the amount of the fiduciary issue only to the extent that it is created by the Bank of England. We have not only initiative but control lying with the Bank of England, which is a body independent of the Government. Even when we are dealing with the fiduciary issue, there is only a limited and indirect control by the Government.
It is time for us to review very carefully whether there is proper and adequate machinery for controlling the volume of money. I entirely agree with what has been said by my hon. Friend the Member for Loughborough about the need for further information about the velocity of circulation, because in so far as it is possible to help towards a solution of the problem of inflation by controlling the supply of money that can be done only if we know a great deal more than we do now about the velocity of circulation.
1169 We need to go further than that and to investigate the machinery of control and the machinery of issue, the machinery by which money is created. My hon. Friend made a valid point when he asked the right hon. Gentleman how the profit which derives to the Government when there is an increase in the fiduciary issue is shown in the accounts. Of course, there is such a profit—if that is the right term to use—and it is very right and proper that the benefit which arises when money is created should accrue to the Government, that is to say, accrue to the public at large through public expenditure.
If the volume of money is increased by, say, £500 million, whoever first has that £500 million to spend is getting something for nothing, something for the mere cost of printing the money. It stands to reason that if there is to be an increase that benefit must accrue to someone. It is precisely because a person who first spends new money gets something for nothing that it is a criminal offence for a counterfeiter to forge money.
One of the criticisms which is to be levelled against our present financial system is that as to three-quarters of our money, namely, the money which is created in the form of bank credit, that benefit accrues to private individuals, the persons who borrow the money, and to the banks by way of interest. The country at large does not benefit as it would if that money were created directly by the Government, either through increasing the fiduciary issue, or by whatever other system was adopted.
Secondly, by allowing three-quarters of our money to be created in this way by the banking system, the amount of money that is increased in that way carries with it into perpetuity, so long as bank deposits and bank advances remain the same, the heavy burden of interest, a burden which, under the policies adopted by the Government, is a very heavy burden, indeed. Where that money is created and loaned to the Government, that burden is borne by the taxpayer. Where it is created and loaned to private borrowers, that burden is paid by the private borrowers and borne in general by the economy of the community.
It does not appear to me to be right in principle, or for any other reason, that if it be necessary to expand the 1170 supply of money under our expanding economy, that we should be forced to pay a levy, as it were, to the banking system in the form of these interest charges on the new money which is created in that way.
Above all, the complaint that I make about our existing system is that there is a completely divided responsibility between the banking system and the Government. It appears to me that in a matter of this character the responsibility ought to rest fairly and squarely upon the Government, as should the power to discharge that responsibility. Under the present system, which we have the opportunity to discuss tonight, through the machinery of the debate upon this Order, the power does not exist in the Government, and such control as they have is extremely limited.
§ 10.36 p.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
The House, and especially hon. Members on this side, ought to be very grateful to the hon. Members for Loughborough (Mr. Cronin) and for Lewisham, North (Mr. MacDermot) for the sparkling exposition of Socialist economics to which we have had the opportunity of listening for the last 35 minutes.
The hon. Member for Lewisham, North was not in his usual form, as he spoke for only 20 minutes instead of 45. Nevertheless, he achieved the same impenetrability of thought in 20 minutes as he has done on previous occasions. I could not help feeling, as I saw the smiling face of the hon. Member for Stechford (Mr. Roy Jenkins), that he and his two hon. Friends will probably form the Treasury Bench of the future. There is the Chancellor, and there, behind him, are the Financial and Economic Secretaries—or perhaps I should say the Nervo and Knox of the Crazy Gang, who no doubt look forward to the time when they will occupy the Government benches.
Nobody can say that the country has not been warned. My goodness! I hope that this debate will go down in our history. We have been here for only 35 minutes, but during that time the world of truth has been more disturbed and muddied than in any other 35 minutes for which I have sat in this House. I do not propose to add to the confusion.
1171 If those interested in the question of the fiduciary issue will consult two rather interesting tables in the Monthly Statistical Digest, which is available in the Library, they will see that Table 139 includes the average estimated circulation with the public and Table 161 includes details of wages and salaries, and that there is a direct co-relation between the total of wages and salaries and the total of money with the public.
That is not surprising. That is what the fiduciary issue is for. It has no more relevance to the financial state of this nation than the amount of money hon. Members carry about in their pockets in order to pay for their lunches. Some hon. Members opposite like to have lunch at the Savoy, and carry large sums of money with them, while others prefer bacon and eggs and carry smaller sums. That fact has no greater relation to the financial state of the nation than has the fiduciary issue.
If the fiduciary issue were to be reduced we should be taken back to the unhappy days of 1920. It was considered to be the financial salvation of this country, after the 1914–18 War, to reduce the fiduciary issue, and that reduction, under Lord Cunliffe's direction, produced the greatest deflation that this country has ever known. If hon. Members are considering something in those terms they should look at our economic history more closely than they have—and, my goodness, they have not looked at it very closely.
If they reduce the fiduciary issue the result will be that the clearing banks will have to draw on their balances at the Bank of England. One thing that was not mentioned by either the hon. Member for Loughborough or the hon. Member for Lewisham, North is that the clearing banks have to keep balances at the Bank of England, and draw on them in order to meet their needs. The net result of reducing the fiduciary issue would be that the Bank of England would be unable to meet its obligations. That, to my mind, is a perfect example of what would be produced by Socialistic economies carried to their logical conclusion. It has been particularly pleasant to me—
§ Sir H. d'Avigdor-Goldsmid
—I am going to finish my sentence—to hear this logical, interesting and fascinating exposition of the way in which the party opposite propose to conduct the fortunes of this country.
§ 10.41 p.m.
§ Mr. R. J. Mellish (Bermondsey)
I should not have intervened in this debate but for the speech of the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid). He is the last person in the world who should stand up and criticise the speeches of my hon. Friends. We on this side of the House regard him as a buffoon. If it comes to throwing insults across the Floor of the House, he is the last person who is qualified so to do.
We shall look forward with interest to the speech of the Paymaster-General who, we hope, will explain why it is necessary that this Order should be made. I do not claim to be an economic expert, but I understand that this Order relates to the currency in bank notes in 1954, when it was laid down that the fiduciary issue should be £1,575 million. Since then Statutory Instruments have been applied, one in 1956, to increase this amount to £1,765 million; and I understand that by this Order this sum goes up by over £400 million.
A humble person like myself cannot be expected to be an expert, but it seems to me that over the last few years there have been several hundred millions of pounds required from the point of view of the fiduciary issues. That is an indication that there is a great deal more money in the country, so we hear the ominous word, "inflation." One has the right to ask the Paymaster-General—
§ Mr. Mellish
No I do not intend to give way. I do not see why I should extend to the hon. Gentleman a courtesy which he was not prepared to extend to my hon. Friend. He must learn that if he starts throwing insults about in the House he will get something back. He is not qualified to refer to my hon. Friends in the manner in which he did.
Knowing both my hon. Friends very well, I can say that their knowledge in these matters is just as good as that of the hon. Member. [HON. MEMBERS: "Oh."] 1173 In my view, it would not have to be all that brilliant to be equal to the hon. Gentleman's knowledge. He may be well-known in the City, and as a financier, but that does not mean that he has all the experience.
Other people can study this matter and learn about it without actually being involved in the swindle. [HON. MEMBERS: "Swindle?"] I withdraw that word. The trouble is that when an hon. Member makes the sort of speech which was made by the hon. Member for Walsall, South other hon. Members may be expected to lose their tempers. We shall want to know a great deal more about this matter before agreeing to the Order.
§ 10.44 p.m.
§ Sir Peter Roberts (Sheffield, Heeley)
I wish to ask one question of my right hon. Friend. If he cannot give me an answer tonight, perhaps he would look into the matter and give me an answer later.
Reference has been made to the balances at the Bank of England which stand against the fiduciary issues. Some years ago there was something called the profit on the fiduciary issues, which was the profit drawn from the bank balances at the Bank of England. May we know what has happened to that old fiduciary profit? The figure may be about £120 million. On looking through the accounts, it is difficult to see where is that profit. I do not expect my right hon. Friend to answer it at this stage, but I would be most interested to know at some later stage the answer to that question.
§ 10.45 p.m.
§ The Paymaster-General (Mr. Reginald Maudling)
My hon. Friend the Member for Sheffield, Heeley (Sir P. Roberts) has certainly asked a complicated question. I must say that in these matters one always feels that accountancy sometimes hides things, though not so well as might appear. Any profit which the Bank of England may obtain from holding Government securities is, of course, a bogus profit, because it is only the interest that the Government pay themselves. Therefore, it may in this instance turn out to be self-destroying.
So far as the effects of this Prayer are concerned, I rather agree with my hon. Friend the Member for Walsall, South 1174 (Sir H. d'Avigdor-Goldsmid) that they would be rather disastrous. Though the hon. Gentleman the Member for Loughborough (Mr. Cronin), who moved the Motion, said that we might move more gold bullion across from the equalisation account, I think he knows perfectly well that no one would dream of rejecting this Order. It would simply create chaos to do so.
The purpose of the Order, of course, is to extend for another two years the powers of the Treasury to increase by direction the amount of the fiduciary issue over the £1,575 million laid down in the Act of 1954. I do not think there will be any challenge from either side regarding the fact that the Treasury must have this power.
The real question appears to be what is the economic significance of the fiduciary issue. In other words, what is the economic significance of the note circulation? My hon. Friend the Member for Walsall, South made the main point when he pointed out that the circulation of bank notes has, roughly speaking, increased pretty well proportionately with the national product and with personal incomes. As people have more money, they tend to hold the same proportion of their money in the form of cash.
With respect to hon. Members opposite, I think they have failed to distinguish between money and cash. If we look at the pressure of inflation, it is important to note that the total volume of cash is almost certainly a percentage of the volume of money.
§ Mr. Cronin
The right hon. Gentleman would agree that the volume of notes in circulation is roughly about one-third of the total of effective money. I do not think one can ignore one-third of that total.
§ Mr. Maudling
That is the point I was making, that the volume of cash is normally a percentage of the volume of money.
I think the hon. Gentleman was a little off beam. It is the volume of deposits and not the volume of the note circulation with which people are concerned, and, therefore, it is not relevant to this issue. Surely a bank note is a Government security. It is a non-interest bearing security. Therefore, from the point of view of the Treasury, the bank note is 1175 rather a useful thing to have in circulation.
The answer about the profit on the note issue—"profit" is the wrong word—is that the issue of notes represents the issue of Government securities, Treasury bills or long-term Government securities, and appears in the national accounts on that basis. Bank notes, of course, are non-interest bearing.
That leads me to the main point I want to make, that the volume of notes in circulation is entirely determined by the demand for those notes on the part of the public. Clearly, if people want bank notes they must be entitled to have them to the extent to which they own that amount of money. If people have an amount of money at the bank, they must be able to draw bank notes to the value of that money if they so desire. Therefore, the Treasury and the Bank of England must meet the demand for bank notes. No one could envisage trying to control the volume of money by saying that people who want to withdraw money from the bank should not be able to obtain bank notes to the value of that money.
There must be sufficient notes in circulation, therefore, to meet the demand. The Treasury cannot increase the number of notes in circulation beyond the demand, because no one wants to hold Government securities in the form of bank notes which are not interest-bearing securities. Therefore, on either count, it seems to me that the volume of bank notes in issue is entirely determined by the demand for bank notes and by nothing else.
The hon. Member for Lewisham, North (Mr. MacDermot) was quite right in saying that to that extent there is no complete Parliamentary control in this matter because this House cannot control the demand for bank notes and, equally, we cannot say that the amount of bank notes to be printed can be other than that needed to meet demand. Therefore, it is very easy to exaggerate the economic significance of the note circulation.
The economic significance of the volume of money is, of course, immense, and I should be tempted by what one or two hon. Members opposite have said to enter into this matter but that your 1176 presence, Mr. Speaker, and the imminence of the Budget debates which give me warning not to enter into those speculations on inflation, deflation, the volume of money and so on. I shall stick to the Prayer and the Order. There is no great economic significance in the circulation of notes, because it is normally a fixed relation to the total volume of money, and the total volume of money is, I suggest, beyond the scope of this debate.
The point has been made by hon. Gentlemen opposite that one should not ignore the note circulation as an indicator of economic activity. With that I would entirely agree. It is an important thing on which to keep an eye, but I do not think hon. Members should be misled by articles, even in the most respectable financial newspapers, to think that the Treasury does ignore such an indication, because, without going into details, I can say it is not true. It is one of the indicators, but there are very many other economic indicators nowadays of the total level of demand; so the fiduciary issue is nothing like as important an indicator as it used to be. If there were a sudden change in public habits, if people started to hold more money in bank notes, if the ratio between the total volume of money and the volume of the notes changed abruptly, that would be interesting and would have some meaning; but it has not happened.
I can assure hon. Members that the Treasury keeps close watch on the note circulation and were anything exceptional like to occur its attention would be immediately directed to it.
§ Mr. MacDermot
Are any statistics available as to the velocity of circulation of the note issue as opposed to bank notes?
§ Mr. Maudling
I think the velocity of circulation of the note issue would be the ratio between the amount of notes in issue and the total amount of transactions, just as, in the case of bank deposits it is the ratio between the amount of bank deposits and actual use of those deposits, of which statistics are certainly available. One should not be too much led astray by this, because statistics of velocity of circulation are far more a symptom of what is happening than the 1177 cause of what is happening. They should be read as such.
Hon. Members who have raised this matter have raised an important point which this House should discuss, but I hope I have been able to say enough to indicate, first, that we are all agreed that this Order clearly must stand and that the purpose of the Prayer is only to debate the substance of it. Secondly, I hope it will be agreed generally that the significance in economic terms is not the volume of bank notes but the volume of money, and that the volume of bank notes is a proportion of that, and normally a hardly varying proportion of the total volume of money While it would be interesting to discuss the total volume of money, it would be untimely and, what is more important, out of order.
As to the figure of the fiduciary note issue, I admit it is a matter we shall always have to watch, but it is possibly less important than it used to be as an indicator, since other economic facts have become very regularly available. I hope the House will accept the Order and that the Prayer may be withdrawn.
§ 10.55 p.m.
§ Mr. Roy Jenkins (Birmingham, Stechford)
The Paymaster-General has brought a certain amount of heat and transmitted a certain amount of light into the debate. I think he has well justified my hon. Friend the Member for Loughborough (Mr. Cronin) in moving the Prayer. The right hon. Gentleman has left one or two important issues unresolved. Our object in putting down the Prayer, as the Paymaster-General realises, but as the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) did not appear to realise, is to try to get some idea of the current state of Government thinking about the relationship of the quantity of money to inflation. We have had rather confusing pronouncements on this issue from the Government and ex-members of the Government, and from future members of the Government, perhaps, over the last few months.
It is true that at the present time, as the Paymaster-General said, economic thinking is on the whole not inclined to give a very important place to the fiduciary issue in determining the state of inflation. His statement on this was very much in line with the statement 1178 made by the Minister of Pensions and National Insurance, when Financial Secretary to the Treasury, during the Second Reading of the Currency and Bank Notes Bill four years ago—which is to take the view that so far as the note issue is concerned the Government are more or less supine, that there is not very much they can do about it and that it does not have a very important effect upon inflationary or deflationary tendencies.
I am not clear how this squares with the view of the hon. Member for Walsall, South that Lord Cunliffe had promoted a great deflation by reducing the fiduciary issue in the 20s and that my hon. Friends must be seeking to follow Lord Cunliffe because they had tabled a Prayer. I thought there was a clear contradiction here between the attitude of the Paymaster-General and the attitude of the hon. Member for Walsall, South.
§ Mr. Maudling
What my hon. Friend said was consistent with what I said. It is essential to meet the public demand for notes. Otherwise, the situation would be as my hon. Friend said.
§ Mr. Jenkins
It might be desirable to do so, but the purport of the speech was that this was not really a policy decision on the part of the Government it was acting in accordance with normal needs as any reasonably sane person could be expected to do. This makes sense only if we are to take the view that former Governors of the Bank of England, particularly Lord Cunliffe, were not sane on this issue. I thought there was a contradiction, and I thought the confusion came from the hon. Member for Walsall, South.
The hon. Member attacked my hon. Friends bitterly on the ground of lack of lucidity. This is always a dangerous thing to do in a debate on an issue as complicated and confused as this. Unless one is extremely confident of one's own lucidity, one is liable to be in the position of throwing stones in glass houses. I thought the hon. Member was not only throwing stones in glass houses but hurling boulders in crystal palaces I did not find his speech, as I have also found his speeches in the past, a model of lucidity, though his speeches have many other advantages. He told us he was not going to add to the confusion. 1179 I thought at that moment that he was going to sit down. Instead, he went on for some time, and added greatly to my confusion.
There is still confusion in my mind after the Paymaster-General has spoken. What is the Government's attitude on the whole question of the quantity of money? I thought there was one mistaken premise on which the Paymaster-General worked, and that was in respect of the quantity of currency, of bank notes, in existence as a fixed proportion of the total quantity of money in the sense of bank deposits plus currency. Now, of course, within very broad limits they are fixed proportions, but only within very broad limits. Indeed, during the period that the present Government have been in office there has been a very substantial and significant increase in the proportion which currency bears to the total money in existence.
I do not know whether hon. Members share the crude view on the quantity of money of the former Chancellor of the Exchequer, the right hon. Member for Monmouth (Mr. P. Thorneycroft), or are inclined to what I think is the rather more official view of the Government at the present time. Certainly, if they share the very crude view of the right hon. Member for Monmouth about the quantity of money, they must believe that the quantity of money as a whole is absolutely vital in determining the inflationary position.
If one looks back over a period of five years, when we have had consistent inflation, one part of the quantity of money—bank deposits—has been stationary or falling, and the other part of the quantity of money—the amount of bank notes in existence—has been rising substantially. It seems reasonable, therefore, to assume that the number of bank notes in existence has more to do with inflation than the volume of bank deposits.
I am rather sceptical about the whole approach associated with the quantity theory of money, but it is certainly an approach to which the right hon. Member for Monmouth very firmly nailed his colours during the summer and autumn of last year, and I imagine that 1180 it is an approach shared by many hon. Members opposite. It is an approach, however, which, on the evidence of the past few years, makes much more sense if related to the amount of currency than if related to the amount of deposits, as we have had consistent inflation with stationary or falling bank deposits.
Hon. Members opposite have, therefore, got themselves into a very difficult position on this, and I doubt whether even the agility of the Paymaster-General could enable him to remove himself from that position without, at any rate, completely throwing overboard his right hon. Friend the Member for Monmouth.
It may have occurred to the right hon. Gentleman and to some of his hon. Friends—although, apparently, it did not occur to the hon. Member for Walsall, South—that we did not put down this Prayer in order to propound as an important part of Socialist financial policy the fact that we wished to reduce the fiduciary issue. Indeed, if one took the view that all Prayers put down automatically committed the party to a particular aspect of policy, the Government Front Bench would have more responsibility from the pre-1951 days than they have now.
We have put down this Prayer in order to get at the state of Government thinking on these matters. In view of the debate we have had, I do not think my hon. Friends would wish to divide the House—even allowing for the rather boisterous performance of the hon. Member for Walsall, South. I would advise my hon. Friends to withdraw the Prayer, because we have had some interesting statements from the right hon. Gentleman, although he has been very far from clearing our doubts about the Government's economic policy. We will let the Order go through, although the debate has increased our feeling that in their economic policy the Government are fighting on the wrong side, in the wrong battle and with the wrong weapons.
§ Mr. Cronin
As we have had an interesting and agreeable debate, Mr. Speaker, I do not think any useful purpose would be served by going further, In the circumstances, I beg to ask leave to withdraw the Motion.
Motion, by leave, withdrawn.