§ 10.1 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, 1960 (S.I. 1960, No. 327), dated 29th February, 1960, a copy of which was laid before this House on 4th March, be annulled.I feel somewhat diffident in rising to my feet for a second time this evening, but this is a very important matter, and we shall require a lot of assurances from the Economic Secretary to the Treasury before we agree to this Statutory Instrument being passed. This is becoming an event which occurs every two years, and as such I should like to welcome the Economic Secretary to join us. He will find that there is a similar team. No doubt we shall see some other Economic Secretary in two years' time, when the hon. Gentleman reaches even higher spheres.
First, one should explain the nature of this Order. All hon. Members are aware that the fiduciary issue is that part of the currency, bank notes and coin, which is not backed by gold and bullion; in other words, it is simply backed by Government securities. Under the Currency and Bank Notes Act, 1954, it was arranged that the fiduciary issue should not exceed £1,575 million. I should say in parenthesis that the fiduciary issue is the total for all practical purposes of bank notes and coin in circulation. In Section 2 (1) of the Currency and Bank Notes Act, 1954, we find that the total amount of the fiduciary issue—in other words, the bank notes and coin in circulation— must not exceed £1,575 million for more than two years without a Statutory Instrument, which can be passed under Section 2 (8) of that Act. This Order is subject to annulment by the House. In other words, what we are discussing tonight is whether the total quantity of bank notes and coin in circulation should exceed £1,575 million or not.
On 10th February, the total amount of bank notes in circulation was then £2,150 million, and, according to a Treasury Minute of 18th March, the Governor and Company of the Bank of 328 England recommended that the fiduciary issue should be increased to £2,200 million.
I should not like anyone in the House to think that it is a dogmatic matter of policy, so far as this side of the House is concerned, that the fiduciary issue should be reduced back to £1,575 million. Obviously, it would cause considerable fiscal embarrassment, to say the least. The fiscal embarrassment would not be as severe as some people think, because it is directly within the powers of the Government to move gold and bullion from the Exchange Equalisation Account bank to the Bank of England, but it would be a horrible nuisance, to say the least, and we on this side of the House are the most co-operative people on all financial matters.
At the same time, we feel that before we agree to this Order, we should have certain assurances. The fiduciary issue, of course, is an index of the amount of inflation that is going on. I do not propose to talk about inflation, which is a very large subject, and my hon. Friend the Member for Dewsbury (Mr. Ginsburg) who will have a few words to say on the subject, will do it with much more skill and knowledge than myself.
I think we should certainly keep in mind the size of the fiduciary issue as a thermometer of inflation. While we are on the subject of the fiduciary issue, perhaps the Economic Secretary will tell us for what reason the Government have introduced this new component of it, the new £1 notes? They seem to be the subject of criticism throughout the country and some people find them rather unattractive.
§ Mr. Deputy-Speaker (Sir Gordon Touche)
I am sorry to interrupt the hon. Member. On this Prayer we cannot discuss the quality of the notes; we can discuss only the amount of the fiduciary issue.
§ Mr. Cronin
I bow to your Ruling, Mr. Deputy-Speaker, but it seemed to me that the bank notes, being a componet of the fiduciary issue, might bear description. I would not think of questioning your Ruling for a moment. I am only explaining why my words took that direction.
329 The total number of notes and coins in circulation is only one component of the total amount of money, so any views we may have as to the amount of notes in circulation must also take into consideration the total quantity of effective actual money. As we all know, the actual total quantity of money consists not merely of notes and coins in circulation, but also of bank deposits, and we can hardly make any effective proposals about the fiduciary issue unless we consider the situation of bank deposits.
Bank deposits, according to the Economic Survey, were in the region of £6,131 million at the end of 1958, and at the end of 1959 they were £6,475 million, according to Table 23 of the Economic Survey. Bank deposits themselves are a mathematical function of bank advances. All advances create deposits, and the important thing is the total of bank advances, which at the end of 1959 amounted to £2,818 million. In 1959 there was an increase in bank advances of £692 million.
This is a very alarming increase, and one wonders to what extent the Government are responsible for it or have control over it. Unless we can have reassurance that the Government will maintain some control over the bank deposit components of the total money in circulation, we shall have to take a much stricter view of the increase in the fiduciary issue. Will the Economic Secretary tell us exactly how much the Government can control the total amount of bank advances? If he intends to quote the 1946 Bank of England Act, there is considerable doubt that that does give the Government powers—
§ Mr. Cronin
It will be quite impossible to debate the question of the total amount of currency and bank notes in circulation unless we can debate also the total amount of the other components which make up the total amount of money. What we are debating is the total amount of money available to the community.
§ Mr. Roy Jenkins (Birmingham, Stetchford)
On a point of order, Mr. Deputy-Speaker. Are we not considering whether it is desirable that there should be this extension in the period for which the fiduciary issue can apply? Surely in considering whether this is desirable or not, it is necessary that we should take into account one of its consequences, which I think is the level of bank advances. Surely it is very difficult to be able to consider whether the fiduciary issue of a certain size is or is not desirable if we are not able to consider certain consequences which flow from that fact.
§ Mr. Deputy-Speaker
I am afraid that under an Order like this we are very limited to the terms of the Order.
§ Mr. David Ginsburg (Dewsbury)
Further to that point of order, Mr. Deputy-Speaker. When this matter was debated in the House two years ago, on 1st April, 1958, these considerations relating to bank advances and to the velocity of the circulation of money were allowed by the Chair.
§ Mr. Cronin
Further to that point of order. I think the argument is extremely limited here, and obviously this House will have no control over the total amount of money in circulation at all if we are completely prevented from debating an essential component of the fiduciary issue. I feel that this Ruling will have the most far-reaching consequences if it is accepted. I do not think, perhaps, you really meant that we could not discuss the matter of bank deposits at all. Bank deposits are—
§ Mr. Deputy-Speaker
I do not say that the hon. Member cannot mention them, but he cannot discuss methods of control, which are far beyond the Order.
§ Mr. Cronin
I do not wish to be tediously repetitive and I hope you will appreciate that I am deferring to your views, Mr. Deputy-Speaker. All I am suggesting is that this Order is one to extend the time for which the fiduciary issue should exceed a certain amount. The fiduciary issue is a function entirely of the total money in circulation. We cannot possibly discuss this Order 331 unless we also consider the total amount of money in circulation.
Although this does not bind you, I cannot help recalling that on the last occasion when we debated this subject, on 1st April, 1958, we were allowed to discuss quite fully the whole question of the total amount of money in circulation, which includes bank deposits.
I do not want to trespass on the rules of order about this, but if you will let me at least make some passing reference it would be of great convenience to the whole House. What I would like the Economic Secretary to tell us is to what extent the Government are actually able to control the total amount of money in circulation, less the fiduciary issue, bank notes—
§ Mr. Cronin
Perhaps the Economic Secretary will tell us to what extent the Government are able to control the total amount of the fiduciary issue, bearing in mind the following circumstances: we all know that the total of bank notes and coins in circulation is something with which the banks have to comply when they issue to the general public what the general public requires, so that the fiduciary issue is more or less a passive economic phenomenon which must follow the public's demand. The Economic Secretary will probably agree with me about that.
Will he tell us to what extent the Government can control the total amount of the fiduciary issue, given that the fiduciary issue can be increased only if there is also a concomitant increase in bank deposits and, therefore, bank advances? It will probably be better to do that to solve the problem of order which has been exercising us. I have no doubt that the Economic Secretary, who is always a most courteous and helpful person, will reply in those terms and we will all have the reassurance which we require without any feeling that we have upset you, Mr. Deputy-Speaker, or transgressed the rules of order.
Of course, we cannot discuss the inadequacies of the Bank of England Act, 1946, or even whether it should be redrafted to give more control, but I 332 wonder whether the hon. Gentleman will also tell us that, with a view to maintaining the fiduciary issue at a reasonable level, the Government will continue to use monetary measures to reduce the total amount of money in circulation—I refer, of course, to the fiduciary issue and also to the total of bank advances and bank deposits.
In his Budget speech, the Chancellor gave us a rather dark hint that monetary policy was to be applied perhaps somewhat rigorously in future, and we would like to have some idea of what that policy is to be in so far as it applies to the actual amount of currency and bank notes in circulation, as we all have to stick to that to be in order.
The fiduciary issue, the currency and bank notes in circulation, is backed for all practical purposes by Government stock. As the Economic Secretary knows, there has been a considerable decline in the value of Government stocks and that decline was greatly accelerated a few weeks ago when the Government Broker suddenly withdrew his support in Government stocks in open market operations. That produced a sudden severe fall in Government stocks and caused widespread despondency on the market and greatly accentuated the distrust which the general public already had for Government stock. Can the Economic Secretary tell us something about that? It is of prime importance, since the currency and bank notes in circulation are based entirely on Government stock. We want to be sure that the Treasury will do everything it can to maintain the value of Government stocks.
Of course, at present there is a considerable danger of inflation. We know that there has been a large boom on the Stock Exchange and a tremendous increase in the value of ordinary shares. We know that dividends have substantially increased and that several large wage claims have been met and that other wage claims are outstanding.
We are faced with a potentially inflationary situation. This has its impact on the demand for currency and bank notes. I refer to this because we must keep in order. Nevertheless, we are concerned about the Government's policy with regard to this prospective inflation, and we cannot feel that the Chancellor in his Budget statement gave an adequate reassurance.
333 With those remarks, I leave it to my hon. Friends to amplify what I have said. I have no doubt that they will show much more ingenuity and keep within the rules of order better than I did, but if the Economic Secretary gives me the assurances for which I have asked I shall be very grateful.
§ 10.20 p.m.
§ Mr. David Ginsburg (Dewsbury)
I propose to make an appropriately brief intervention this evening, first, because the Treasury Bench has had a very heavy time of it today, and, secondly, because the problem we are discussing is a difficult one from the point of view of the rules of order. I hope, Sir Gordon, that you will be charitable with me, and perhaps charitable to the Government spokesman who will have to put forward some arguments in reply.
I will content myself by making three points. First, I wish to draw the attention of the House to the significant rise in the note issue which has taken place over the years. Secondly, I should like to invite the observations of the Economic Secretary about the nature of Government thinking on this phenomenon. Thirdly, I should like some assurance that in this policy the supremacy lies with the Government and not with the Bank of England.
It is no exaggeration to say that there is considerable public concern about the continued rise in the note issue. My hon. Friend the Member for Lough-borougth (Mr. Oronin), who is a member of the medical profession, has described the note issue as "the thermometer of inflation". Though neither he nor I would wish to over-simplify the problem, we realise that there is, as he mentioned, the question of the bank deposits. My hon. Friend went into that at some length, but there is also the equally important problem of the velocity of the circulation of money.
Presumably the Government are concerned not merely with the note issue but with the total amount of money available. Presumably they are also concerned with the velocity at which this money circulates. May I interpose here that it is very unsatisfactory for hon. Members that the Government have still not been able to provide statistics about the velocity of the circulation of money? Had those statistics been available, it is 334 arguable that my hon. Friends and I would not have had to pray against the Order this evening. However, those statistics are not available and we are bound to say that the trend of the note issue is an upward one.
That upward trend must be of greater concern to hon. Gentlemen opposite than to hon. Members on this side of the House, because it is from the benches opposite that we have consistently heard the cry that this country must not print its way into inflation. Given that point of view, I put to the Economic Secretary, diffidently and provisionally, a paradox about the statistics of the note issue, because it has intrigued me and I would welcome his comments.
Over the period 1945 to 1951, when my hon. Friends were in office, the note issue rose by about £25 million. During the period 1951 to 1960, the period of the present Government's stewardship, the note issue has gone up by over £700 million. That is a large and serious sum, sufficiently serious for the Radcliffe Committee to have commented upon it in its observations.
It is even more intriguing, if one breaks down the £700 million, to see that it is shared out quite impartially between the respective Chancellors of the Exchequer of the day. The Home Secretary heads the list. Under his stewardship, the note issue went up by as much as £400 million. When the Prime Minister was Chancellor of the Exchequer, the note issue went up by £150 million. It even went up by a modest amount when the right hon. Member for Monmouth (Mr. Thorneycroft) was Chancellor of the Exchequer and it has gone up by a further £150 million under the stewardship of the present Chancellor. This appears to be an inexorable trend. My hon. Friends and I would appreciate the Government's comment on that phenomenon.
We would also like to hear something of the Government's viewpoint concerning the note issue and whether they regard it as a serious instrument of economic monetary policy. It may not be easy for the Economic Secretary to reply to my question owing to the rules of order. Nevertheless, the Radcliffe Committee took the view that note issue policy was closely linked with the whole complex of monetary policy. Indeed, it stated 335 that the Government's monetary policy must be viewed in relation to the general objectives of the Government's economic diagnosis in a particular situation.
With those words in mind, I should like first to take up the Government's thinking on the question of the note issue and to make two brief quotations from the Report of the Radcliffe Committee. In paragraph 100, the Committee stated:The authorities have explained to us in evidence that they do not regard the supply of bank notes as being the only, nor nowadays the only important, supply of money, and that the Government's function in issuing notes is simply the passive one of ensuring that sufficient notes are available for the practical convenience of the public.In paragraph 348 the view is again expressed, but in rather stronger terms. The Committee stated:As was made clear to us in evidence, this control is a vestige of an earlier, more significant control, dating from the time when the note issue was mainly backed by gold and the danger that the authorities might abuse the power to issue fiduciary notes was taken sufficiently seriously to warrant close Parliament scrutiny of the exercise of that power.Therefore, my hon. Friends and I have no apology to make for bringing this matter before the House. We do, however, ask the Economic Secretary whether the Government still subscribe to the view which is expressed so felicitously in the Radcliffe Report.
It as interesting that, in the very short conclusions of the Radcliffe Committee, no mention whatever is made of either restricting or increasing the note issue as a weapon of monetary policy. It is a quite passive instrument which has no significance. If that is true, and if that is the nature of current thinking, I should like to put this question to the Economic Secretary. Are he and his right hon. Friend the Chancellor happy at the continued expansion of the note issue having regard to their own policy, first, with regard to the raising of the Bank Rate in January, and secondly, in regard to what the Chancellor said about credit restriction in his speech yesterday?
I quote in particular from columns 45 and 46 of the OFFICIAL REPORT. The Chancellor said yesterday:But, equally, we must be careful not to allow credit expansion to prejudice stability in the internal economy or balance of payments."—[OFFICIAL REPORT, 4th April, 1960; Vol. 621. c. 45–6.]336 So much for the question of the narrow problem of the note issue. But there are certain wider considerations. The House cannot really decide whether the Government are right in bringing this Order forward at the present time without relating their action to a very modest and tentative diagnosis of the economic situation.
My hon. Friends and I would like to ask the Economic Secretary whether the Government's monetary policy is operating under a diagnosis that we are in an inflationary situation or under a diagnosis that we face a difficult balance of payments crisis. The reason that I put this to the Economic Secretary is that my hon. Friends and I are very confused on the matter because we have had confusing statements from Government spokesmen.
To begin with, we had the original statement from the Bank of England in January when the Bank Rate was raised. It was then stated that the Bank Rate was being raised because of the inflationary situation in the economy. Subsequently we had the statement of the Chancellor on his monetary policy to which the Order relates. This was on 28th January, when the Chancellor pinpointed the danger that the country faced as a balance of payments crisis. On 11th February we had the Liverpool speech of the Governor of the Bank of England, when he stated that the main problem that the economy faced was the menace of inflation. I put some Questions to the Economic Secretary last month, and yesterday the Chancellor, referring to his monetary policy, said that his increase of the Bank Rate, to which the note issue is related, was designed to deal with a balance of payments crisis.
I will leave that aspect of the problem at the present stage, and simply say to the Economic Secretary that this is too bad and extremely confusing. If the House is to pass the Order, we should like to know what sort of economic situation the Government feel that they are facing at the moment.
I come to the last point which I indicated to the Economic Secretary I would raise. It is the view of my hon. Friends and myself—in this view we are reinforced very strongly by the Radcliffe Committee—that in monetary policy 337 primacy should rest with the Government of the day and not with the Bank of England. I have just briefly quoted certain indications of divergencies which exist in the views of the Government and the Governor of the Bank of England. This is very unfortunate, not because they differ but because we in this House cannot cross-examine the Governor of the Bank of England on any particular aspect of monetary policy. For better or ill, we can cross-examine only the Government of the day. Therefore, it is right that the will of the Government of the day in these matters should prevail, because it is the Government of the day which is alone answerable to this House.
I hope that in the course of this debate we shall get some reasonable reassurance from the Treasury Bench on these very weighty and important matters.
§ 10.35 p.m.
§ Mr. Ray Mawby (Totnes)
I hesitate to enter this debate, because I am not an economist, but I was rather surprised by the suggestion of the hon. Member for Loughborough (Mr. Cronin) that the size of the fiduciary note issue was the thermometer of the size of inflation which tended to show just how inflationary the system was. I should have thought that one could equally set out to prove that it was a thermometer of rising prosperity. However, I do not think that either is correct. The size of the issue depends upon how many pound notes each person decides he ought to have in his pocket to enable him to make the payments which he has to make from day to day.
§ Mr. Cronin
I think the hon. Member will agree that the fiduciary issue, if it increases and if prices remain stable, is probably an indication of increasing prosperity, but that if it increases and prices do not remain stable but increase, it is an indication of inflation.
§ Mr. Mawby
I should not have thought that was necessarily so. After all, the actual notes in circulation do not represent the only thing upon which we calculate the amount of money which is needed to purchase the goods which are available.
We are dealing with a narrow point. This is a matter which we should consider practically, in the same way as any 338 bank decides how many shillings to circulate. Banks circulate as many shillings as they think will be required by people to put into their gas and electricity meters, and they take into account the number of shillings which will remain in the meters during a quarter until the shillings are removed by the collectors and are put into circulation again. The whole matter of the issue of notes is decided purely on that sort of basis.
What are bank notes? They are non-interest bearing securities. Therefore, the average person with any sense will keep only the smallest number of notes in his pocket that he feels he requires to enable him to carry out necessary transactions. Certainly, with the changes which are occurring, with more and more people using a bank account instead of carrying out transactions in cash, there may well be in the future a reduced demand for bank notes. People will not be using so many currency notes; they will use more cheques, and their wages and salaries will be paid directly into their bank accounts.
Therefore, I should have thought that, from the practical point of view, this is purely a matter of finding out from the experts—and after all, I should have thought that the bankers are the experts —what demand is made upon them for these notes to enable each person to convert whatever securities he may have to ordinary notes for the purpose of carrying out day-to-day transactions. I believe that it is as simple as that. However, I am not an economist, and it may be that it is not as simple as that.
§ 10.37 p.m.
§ The Economic Secretary to the Treasury (Mr. Anthony Barber)
I should like, first, to say how grateful I am to the hon. Member for Loughborough (Mr. Cronin) for his opening remarks of welcome to me at these biannual debates. I am bound to tell him that just now, when he referred me to the debate which took place on 1st April, 1958, I felt some relief at sitting on this Bench, because when he was referring to the question whether or not people had confidence in the Government of the day then, I noticed that he said:They see a Government moving towards its demise at a rather rapid pace …".— [OFFICIAL REPORT, 1st April, 1958; Vol. 585. c. 1164–5.]339 I am fortunate, in the circumstances, to be here this evening and to be able to deal with the points which have been raised. I hope that when I have finished what I have to say, the hon. Gentleman and his hon. Friends, and my hon. Friend the Member for Totnes (Mr. Mawby), will feel that I have answered reasonably satisfactorily the questions which were raised.
I regret that owing to the Ruling of your predecessor, a few moments ago, Mr. Deputy-Speaker, it will not be open to me, under this Order, to go into the more general questions of the economic situation which were touched upon by the hon. Member for Dewsbury (Mr. Ginsburg), nor into the wider question of monetary policy which was referred to yesterday by my right hon. Friend the Chancellor of the Exchequer. We still have a couple of days to go and no doubt the hon. Gentleman, if he catches the eye of the Chair, will have the chance to go into the points again.
The hon. Member for Dewsbury referred to the fact that for the past two years there had been a considerable rise in the note issue. I should like to give him the assurance that as far as the Government are concerned, and the Bank of England, also, this is a matter which we take very seriously and which we watch very carefully. On the other hand, I think it fair to make the point that the extent of the rise in the note issue is only one of many indicators which are relevant either to the question of inflation or to the question of the level of economic activity.
My hon. Friend the Member for Totnes referred specifically to the point raised by, I think, the hon. Member for Loughborough, about inflation. I think it was suggested that the extent of the note issue was in itself an indicator of inflation. I must say that I do not think that that is necessarily so. It is true that in certain circumstances it could be an indicator of inflation, but, in general, I would have thought that that was not so—and certainly not without going into great detail.
It is a fact that over the past two years—I think that hon. Members on both sides of the House would agree with this—we have been able, reasonably successfully, to contain inflation, and yet during these past two years the 340 amount of the fiduciary note issue has increased. As my hon. Friend the Member for Totnes rightly pointed out, if habits change and people use cheques more than they do at present that in itself would be a tendency towards the reduction of the note issue, or, at any rate, towards moderating the increase which has been taking place. No doubt as activity continues the increase in the note issue in the future will also continue.
As the hon. Member for Loughborough rightly said, the purpose of this Order is to extend for another two years the powers of the Treasury to increase by direction the amount of the fiduciary issue over the amount of £1,575 million which was laid down in the Currency and Bank Notes Act, 1954. I understood from the hon. Gentleman that if he were satisfied on the principal questions which he and his hon. Friends raised it was not the intention of the Opposition to divide the House. I am grateful to the hon. Gentleman for what he said and for his co-operation.
I do not think that it could be argued that the Bank of England—the relationship between the Bank and the Treasury has been referred to—should not have the task of representing to the Treasury that it is expedient for the fiduciary note issue to be altered. The real question which has been raised by hon. Gentlemen opposite is really what is the economic significance of the increase in the fiduciary issue—in other words, what is the economic significance of the size of the note circulation.
The hon. Member for Dewsbury referred to the Radcliffe Report and to the conclusions reached in that Report. Since the last debate two years ago, on 1st April, 1958, we have had the advantage of seeing the evidence which was given to the Radcliffe Committee. I think that the significance of the fiduciary note issue was well stated by the Governor of the Bank of England when he gave his evidence, and certainly the significance of the note issue has not changed.
I do not think that I can do better than quote a short passage from what was said by the Governor of the Bank of England.The size of the note circulation is very important. It is a figure which we watch continuously as a significant component of the 341 total money supply: and I think it is one of the figures which should be continually before the public. But this does not alter the fact that the present rôle of the Issue Department in the supply of currency is passive.The hon. Member for Loughborough asked to what extent we control the fiduciary issue. At present, it is not considered the purpose of the Bank or Her Majesty's Government to exercise any positive control over it. The rôle of the Bank of England is simply to supply the amount of notes which the banks and the public desire to hold and not in any way to restrict the supply of notes below the level of the demand.
After all, as I think was implicit in what was said by the hon. Member for Loughborough, if the Bank of England refused to supply the clearing banks with the notes required by their customers it would lead either to an increased use of cheques, or an increased trade in postal orders or other means of payment or a run on the banks, and complete and utter confusion.
§ Mr. Cronin
We have agreed that the fiduciary issue is a fairly constant fraction of the total amount of money in circulation. We are concerned to know to what extent the Government are able to control the total amount of money in circulation, because the fiduciary issue depends on that.
§ Mr. Barber
It would be truer to say that the proportion which the note issue bears to the money national income is more relevant. In general terms, I think that it is about 10 per cent. The extent to which the money is controlled, or to which it would be desirable to control it, raises a wide issue with which I could not deal in five or ten minutes; and if I attempted to do so I should be out of order.
§ Mr. Cronin
I am sorry to interrupt again, but I think that this is fairly important. We do not want to go into a general dissertation on fiscal policy. But the fiduciary issue is a fraction of the total amount of the money. The total amount consists of the fiduciary issue plus the bank deposits, and the Government can control the fiduciary issue only by controlling the total amount of money in circulation. We should like the hon. Gentleman to tell us how the Government control the total amount of money in circulation. If they do not 342 do anything to control the fiduciary issue, how do they control the bank deposits which activate the fiduciary issue? To what extent have the Government power to control the banks?
§ Mr. Deputy-Speaker (Major Sir William Anstruther-Gray)
Order. I am doubtful whether the control of the banks can properly be discussed under this Order.
§ Mr. Cronin
I consider that this is germane to our discussion, because in the final analysis the fiduciary issue is handed across the counters of the banks. Therefore, the control of the banks must be germane to this discussion.
§ Mr. Deputy-Speaker
I do not think that we want to go too far into this on the detail of the Order. I do not think that that could be done.
§ Mr. Barber
With respect, Mr. Deputy-Speaker, I would agree with what you say because, as the hon. Member for Loughborough said earlier, there is a relationship between bank advances and bank deposits. The question of bank advances raises the whole question of control of credit by the Government, which is just the sort of matter that we have been discussing during the last two days, and shall continue to discuss tomorrow and Thursday.
I was trying to explain what would happen if, in fact, the Bank of England refused to supply the clearing banks with the bank notes that are required by their customers, and I was pointing out that if that happened it would lead to considerable confusion. What happens, in practice, is that the Bank of England has to meet a demand for bank notes before Easter, Whitsun, August Bank Holiday and Christmas. In other words, there is a seasonal rise, as the hon. Gentleman knows, in the demand for these notes. The pattern has been roughly the same in recent years although, of course, the level of the fiduciary note issue has risen over the period.
As the hon. Gentleman rightly said, bank notes are only part of the total money supplied, the larger part being, of course, bank deposits. People wanting bank notes are entitled to have them up to the amount that they are allowed to withdraw from their banks. The 343 volume of notes in circulation, therefore, is wholly determined by the demand for bank notes by the public, and demand for bank notes means demand for cash— cash for every-day needs, both domestic needs and the needs of business.
It may well be, as I indicated earlier, and as my hon. Friend the Member for Totnes suggested, that, in due course, the increased use of cheques will of itself tend to cut down the demand for bank notes. There can, however, be no question of trying to control the volume of money by saying that people who want to withdraw some or all of their balances should not be able to obtain bank notes if they so desire.
Ever since the Currency and Bank Notes Bill was before the House, it has been recognised—
§ Mr. Ginsburg
I do not want to press the hon. Gentleman too far, because he has been very helpful, but I mentioned a third component in the total supply of money—the velocity of the circulation of the note issue itself. Can the Economic Secretary give the House any information on that concept, and can he also say whether, in future, it will be possible for the Government to produce statistics on the velocity of circulation of money in the economy?
§ Mr. Barber
I had not anticipated, I must admit, that on this Order the question of velocity of circulation would arise. What I should be very pleased to do would be to look into that point and, perhaps, I could, if necessary, write to the hon. Gentleman about it.
I was saying that it has been recognised ever since the Currency and Bank Notes Bill was before the House that Parliament should have the opportunity of considering any permanent increase in the level of the fiduciary note issue. This was because of its importance as one of several indicators of the level and pattern of economic activity. There was also the possibility—remote, I hope—that there might one day be a Government which wanted to use the note issue actively as a means of deliberately inflating the supply of money. That, however, is unlikely in the foreseeable future.
The size of the note issue recently has borne a remarkably constant proportion 344 to the size of the money national income, and I think that one would naturally expect this result, on the hypothesis that bank notes are, as it were, the small change of the monetary system.
I have tried as best I can to deal with most of the points raised in this short but useful debate. As I have said, the question of the fiduciary note issue is a matter which the Government certainly will continue to watch. It is one of the indicators of economic activity, but in view of the practical necessity of satisfying the demands of the public for cash I hope that the House will accept the Order and that the Prayer will be withdrawn.
§ 10.56 p.m.
§ Mr. Roy Jenkins (Birmingham, Stechford)
I think that we can all agree with the Economic Secretary that it would certainly not be desirable that the Bank of England should not be able to meet the demands of the public for notes. Our intention in putting down this Prayer was a probing intention, and we do not intend to use our strength to defeat the Order.
At the same time, this is an important issue, and while the hon. Gentleman paid considerable attention to answering points which have been put to him, I do not think that he gave us as clear an idea of the movements of the Government on this matter as I would have liked to hear. The Government's right, through the Bank of England, to print a great sum of money is a matter of considerable importance.
There is great agitation on the benches opposite about Government spending. This is a hardly less important matter. I do not know whether Members opposite who are here this evening are rebels or loyal supporters of the Government. Most of them do not look in very rebellious mood at the moment, but this is a matter of considerable importance on which we might have expected to hear from some of those who have been strenuously complaining about the Government's carelessness with public money at present.
The burden of what the Economic Secretary said was that the Government were entirely passive in this matter, that they just sit back and meet the demands of the public. He also assured us that they take this very seriously and watch 345 very carefully the size of the fiduciary note issue. We are glad to know they do that, but I do not know that it is a very useful form of watching, because they can, in fact, do nothing about it.
However, we are glad to know that they take in the evidence, even if they are not in a position to act upon it. This is, I believe, a reasonably enlightened theory, but it certainly was not the theory held on the benches opposite or, indeed, in the Treasury a relatively short time ago. When the right hon. Gentleman the Member for Monmouth (Mr. Thorneycroft) was Chancellor of the Exchequer he pinned his colours very firmly to the mast as to the amount of money being absolutely the determining factor in whether or not we had inflation or stable prices.
It is true—and no one would deny it —that the fiduciary note issue is not an insignificant part; it is a part, but not the major pact, of the total supply of money, but I understood that it was the view of the Government two years ago, when we last debated these matters, that it was in a sense a determining part, because the relationship of the fiduciary issue to the total quantity of money, made up of the fiduciary issue and the total of bank deposits, was so constant that one could, as it were, work out the total amount of money at any time, provided that one knew the amount of the fiduciary issue.
The right hon. Gentleman the President of the Board of Trade, who was then Paymaster-General, and who replied to that debate, said: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."—[OFFICIAL REPORT, 1st April, 1958; Vol. 585, c. 1177.]As I understood it this evening, the hon. Member's thought had advanced, perhaps moved—I will not say whether advanced or not—but had moved a little from that position, because the Government are anxious to tell us what is the relationship between the fiduciary issue and national income—not necessarily the volume of money. As far as I can see, this marks a slight change in Government emphasis. I make no complaint about that. I have no desire for the Government to remain absolutely 346 wedded to the views which they put forward two years ago, but, at any rate, it was certainly the view of the President of the Board of Trade two years ago, and I think that it is broadly the view of the Government now, that there is a close relationship between the total volume of money and the amount of the fiduciary issue—perhaps "close relationship" is the wrong expression and "constant relationship" is better.
Undoubtedly, when he was at the Treasury, the right hon. Member for Monmouth took the view that these two considerations together were crucial to the whole inflationary issue, but now, as I understand it, more sophisticated doctrines prevail at the Treasury and we are asked to accept the view, not that it is in no way crucial to the inflationary position, but that it is something which is entirely determined by the demand of the public for notes and that there is not very much the Government can do about it. That is a big change from the doctrine which prevailed at the Treasury two-and-a-half years ago.
On the whole, it is an improved doctrine. We make no complaint about it, but it is important that the House should take note of the fact and of the extent to which the Treasury pundit has now been completely abandoned by the Government in their new thinking. I hope that by the time we come to debate this issue again, in two years—with a slight change of team for the sake of variety—as no doubt we shall in some form, the Government will not have changed round so completely as they did during the previous two-and-a-half years.
§ 11.2 p.m.
§ Mr. Cronin
In view of the lateness of the hour, I shall make only two or three brief comments. The Economic Secretary said that in the last debate I said that the Government were moving towards their demise. I still adhere to that opinion, with the qualification that that demise has been interrupted by the General Election.
Another point was whether the fiduciary issue was an index of inflation. It is interesting to note that from 1951 it has increased from £1,500 million to £2,000 million, a proportion of about three to four, while, at the same time, the value of the £ has fallen from 20s. to 15s. in 1951 terms. So the fiduciary 347 issue follows roughly the course of inflation.
I am disappointed that the Economic Secretary did not give us some definite views about how the Government control the banks which control the total amount of money. I rather felt that my hon. Friends used the rules of order as a starting horse and the Economic Secretary used them as a shield. As a result, we have not got as much information as we would like. Nevertheless, with that proviso, I must say that the hon. Gentleman has been most helpful. We have had a very agreeable debate, conducted in the most urbane atmosphere, and very useful opinions have been expressed on both sides of the House.
I beg to ask leave to withdraw the Motion.
§ Motion, by leave, withdrawn.