3½ PER CENT. WAR LOAN

HC Deb 07 December 1960 vol 631 cc1400-10

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Chichester-Clark.]

10.11 p.m.

Mr. Percy Browne (Torrington)

I welcome this opportunity to discuss the question of the 3½ per cent. War Loan and the possibility of alterations in its terms. It is ironic that we should be discussing this Government stock at a moment when its market value is lower than at any time since it was first issued in 1932.

In the past fifteen months, since I have been in this House, I have asked three Questions about this stock. My first Question was on 22nd March, 1960, when, in answer to a supplementary question by the hon. Member for Islington, East (Mr. Fletcher) suggesting that there should be a date for the redemption of this stock, my right hon. Friend the then Chancellor of the Exchequer answered: I think that I must leave the Answer as I have given it today without adding any further to it."—[OFFICIAL REPORT, 22nd March, 1960; Vol. 620, c. 215.] Perhaps I was too gullible, but I felt that even though the door was shut, it was not necessarily bolted.

In November, I asked another Question on the same subject, and in reply to my supplementary question my hon. Friend the Economic Secretary said: … reluctantly, I must tell the House that I can hold out no hope of any change."—[OFFICIAL REPORT, 10th November, 1960; Vol. 629, c. 1215.] It may be asked why I choose War Loan as opposed to the old Consols or Daltons, officially called 2½ per cent. Savings Bonds, or some other Government stock. I believe that War Loan is in a different category, for three reasons. The first is its name. War Loan was invested in by a lot of small savers during the war for the reason that they felt they were helping the war effort by investing in Government loan. The second reason is the terms of conversion when the old 5 per cent. 1917 issue of War Loan was converted by those who wished to convert it to the present 3½ per cent. stock. One of the conditions of the conversion was that the loan should be redeemable at par either by a single operation or by successive operations on 1st December, 1952, or at any time or times thereafter.

The third reason why this War Loan is different from the other stock is the volume of money involved. I believe that, at the time of the conversion offer in 1932, there was £1,900 million worth of this stock and that it was far and away the biggest amount then held in any Government security. I also believe that there are more holders of small amounts of this stock than of any other Government stock. I do not need to tell my hon. Friend the Economic Secretary that feeling among many of these small holders today runs fairly high.

I would quote from part of a letter from one of my constituents who says: I invested in this stock because of its name during the war. I put my life's savings into it and since then I have seen the value drop by over one-third. Together with the decrease in the value of the £, my savings are only worth about two-fifths of what they were when I invested them. I calculate that anybody who put £100 in the stock in 1945 has about £36 today. The stock has dropped to just under £60 and the £ has devalued to about 12s. as opposed to 20s. in 1945. This letter is typical of many I have seen. It shows that there is a real grievance, which I share, among those who hold this stock.

The crux of the case is that the small man, and by that I mean the person who had small savings and invested them in a small way, did this because he felt that he was being patriotic by doing so, and because in any case he felt that it was Government stock and as such it was safe. These people feel cheated by the devaluation which has happened since. People say, "He could have gone to a stockbroker and could have bought equities and the appreciation in equities would have countered any loss made on War Loan." The sort of people I am talking about do not have recourse to stockbrokers. They do not know any. They live in small towns and villages in the country and they do not understand that when interest rates rise so the value of fixed-interest stock goes down, and particularly of undated stock of this description.

I would ask my hon. Friend the Economic Secretary to the Treasury whether it is possible to find some method of helping these people in their predicament, and particularly the elderly of whom there are large numbers who hold this stock. At the moment if they realise their stock they will suffer a heavy loss, or, because they cannot realise it, they are suffering hardship. I suggest two possible methods of tackling this problem. The first is to pay back or offer some conversion at par or thereabouts, depending on the amount held and the date on which the stock was bought.

It has been suggested that it should be done on either of these criteria—the date or the amount—but I believe that a combination of the two would be more satisfactory. As a lead, I suggest any amount under £2,000 bought before 1950. This is the ideal solution, but it has certain snags. It is probably impossible to find the number of holders of this stock. I am told that the turnover of the stock is about one-third a year and that there are one million entries in the Bank of England dealing with it. There are difficulties about legacies, about those who die after buying the stock and those who inherit it, and about trust funds, and so on. These are, of course, administrative difficulties.

The fundamental difficulties probably are the question of a departure from anything that the Government have ever done before, and the principles that underlie all Government borrowing. They are that the Government should adhere strictly to the terms of issue and that any conversion or redemption should treat all holders of Government stock alike. This last dictum, that any conversion or redemption should treat all holders alike, is the only justifiable reason why my hon. Friend may say that it is impossible to do anything along these lines and to right the very real feeling of injustice that I have described. If my hon. Friend says this, one must accept it, but one thing he must not do is to hang his argument on the peg of the first principle I mentioned, of adhering strictly to the terms of issue.

This leads me in this particular case to the second possible method of doing something to help these people. In answer to a Question of mine on 10th November, my hon. Friend said: One of the foundations on which the gilt-edged market rests is the long-established and hitherto unbroken rule that the Government honours the terms of issue of their stocks without exception or variation."—[OFFICIAL REPORT, 10th November, 1960; Vol. 629, c. 1215.] I have already mentioned one of the terms included when this conversion offer took place in 1932, which was that it could be redeemed at par at any time from 1st December, 1952, or at any time or times thereafter. As far as I can see there is nothing in the rules, as it were, to prevent the dating of this stock. Under the circumstances, I suggest that this is the least we should do.

It might be possible to combine two methods of dating stock for those people who hold under a certain amount bought before a certain date, but presumably the difficulty here would be that we would immediately have two classes of stock with different quotations. In any case, I think that we must date the stock.

The announcement of a date would possibly be of doubtful value to the elderly who hold stock at the moment, but it would show that the Government intended to try to do something about it, and it would be of benefit to dependants as well as increasing the value of the stock as the date of conversion drew near.

Without some sort of action it is patently dishonest to say that there is any possibility, while interest rates are high, of this stock ever increasing in value very much above where it stands today. I hope that my hon. Friend will bear in mind the sense of injustice that is felt by many people—and I share their views—and also the hardship caused to many holders of 3½ per cent. War Loan, particularly the elderly. I ask him to try to find some way of helping them.

10.23 p.m.

Brigadier Sir Otho Prior-Palmer (Worthing)

I wish to support the able speech of my hon. Friend the Member for Torrington (Mr. P. Browne). As my hon. Friend the Economic Secretary knows, I raised this matter at very great length in the debate on the Queen's Speech. I must repeat one or two things which I said then.

Ever since the war, as a result of inflation, the rise in the cost of living and the devaluation of the £, there are some members of the community who have been hit extremely hard. They are those who do not pay Income Tax, so there is no relief there to help them, and they are just too well off to reap any benefit from National Assistance. They are a great block of people who have worked hard all their lives. They saved for their old age and invested their money in Government securities. They have been treated hardly by Governments of both parties since the war.

It is a coincidence that a very large number of these people support the present Government, but that is no reason for either doing something or for not doing something. If they were members of a very big and powerful trade union organisation, so that their voice could be heard and pressure brought to bear, something would have been done a long time ago. It is absolutely iniquitous that, because these people are old and will be dying off before long, and the problem will, therefore, soon solve itself, nothing should be done for them just because they have no voice or power to bring pressure to bear on Parliament.

The arguments which I have heard from the Front Bench about why this should not be done do not hold water. My hon. Friend has put forward various solutions. If those are not acceptable, I am convinced, as I have said before, that the great brains in the Treasury should be able to find a way in which to help these people. We have at the moment lowering taxation, with a heavy rise in rates largely due to education. These people are being made to pay more and more in rates as time goes on. Many of them live in houses they would give their eyes to get out of, and which could be converted into flats, but they just cannot find the money to move. That is absolutely true: they cannot afford to move.

I would say that even if a date were put on which might be a farly long-term one—I disagree with my hon. Friend over this—it would be of help to these people, especially the elderly, because the very next morning the value of the stock would rise and many of these people would be able to realise on it. I hope that my hon. Friend will not close the door on this, but will have further talks with my right hon. and learned Friend the Chancellor before the next Budget.

I make an earnest appeal to him on behalf of these worthy people, many of whom are literally going without meals to make ends meet. It is not very easy to live on £150 a year these days, although many of them are having to try to do so.

Mr. James McInnes (Glasgow, Central)

Does the hon. and gallant Gentleman not agree that the stock could be dated?

Sir O. Prior-Palmer

Yes, that is what I am asking. I am sorry if I did not make it clear.

10.26 p.m.

The Economic Secretary to the Treasury (Mr. Anthony Barber)

On several occasions during the last year or so points concerning 3½ per cent. War Loan have been raised in this House at Question Time, and I think that my hon. Friend the Member for Torrington (Mr. P. Browne) would be the first to agree that this has not really been a very satisfactory procedure.

I am grateful to him for raising the matter on the Adjournment tonight and for giving me the opportunity of explaining the Government's position more fully. Perhaps I might also say that in view of my hon. Friend's determined Questions, and the sincere interest which I know he has in this matter, I think it fitting that it should have fallen to him to raise this matter at greater length. Perhaps I might also say that I am pleased once again to have heard my hon. and gallant Friend the Member for Worthing (Sir O. Prior-Palmer) speak on this subject.

I think that it would be helpful if, at the outset, I were to say a word about the history of 3½ per cent. War Loan. It is not, of course, the first Government stock to be described as "War Loan". Its predecessor was the 5 per cent. War Loan, and I myself, I am bound to say, was surprised to learn that there have been no fewer than six issues with this name during this century. Nor is the use of the word "loan" to describe a negotiable Government security confined to these issues. It has been used in the description of more than a few gilt-edged issues of both dated and undated stock.

When it was decided, in 1932, to redeem 5 per cent. War Loan 1929–47, holders were offered conversion into the new 3½ per cent. War Loan. They had, of course, a choice. They could accept the conversion offer, as most of them did, or they could take redemption in cash.

I should like to read to the House the two most important conditions of the conversion issue, which were as follows:

1. "(a) The rate of interest will be reduced to £3 10s. per cent. per annum.
2. (b) The Lords Commissioners of His Majesty's Treasury reserve to themselves the right, on giving three calendar months' notice of each operation in the London Gazette, to redeem the loan, at par, either by a single operation or by successive operations, on 1st December, 1952, or at any time or times thereafter."

The effect of these conditions was that the holders of the War Loan were assured of a return of 3½ per cent. on their money for at least twenty years, because the first possible date of redemption was fixed at 1st December, 1952, but these terms of issue did not fix any final date of redemption after 1st December, 1952.

Mr. P. Browne

Would my hon. Friend not agree that at that time it would have been difficult for investors to have found anywhere to put their money if, as I believe I am right in saying, there was £1,900 million of War Loan they could choose to go into?

Mr. Barber

I am bound to say that I cannot accept the argument of my hon. Friend. I think, as I shall go on to show in a moment, that it was a very good thing for many people in the circumstances of the time at which the conversion offer was made to accept it and go into the new 3½ per cent. War Loan. I should not have thought, despite the amount involved, that it would have been impracticable, if I may put it that way, for a considerable proportion of the holders of the old 5 per cent. War Loan to take out their money and invest it elsewhere.

This type of stock, with no fixed final redemption date, was no new thing in Government borrowing, and I really do not think there could be any room for doubt as to what was meant by the terms which I have read to the House.

Bearing in mind the fall in interest rates and the other circumstances of the time, I doubt whether anybody would deny that it was a reasonable decision to convert the 5 per cent. War Loan in 1932. Although holders were asked to accept a reduction in the interest rate from 5 per cent. to 3½ per cent., it can now be seen, looking back on things, that they did not get at all a bad bargain. Long-term interest rates fell further shortly after the issue of the stock, and, except for a period of a little over a year just before and after the beginning of the last war, they remained below 3½ per cent. for the next seventeen years, until 1949.

During that period of fifteen or sixteen years the price of War Loan stood above par. It follows that a conversion offer at almost any time between 1932 and 1947, which was the final redemption date of the old 5 per cent. War Loan, would have been on less favourable terms than the offer which was actually made.

By the end of 1947 rates had begun to creep up; in 1949, under Sir Stafford Cripps, they rose above 3½ per cent.; and by the end of 1951 the price of War Loan had dropped to 80. Since then, as my hon. Friend pointed out, it has fallen still further to the current level of about 60.

The fall in the price of fixed-interest securities reflects the continued rise in the level of interest rates which is caused by a large variety of factors, chief among them the persistent and widespread pressure of demand for capital. Many of these factors are not within the control or the influence of Government policy. It would certainly be mistaken, and probably impossible, for the Government to seek to resist a persistent and sustained trend in the level of interest rates.

My hon. Friend referred to several possible reasons for distinguishing between holders of War Loan and other undated stocks. He referred to the name of the stock, the terms of the conversion and the volume of money involved. As to the name of the stock and the terms of the conversion, I hope that, in view of what I have already said, he will at least understand my contention that there is really no justification for discrimination on these grounds.

I agree with my hon. Friend that this is the largest outstanding issue of Government stock and that there are probably more small investors in this than in any other gilt-edged stock, though certainly some of the wartime issues must also be fairly widely held. But I cannot see haw either of these facts entitles the holders of War Loan to be treated differently from holders of other Government stocks. It seems to me that any such action would rightly be regarded as very unfair to holders of other Government stocks, many of whom would have no less strong claims for a share in any special benefit that might be going. The truth is that one could not fairly or practicably discriminate between one holder of Government stock and another according to the issue or type of stock held.

The suggestions that have been made over the past year or two—some of them have been repeated by my hon. Friend tonight—for helping holders of War Loan fall into three categories: first, redemption at par of individual holdings in cases of hardship or long holding; secondly, the fixing of a final redemption date for the whole stock or for individual holdings; and, thirdly, refinancing the stock at current rates of interest.

All these suggestions have their own particular difficulties, and all would be more or less costly to the taxpayer. I wish that I had time to go over in detail the points concerning each of these three types of suggestion, but I want to concentrate, in the short time that remains, on the main, and to my mind insuperable, objection which applies to all such suggestions, and it is an objection which my hon. Friend faced in his remarks a a few minutes ago. This is the objection to which I referred in reply to my hon. Friend's Question on 10th November.

Any action of the kind suggested would certainly be a breach of the spirit, if not always of the letter, of the terms on which War Loan was issued. I must repeat, because it is very important, that it is a general rule that the terms of issue of Government stock are invariable once the stock has been issued, and that the Government's pledged word, as embodied in the terms of issue of stock, is a bond which no Government will vary or repudiate.

Mr. Leslie Spriggs (St. Helens)

Will the hon. Gentleman consider the emergency in many of the homes in the country today of people holding 3½ per cent. War Loan — people such as widowed mothers and old-age pensioners who are having to hold on to this stock?

Mr. Barber

I am trying to deal with the practical suggestions made by my hon. Friend for dealing with this matter. We all appreciate the circumstances mentioned by the hon. Gentleman. I am trying to deal with the practical possibilities of providing help.

If I might continue what I was saying, the market's knowledge that the terms of issue will be honoured without exception or variation is one of the foundations upon which the gilt-edged market rests. I should regard it as a very dangerous thing to break this rule, for which there are good practical reasons.

My hon. Friend has argued that redemption of individual holdings is not contrary to the terms of issue, because they provide for redemption either by a single operation or by successive operations. This provision would make it possible to spread any future redemption or conversion over a period of time by redeeming or converting only a certain proportion of the issue at any one time. But any partial redemption of this kind would have to be available to all holders of the Loan in proportion to the size of their holdings; it would have to be, if I may put it so, a partial general redemption, not redemption of some individual holdings and not others. Indeed, it would be a misuse of this provision to employ it to favour individual holders or classes of holders, however deserving of assistance they might be.

The same general objection applies, of course, to the idea of fixing a final redemption date for some holdings but not for others. If we were now to take the sort of action which has been suggested, we should not only be breaking a cardinal rule; we should in the process be acting very unfairly to all those who have in the past based decisions to sell their holdings, often at a considerable loss, on the assumption that no such action would be taken.

These people, I should have thought, would have a strong case for demanding compensation for what they might regard as a breach of faith; but I am advised that, apart from any question of cost to the Exchequer, it would be very difficult indeed, and perhaps impossible, to work out a practicable scheme for paying compensation to them.

All that I have said serves to underline one fundamental point. It is neither fair, nor reasonable, nor practicable, to discriminate between one holder of Government stock and another, whether according to the issue or type of stock held, according to motive for buying it, or according to personal circumstances.

I have every sympathy with anyone who has seen the capital value of his savings fall. But if it is a question of hardship, relief ought not to depend on the possession of a particular Government stock. There are other and better means of relieving hardship.

There is one other point to which I ought to refer. I have already said that the level of interest rates is, for the most part, outside the control of the Government. It is true that the Bank of England can, through the activities of the Government broker, bring some influence to bear on prices in the gilt-edged market, but there is a definite limit to what can and should be done in that way. The gilt-edged market, like any other market, must operate at whatever level of prices is in line with demand and supply, and, as Sir Stafford Cripps realised, it would certainly be mistaken, and very likely impossible, for the Government to attempt to keep prices at an artificial level, or to seek to resist a persistent and sustained trend in the level of prices.

I do not underestimate the concern which my hon. Friend has expressed. But the basic difficulty is that the matter has to be looked at not just from the point of view of those particular holders of this one stock, but also from the point of view of all holders of all Government stocks, and from the point of view of the Government as a borrower and, therefore, of the nation as a whole. Every time that we have considered the matter we have been forced to the same conclusion. I do not like having to speak so bluntly to disappoint those who, I know, feel strongly about this matter, but it seems to me to be essential that the holders of War Loan should be under no illusion as to the position.

Question put and agreed to.

Adjourned accordingly at nineteen minutes to Eleven o'clock.