INTEREST RATES (Hansard, 26 March 1968)

§ Mr. Oscar Murton (Poole)
I wish to discuss very shortly the problem of high interest rates, and I should like to make three points upon the continuing disastrous effect of the high Bank Rate, which in its turn affects all other interest rates. I should like to discuss the effect of the high Bank Rate on local authority borrowings, on the building industry generally, and, thirdly, upon building society loans.
Until last week, this country had had to face some months of a Bank Rate at the astronomical level of 8 per cent., but in the last two or three days this has been reduced to 7½ per cent. While this is welcome, it does not really take the steam out of my argument, because by any consideration a 7½ per cent. Bank Rate is still inordinately high. I think that we have to consider this figure in the light of the effect the imposition of a 1 per cent. increase in a Bank Rate can have on the economy generally.
I accept that local government borrowing rates are not necessarily linked automatically to the Bank Rate, but if all 1281 interest rates were to rise by 1 per cent., the gross cost to local authorities in the first year of such an imposition would average £200 million a month. I accept that this would be met to some extent by increased subsidies and grants, but naturally it would only be to some extent, and the fact remains that since the act of devaluation, and with the Bank Rate running at 8 per cent., all local authorities have in recent times been at or very near their wits end to balance their budgets in the light of the adverse changed circumstances.
Many carefully prepared schemes made by newly Conservative-controlled councils to improve management procedures, and to recast their finances after a long period of what I might say is Labour extravagance in the case of certain councils, have had to be shelved, reserves have had to be raided, and indeed drawings have had to be made on balances in hand to stabilise the rate fund, and many important capital projects have had to be shelved.
It is truly ironic that at a time when local government of this country, by the wish of the electorate, has been entrusted in great measure to the Conservative Party, its effects have been stultified by what I can only call the bungling ineptitude of central Government. There is only one answer to that in the case of central Government. The remedy lies in getting rid of the present Labour central Government, in the same way as we have succeeded in doing largely in local government.
I think that the point is really brought home when one considers the Ministry of Housing and Local Government's circular 84/67—this is better known as the Minister's personal message—of the 15th December to all local authorities, which I suggest set the seal on the great anxiety, and I might almost say the near panic, which reigned in Government circles regarding the runaway spending which was taking place in the whole of the public sector. Unfortunately, when one deals with the question of over-expenditure in the public sector, it is inevitably the local authorities which are the first to feel the effects of what the Government consider to be the necessary remedial measures. I believe that the last time that a Minister had to appeal to local authorities in these terms was 1282 in 1951, just before the fall of that Labour Government: history seems to be repeating itself.
In the meantime, our great cities are in a difficult position. The City Council of Newcastle-upon-Tyne, basing its estimates on an assumed fall in Bank Rate from 8 to 7 per cent.—it showed a certain prescience—considered that it would have to face an addition of £350,000 for the 15-month period from December last year. This is made up of £100,000 additional interest rate payable in 1967–68 and about £250,000 on interest charges in 1968–69—and this takes no account of extra loan charges. Each 1 per cent. increase in the interest rate costs the Greater London Council an extra £1 million a year, and the increase in Bank Rate from 5 per cent. to 8 per cent. which accompanied devaluation severely affected London's finances.
The same pattern has emerged in county boroughs, county councils and county districts. This is disturbing and difficult for local authorities, which have had anything but an easy time for the last three years and especially the last three months. Probably the most serious factor is the growing tendency for Ministers to interfere in local government—for example, over the sale of council houses and secondary education, as well as the threat of interfering with passenger transport—

§ Mr. Speaker
Order. The hon. Member chose this subject. He is bound by his own rules of order at the moment.

§ Mr. Murton
I will come to order very quickly, Mr. Speaker. I wanted to move on to rent increases. The Minister of Housing announced on 21st March that the Government proposed to introduce legislation to allow the Minister to restrain council house rent increases. As my right hon. and learned Friend the Member for Hexham (Mr. Rippon) has said, this is an unprecedented interference with the statutory powers of local housing authorities in peace time. The Minister will be interposing himself between local authorities and the responsibilities which the law obliges them to fulfil.
In other words, the Government are arrogating to themselves certain powers without accepting the inherent responsibility, which totally conflicts with the 1283 Minister's policy for rates during 1968–69. If essential rent increases are to be controlled—

§ The Financial Secretary to the Treasury (Mr. Harold Lever)
As I have to reply, do I understand that the hon. Member will relate rent increases to high interest rates? Otherwise, I am unprepared to answer. Does he wish merely to make declarations in the knowledge that he will hear no argument in reply? If he talks of rent increases, of which I have had no notice, he must not expect a reply.

§ Mr. Murton
I am prepared to accept any reply from the Financial Secretary. If the hon. Gentleman cannot reply, I will have to suffer his silence.
If rent increases are to be controlled, how can increases in rates be held to the minimum? The last sentence in the Minister's letter to local authorities on 15th December, 1967, said: If essential rent increases"—

§ Mr. Speaker
Order. The hon. Member must link what he is saying with the subject which he has decided to raise tonight. He, and nobody else, chose that subject.

§ Mr. Murton
I wrote to the Minister advising him that I intended to raise this type of problem. However, if you feel that I am going beyond the bounds of order, I will move on to further paths.

§ Mr. Speaker
The last thing that I would want to do would be to spoil the hon. Member's speech. He indicated to me, and he won a place in the Ballot, that he intended to discuss the problem of high interest rates. He must, therefore, link what he is saying with that subject; in other words, he must link rent increases with high interest rates. I am sure that he is able to do it. Indeed, in his position I think I could do it. [Laughter.]

§ Mr. Murton
I am sure that that is so, Mr. Speaker, and I have said enough to make my point in this respect.
I come to the question of the building industry. A Bank Rate of 8 per cent. means that, generally speaking, a builder must borrow at 10 per cent. A fractional 1284 drop to, say, 7½ per cent. will mean that he is still borrowing to finance his business at a costly rate. The effect of this is reflected in the price of his product. He will probably be a fortunate builder if he can borrow at 10 per cent. Indeed, he may not even be granted loan facilities. I understand that there is an extraordinary hiatus here, because builders are suspended in something of a policy vacuum by the Government in that they neither have priority for credit borrowing, nor, apparently, will the Government accept that they are denied it.
Devaluation has played an important part, as have high interest rates and S.E.T. All this has resulted in higher house prices. Building materials this year have become more expensive and there has been a 4 per cent. increase in building costs. Devaluation has raised the price of a house by £30 to £40. I understand that taxation has raised the cost by another £100. If one adds the effect of interest charges to the cost of devaluation, the result in the long-term is likely to be about £100 for that effect alone. The probable forecast of the national average rise in the cost of a three-bedroomed house in 1968 is suggested to be £350 at the very least.
Is it any wonder that the general level of interest rates, coupled with the inevitable effects of restrictive Socialist legislation over the past three years, has depressed the private sector of the building industry from 218,000 completed houses in 1964 to about 18,000 less in 1967? In the light of this, there has today been a discussion between the Minister of Public Building and Works and the construction industry on these questions. The Press hand-out which I have with me states: As far as private housing was concerned the Minister of Housing and Local Government would no doubt wish to discuss the implications of the Budget with the industry as soon as possible. The important factors in this area would clearly include the availability of mortgage funds and the resulting effects of high rates of interest which remain to be evaluated. That from a Minister of the Crown bears out what I have been saying.
Then there is the effect on the building societies. During the past 20 months they have had a most difficult time. The country is reliant upon them for providing mortgage finance. Each successive 1285 Government, of whatever party, has high regard for them and for the work they do. Indeed, the Government could not work without them. Bank Rate governs levels of building finance. High Bank Rate draws money away from building society investments so that people do not invest in building societies with the same facility as they do at other times and building societies inevitably have less to lend.
The mortgage interest rate under those conditions must go up. It went up to 7⅛ per cent. for new borrowers in June, 1966, and for all borrowers in January, 1967. Incidentally, a 7⅛ per cent. mortgage interest rate means that repayment on a £3,000 mortgage for 25 years costs about 10s. a week more for the same loan as it would at the 6 per cent. rate which prevailed in 1964 under a Conservative Government.
I draw attention to something which I find very worrying, the report in the Daily Telegraph yesterday that interest rates in respect of building societies may well rise. There has been a suggestion that they may have to go up in the autumn to 7½ per cent., because societies have to find more money to meet higher costs. Although some building society chiefs have suggested that the reduction in Bank Rate might make it possible to hold interest rates for the time being, there are other factors which would require them to find additional income. We can only hope that they can ride out the storm.
Whatever happens, I earnestly hope that before long this constantly high interest rate problem may be resolved and the Government will see their way to reducing it to a more reasonable level as soon as possible for the sake of the country, for the future of our country.

§ Mr. R. B. Cant (Stoke-on-Trent, Central)
rose—

§ Mr. Speaker
Order. Does the hon. Member wish to speak on this topic?

§ Mr. Cant
Yes, Mr. Speaker.

§ Mr. Speaker
He has not informed Mr. Speaker that he wished to do so. I asked some hours ago that if any hon. Member wished to speak on any topic he should let me know because I 1286 must preserve the order of topics as they have been recorded by ballot. Does the hon. Member wish to speak on this subject?

§ Mr. Cant
I do, Mr. Speaker. In my defence I say that although I have been present during most of the debates I did not hear what you said earlier. Also in defence, I did call specially at your office this morning and I was told that I was not required to put my name down in respect of this subject.

§ Mr. Speaker
Order. This is no criticism of the hon. Member, but I must protect the subjects in the order in which they appear. Mr. Cant.

§ Mr. Cant
When I noticed that the hon. Member for Poole (Mr. Murton) had put down the subject of high interest rates, it attracted me. I wondered on precisely what topic I should speak, but, as I am now serving in my 16th year as a member of a local authority, I was tempted to discuss my high interest rates in relation to local authorities' problems. I was about to say that I was glad that I did not choose that subject because I might not have survived your rebukes as successfully as did the hon. Member for Poole, but I have got myself into other trouble instead.
I shall not be too long in making my point. This is an extremely important topic. I see from the National Debt return for 1966–67 that the cost of servicing the National Debt is now running at something over £1,200 million, and, in anybody's money—even that of my right hon. Friend the Chancellor of the Exchequer—this is a considerable sum. I should like to discuss this from the point of view of the external aspect of this problem because I feel that in some ways the Government are being rather too cautious.
In any case, I believe that the policy the Government are pursuing in respect of high interest rates—and I am not in this sense accusing this Government only but all past governments, too—is leading to a situation in which they are limiting the effectiveness of monetary policy by increasing the liquidity of the banking system. Without discussing any details, I believe the consequence of this is, quite simply, that we are throwing an enormous burden on fiscal policy and are finding ourselves encumbered with an incomes 1287 policy of which I am afraid I cannot approve.
I should like to discuss this in more practical terms in the sense that if we have a Bank Rate which determines other interest rates, as the hon. Gentleman the Member for Poole has said, one important aspect of such a Bank Rate is quite obviously its effect on our balance of payments, on the capital account and on the current account; and my proposition to the Financial Secretary—who is drawing some delightful faces on his pad at the moment, presumably having set aside his prepared brief—is that this cost, in direct terms, is something that should be evaluated as the cause of this.
It may be that by having that high Bank Rate we in effect substantially strengthen our capital account in that we get funds flowing into London and so on. However, the other effect of a high Bank Rate and therefore a high interest rate—and I must keep repeating that phrase—is that we throw considerable burdens on our current account. I feel that not enough attention is given to this. I was very impressed by an article written by an economist, Mr. Opie, of Oxford, in which he analysed the effect of high Bank Rate in the years 1965 and 1966. He came to the very remarkable conclusion that the deficit in both these years was due almost wholly to the higher outgoings on foreign-owned balances which resulted from the Bank Rate which was in operation; and, of course, the problem is quite simple. It is that the effective Bank Rate is not only marginal. We may use a high interest rate to attract funds from abroad but unfortunately that high interest rate applies not only to the mobile balances but to the old balances as well. When we consider that in those two years we must have had a deficit—I cannot remember the figure exactly—of something like £180 million we see that the higher interest rates we were using to attract money from abroad were imposing this kind of additional balance on our balance of payments. I suggest to my right hon. Friend the Financial Secretary that that is food for thought.
We have not only to consider the direct cost of consequences to the balance of payments of a high Bank Rate. I believe that in more general cost-benefit analysis terms there are considerations to which 1288 attention should be given. I know that my hon. Friend the Financial Secretary will tell me, as my right hon. Friend the President of the Board of Trade told me, that I understand very little about these issues and should tread with caution. That may well be true. Even if it is conceded that we must have our reserve currency balances and must keep balances in respect of the trading and invoicing function of the £, the high interest rates which have been perpetuated in terms of Bank Rate have, as we all know, attracted from time to time substantial hot money balances and it is these to which we should direct our attention.
Those of our outstanding sterling liabilities which are not in Government stocks and are not Treasury Bills, but which are balances with our banks on very short term, balances with the discount market, and direct loans to local authorities and to hire-purchase corporations, may, on the reckoning of the Economist, be about 20 per cent. up to 25 per cent. of our outstanding obligations. If there is even a 10 per cent. switch of these balances because of some interest arbitrage, there is a movement of about £100 million out of or into London.
I contend that this is a very significant aspect of the high interest rate structure which we are maintaining. The information given in the Economist and the Financial Times, and the various patterns of interest rates existing at any moment, makes it obvious that, when in the very short term market relating to Eurodollars and local authority finance we get interest rates of 8½ per cent. to 8¾ per cent., this is something worthy of consideration.
I go back sometimes to the statement made by my right hon. Friend the Prime Minister in December, 1966. I am sorry that I have not my right hon. Friend's memory, otherwise I could tell the House which day and which hour. He said on that day that Bank Rate movements are not an appropriate subject for the House of Commons to discuss. This is a quite incredible doctrine. It is incredible because I think—I hope that I say this with my hand on my heart, backing Britain, and so forth—that Britain has a more direct responsibility for the period of high interest rates into which we have moved than any other country.
1289 I hope that one of the many things that my right hon. Friend the Chancellor will do in the course of time is to get off this Bank Rate hook. I may be told that this cannot be done, that too much is at stake, that the whole question of the £ sterling is too sensitive to be dealt with in this rather cavalier fashion. But many idols have fallen in the financial world in the last three months. We have devalued the Z. We have even dared to question the price of gold.
I think that the time has come to ask whether we could not move more rapidly to a reduction of the high interest rate structure in Britain through a reduction in Bank Rate. I do not suggest that we should follow our Victorian forebears in their Bank Rate policy, but, although the United States federal interest rate is rising slowly, there are many straws in the wind to suggest that we might give some impetus to what looks like being a downward trend in interest rates.
I will not go into this because my time is running out, but I hope that this country, which has played its part in raising interest rates, will take the lead in trying to reduce them. I do not think that a country such as Britain, with all its international responsibilities, should in fact make its economy so vulnerable to volatile hot money. I do not think that we should indirectly finance the building of council houses or hire-purchase arrangements for television sets on the basis of fortuitous additions to our reserves because of our relatively high interest rates, and above all I do not think that we should repay our debts with the use of hot money.
This may be a revolution but, in conclusion, I would say to the Financial Secretary that he might remind my right hon. Friend the Chancellor of the Exchequer that he is an historian. He might get him to read the very interesting book published by Mr. Chalmers on the gilt-edged market, in which he gives us a bit of the perspective of interest rates and tells us not to become too fixed in our mind that we are living indefinitely in a period of high interest rates; that people were borrowing and lending money at 5 per cent. centuries ago and a decade ago, and they may well be doing this again.
Finally—the Financial Secretary looks as if he is anxious to get up—

§ Mr. Harold Lever
I was curious to know whether this was to be the final "finally".

§ Mr. Cant
I am sorry that mental curiosity makes the Financial Secretary so restless physically.
I would just like to go back to that great Socialist Chancellor, Dr. Dalton, who, in Volume 2 of his memoirs, tells us how he got a cheap money policy into operation; how, after fighting a 3 per cent. war, he was determined to wage a war of peace on a 2½ per cent. basis and not the 8 per cent. of today. The secret of that—and, for the consolation of the Financial Secretary, this is definitely my final point—

§ Mr. Harold Lever
Not at all: I have enjoyed it enormously.

§ Mr. Cant
—is that he just decided to put this policy into operation and he did not tell his Cabinet colleagues.

§ Mr. John Smith (Cities of London and Westminster)
Would the hon. Gentleman not agree that part of the trouble is caused by the need to have two different rates, an external and an internal rate, that it is very seldom that the rate which this country requires for external purposes is the same as the rate we should like for internal purposes, but that they both have to be controlled by the Bank Rate? The consequence is that this takes us into—

§ Mr. Speaker
Order. The hon. Gentleman may desire to speak twice in this evening's debate but he must choose his moment. Interventions must be brief.

§ Mr. Cant
I would go further than this. I might even have a dual rate for external purposes. I am sensitive to the need to maintain sterling balances, which relate to our trading and reserve functions, but, in relation to hot money, if we cannot have a zero rate for anything up to 30-day deposits, then at least we should have a reduced rate.

§ Mr. Michael Alison (Barkston Ash)
My hon. Friend the Member for Poole (Mr. Murton) and the hon. Member for Stoke-on-Trent, Central (Mr. Cant) have 1291 focussed attention, by referring to the internal and external repercussions and effects of high interest rates, on a topic of crucial importance to the country today. I shall spend a few minutes discussing the specially hazardous repercussions, as I see them, of the high interest rate which we now have, even at 7½ per cent., on the flow of short-term funds into London. These funds are sometimes called euphemistically "interest-sensitive" balances. The hon. Member for Stoke-on-Trent, Central gave them their more popular name of "hot" money. We must draw the Financial Secretary's attention to the Government's own responsibility and their exposed position in the present state of confidence in sterling and the repercussions for our external affairs of the present high level of Bank Rate.
As I understand it, the interest-sensitive balances, the hot money about which the hon. Member for Stoke-on-Trent, Central spoke, owe their presence in London to two special factors. The first is the differential, the arbitrage, between London and the various other centres, notably New York, which, in order to attract funds to London, has to be high enough not only to be attractive in itself but also to cover the cost of using the forward exchange rate in London, as a guarantee of the funds which come here.
Second, it depends upon it being official policy—I take it that this official policy still subsists—to support the foreign exchange market. When we have these two circumstances—a high enough rate in London to cover the extra cost of buying forward to reinsure oneself and official Government policy to support the forward exchange market—we see the explanation of why London is the centre certainly of the Euro-dollar market and the various uses to which it is put. Euro-dollars, in the phrase now familiar in the House, really amount to foreign-owned sterling with a foreign exchange guarantee. In effect, this is what happens. Dollars come to London, they are changed into sterling because they can be safeguarded against devaluation by the forward market, and they thus have an exchange guarantee, in effect. They are, surely, the most volatile 1292 of all short-term funds to come here. Of all funds these must be the ones which give the Financial Secretary more grey hairs than any other. I am glad to see that he has not many yet, but, no doubt, more will come. These foreign-owned sterling balances, switched into sterling in London, reinsured on the forward market and, in effect, underwritten by the Government, must be the most worrying and most volatile foreign currency which we have here.
The special piquancy, so to speak, of this terrible burden of uncertainty and volatility which the Government have to bear in relation to the short-term funds about which the hon. Gentleman spoke so lucidly is that it is the public authorities generally, and local authorities in particular, which are the main users of, in effect, these specially volatile foreign-own sterling funds. It is worth reminding the House of some of the figures given in the latest issue of the Bank of England Quarterly Bulletin in regard to the scale of hot money, interest-sensitive funds, coming to London attracted by the high interest rate and by the possibility of guarantee in the forward market. On the latest score, as far as one can see, at December, 1967, according to the February issue of the Quarterly Bulletin, local authorities were borrowing no less than £797 million foreign-owned sterling from overseas banks and acceptance houses.
They were in addition borrowing directly from overseas, not through the acceptance houses or banks, about another £150 million. Therefore, close on £1,000 million of short-term hot money was attracted to this country and used to service and help the public authorities, preeminently the local authorities, in their domestic financing arrangements. A large part of that massive sum of volatile foreign funds must be looked on as liable to depart, either in response to the sort of differential changes in the interest rates to which the hon. Member referred, such as the lifting of the New York rate, or, perhaps more worrying, the recent attraction of gold.
If there are a great deal of foreign-owned sterling balances in London and there is a run on gold they are no doubt switched back into dollars pretty quickly 1293 on their way into gold. To give an idea of the scale involved, the figure I gave for local authority borrowing from overseas banks and acceptance houses of £797 million in December, 1967, represented a rise of about 50 per cent. simply between the end of 1966 and the end of 1967. I shudder to think how much of that substantial increase must have been switched back into dollars on the way into gold in the early months of this year.
One could perhaps trace the need for the building societies to raise their rates to the need of the local authorities to come out of overseas borrowing because of the departure of funds and go into domestic borrowing, taking some of the funds which the building societies used to attract. It is a terrifying prospect for the Financial Secretary to have the possibility of foreign-owned sterling funds going at the wave of a wand or the drop of a hat, wiping out all the Treasury's surplus calculations of £500 million at one stroke. That is the extraordinarily exposed position the Government are in because of the very high rate of interest which is maintained and must be maintained—it is difficult to know which comes first, the chicken or the egg—to keep at home those volatile foreign-owned sterling funds.
We must ask the Financial Secretary to reflect very long and hard on the implications of some of the measures which his right hon. Friend has just introduced in regard to the net borrowing requirement of the central Government. They have been much publicised as a great triumph for the Chancellor in reducing the amount the Government borrow from the public at this high rate of interest, making an alleged drop from about £1,000 million to between £300 million and £400 million in the central Government's net borrowing. But the borrowing of the local authorities has been scheduled to go up appreciably this year. They are to spend a good deal more on capital account.
If the central Government have deliberately closed the door on the local authorities because they want to reduce their central borrowing requirements, the net effect of budgeting for the local authorities to spend more is to force them to raise more of this in extra-Governmental sources. We find in the 1294 Financial Statement this year that that is precisely what has happened. The local authorities are now being forced to borrow 75 per cent. more of the money they need from non-Government sources. The Budget Estimates for 1967–68 show a local authority borrowing requirement of £388 million from outside Government sources. It has gone up to about £650 million from outside Government sources. Where will all this extra money come from? The local authorities are being forced by the Government to fish in the hot money market, in the volatile, uncertain, ebbing waters of foreign-held sterling which comes to London, attracted by the very high interest rate.
The Government are therefore reinforcing the danger to which they have exposed themselves. They are forcing one sector of the public authorities—the local authorities—to increase borrowing in foreign-held sterling funds which come to London in response to a 7½ per cent. or higher Bank Rate. Thereby, they are making it more essential that these funds stay here and are forced to keep this very high rate of magnetic attraction to London.
Cannot the hon. Gentleman do something about this by making some administrative change within the mechanics of his Department in order to take the pressure of borrowing by the local authorities at any rate off these foreign-owned sterling funds? For example, if he could put in hand a genuine transfer in the building effort, so that more was given to the private builders and less to the public authorities, we might well find—since the private builders do not borrow, or usually do not have the security to borrow, from overseas banks in foreign sterling funds—that there would be a real possibility of dropping the need for local authorities to fish in these uncertain external waters, thereby making it possible to bring down Bank Rate without the flight of these volatile funds.
The Budget, in its emphasis on reducing central Government expenditure, has had a reflex effect in forcing local authorities to borrow more in the external currency market. The hon. Gentleman should look at another serious effect of the Budget combined with high 1295 rates of interest. This is on costs generally, particularly industrial costs. My hon. Friend the Member for Poole laid great stress on the costs likely to hit the building industry. I want to draw the spectrum slightly wider and remind the Financial Secretary that increases in the Selective Employment Tax—

§ Mr. Speaker
Order. The hon. Gentleman has finally tempted himself into another Budget debate. The Budget debate, however, is over.

§ Mr. Alison
I take the point, Mr. Speaker. I therefore refer to the funds upon which manufacturers are now going to have to pay a very high rate of interest—an increased rate of interest—leading to a substantially increased debt burden in respect of shunted money which is raised gross and then, in large measure, handed back to them in respect of this special tax payment.

§ Mr. Speaker
Order. The hon. Gentleman is singularly unresponsive to the guidance which the Chair gives him from time to time. He must keep to the debate.

§ Mr. Alison
Am I allowed, Mr. Speaker, to refer to the weight of bank interest payments on the moneys which the private sector, under statutory obligation, advances to the Government for short periods and on which they have to pay a rate of interest and which therefore represents—

§ Mr. Speaker
Order. If the hon. Gentleman had been here at the beginning of the debate, he would have heard the classic rules of debate on the Second Reading of the Consolidated Fund Bill. He can raise any matter which affects administration. He cannot discuss problems of taxation or legislation.

§ Mr. Alison
I take your Ruling, Mr. Speaker. I come now to the administrative point. Will the Financial Secretary consider, in respect of funds which will come to the Treasury temporarily and which he then recovers, and upon which loan charges have to be charged, the possibility of coming to some formation through which, on payments which are due to go back after three months, he could issue three-month 1296 Treasury bills, which could be rediscounted?

§ Mr. Harold Lever
That would require statutory action, and it is no good the hon. Gentleman raising points which I would be out of order in answering.

§ Mr. Alison
The point has been registered, at any rate. I hope that the hon. Gentleman will give us at least some encouragement on the possibility of Bank Rate, by administrative and not by legislative action, being substantially reduced, and that the dependence of public authorities in particular of sterling funds which come to London will be reduced.

§ The Financial Secretary to the Treasury (Mr. Harold Lever)
In the course of the debate, I have been accused of drawing monstrous faces and of showing extreme restlessness. I beg my hon. Friend to believe that I was far from restless. He was on one of my favourite subjects and the only reason why I was constantly jumping up was because I took him at his word when he said he was about to conclude, and I was anxious that the House should not be kept waiting for my speech.

§ Mr. Speaker
Order. Would the hon. Gentleman address the Chair? The reporters will then be able to hear.

§ Mr. Lever
I can assure hon. Gentlemen who have spoken that I have listened with great interest to their speeches on the subject of high interest rates, especially when they were in order. It is rather frustrating to hear an argument to which in my impeccable response to the debate, under your guidance, Mr. Speaker, it would be inevitable that I could make no reply. Thus, it is quite hopeless to raise questions of rent increases and the like, because I cannot deal with them in this debate. I cannot deal with suggestions for improvements of the tax mechanism whereby we pay interest to the taxpayers in respect of money paid to us, while they are waiting to get it back.
Unhappily, I must begin by telling the House that there is a well-established practice that all Ministers, in all governments, never give an indication 1297 of future movement in Bank Rate or interest rates with any kind of proximateness. This is obviously inevitable, because this affects Government policy on interest rate, it affects the capital value in the markets, and were I to disclose anything related to the immediate future, while it might give calm and reassurance to hon. Members, it would tomorrow be responsible for unseemly speculation in the market. It must be clearly understood that what I am saying must be in the nature of a general philosophy in relation to interest rates that may not have any impact in one, two or three years.
I hope that the House will realise that it is inevitable that I should speak on the philosophy of interest rates, and not on the particular application of interest rates in the future. I can discuss the past, and this is rather handy because the writ of dogma does not run too clearly on this question of interest rates. There are so many philosophies of interest rates that a simpleton like myself in these matters is completely bewildered.

§ Mr. Speaker
Order. I am distressed at having to interrupt the hon. Member, but I do not think that he has asked for leave of the House to speak again. This is his second speech in the debate.

§ Mr. Lever
I beg your pardon, Mr. Speaker, and that of the House. I hope that I may have the leave of the House to speak again.
As you will recall, I made a speech earlier in the debate. Innumerable reasons have been advanced why interest rates are very high or low, and innumerable reasons have been advanced by all the experts as to what governs these fluctuations. There is a most impressive array of experts on the subject, and the only unhappy matter in connection with it is that they all disagree as to the reasons why we have interest rates high at one moment and low at another.
I have been forced to conclude, most irreverently, after studying these matters over a long period of time, that the claims made for high interest rates—that they select with efficiency the direction of capital investment, that they cure inflation, and various other virtuous attributes—are not made out. I remain, and I can say that the Government re- 1298 main, in principle, committed to the concept of low interest rates. The Conservative Party spokesmen have now become exponents of the cause of low interest rates. Unhappily their record, after the Labour Government of 1950, was one of steadily rising interest rates. The hon. Member for Poole (Mr. Murton) was not in the House in those days, and is probably suffering from the illusion that high interest rates and financial crises prevail only under a Labour Government. He is entirely mistaken. It was a Conservative Government that in 1957 and 1961 put on crisis rates, admittedly not as high—they were 7 per cent. They were very damaging in their consequences to industry.

§ Mr. John Smith
Since the hon. Gentleman, whom I greately admire on this subject, has unfortunately abandoned philosophy for politics, would he not agree that it was not so much high interest rates which the Conservative Party went in for, but the use of interest rates, and that to make interest rates function it had to get away from the artificially low rates it found when it came into office?

§ Mr. Lever
I would not have objected to a certain modest increase in interest rates compared with the lowest achieved by Dr. Dalton, but the Conservative Party, unhappily, when in Government was also under the same difficulty we are. We all like to believe it is due to generalisations such as incompetence and bungling and extravagance and the like, but unhappily, these financial crises which beset us spring from far deeper roots than are covered by such shallow and superficial comment, and they have arisen over the whole sterling area over a long period of years.
I take the point of my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant). It is very difficult to apportion blame about who started it. He thinks this country is very responsible in this regard. If he is right, of course it was the Conservative Government, our predecessors. We have continued, let me say immediately, whenever a crisis arose, to reach for the high interest rate. I think that is true of all Governments, and it is not unnatural they should do so, because in the moment of emergency 1299 one is most anxious to preserve the capital position of the country.
There is another point which has to be faced by hon. Members, and it is this. Again I am in difficulty as I am speaking on a sensitive subject. I cannot go into the illustrations which are directly relevant to current events. But if a country runs into a heavy deficit on its balance of payments it has got to be financed somehow, and it may pay a country better to borrow money abroad, even at a high interest rate, to cover the deficit for the time being, than to follow more unpleasant and destructive courses open to the country to get its balance of payments covered. I am sure my hon. Friend the Member for Stoke-on-Trent, Central would rather borrow £500 million abroad even at a high interest rate than attempt rapidly to cure the imbalance by deflationary measures which might cost a great deal more wealth than is involved in the payment of interest.
I am not making party points. I attacked the Conservative Party only to bring the whole matter into perspective. All Governments have wrestled with this chronic problem for the last two decades. They have resorted at times of crises to high interest rates, but I affirm on behalf of the Government, the conviction that over the long term high interest rates are not desirable things in themselves, though they may be useful at a particular point of emergency such as a devaluation. I am leaving aside, as we are not debating that, the need to devalue, or who is responsible for that and the like, but the fact is we are facing a devaluation. The hon. Member says, it was not the Conservatives. If I were free to discuss it I should like to see a long historical appraisal of the whole situation, not in a partisan spirit, but with a deep, earnest seeking after truth.
Devaluation occurred in November. High interest rates were inevitable at that period, but I can tell hon. Members that we recognised that the points which have been made against high interest rates are in themselves absolutely valid. They do add to industrial costs, as the hon. Gentlemain said. They do add to balance of payments costs, as my hon. Friend the Member for Stoke-on-Trent, Central has said. They make difficulties 1300 for builders and others, as the hon. Member for Poole said. I accept all that. The only trouble is that we must rank high interest rates in moments of crisis as one of the insurmountable distresses of humanity when we get into difficulties.
If we want lower interest rates and a more self-conscious control of our financial affairs that go with low interest rates, we should pledge ourselves to get rid of our balance of payments deficit and put the country on an economically more secure foundation than it has been in recent years.

§ Mr. Peter Hordern (Horsham)
It is clear that an 8 per cent. rate is not attracting funds from abroad and that the clearing banks cannot lend more than a specified amount because they are limited by the Government in the amount that they can lend. What is the point of reducing Bank Rate by only a half per cent., when it is not acting as the magnet which is desired?

§ Mr. Lever
I hate to retreat behind the shield of the statement that I made earlier. I would be involved in areas of comment which would not be regarded as generally desirable if I were specifically to defend the given rate at the given time. I would be involved in predicting the future movements of Bank Rate up or down, and it would not be desirable, especially if it proved wrong. In fact, I do not know which would be worse: if people speculated on what I said and lost because it was wrong, or gained because I was incautiously proved right.
We start from the inevitability of a high Bank Rate after a devaluation crisis. I am glad to see that the Chancellor felt able to bring it down to 7½ per cent. I still regard it as a very high rate and not one that it is in our interests to sustain for longer than necessary.
If one drops to party polemic and debating point scoring, everyone knows that, if we want low interest rates, and I do, and if we think that low interest rates lead to a reduction in industrial costs, an easement on house borrowers, a cheapening of building costs, a lessening of the expense of borrowing money abroad on the reserve balances, and the rest of it, we can only reliably hope to have them if we put our balance of payments in order.
1301 Taking the longer term view, the best guarantee of permanently lower interest rates coming within the possibility of a British Government is to be seen in the Government's effort in the Budget and the Finance Bill which will follow to get our balance of payments right. A balance of payments in order gives a Government far greater room to manoeuvre on these questions of interest rates. Those who want low interest rates should support the measures, however Draconian, which are necessary to put our balance of payments in order. I am confident that the Government will succeed as a result of the Budget and the other measures taken to put the balance of payments into order. We can then look forward to a vastly lower rate of interest than those prevailing at present.

§ Mr. Alison
The hon. Gentleman is talking about getting the balance of payments right. Would he consider that the Chancellor's figure of a surplus of £500 million in a year, say, 1968 or 1969, is self-sufficient to cover a balance of payments in which there may be a component of over £1,000 million short-term funds which could disappear?

§ Mr. Lever
The hon. Gentleman is mistaken in supposing that short-term funds are a component of the balance of payments. He will be delighted to know that, when we compile the balance of payments statistics, short-dated funds of less than a year do not figure in them. The hon Gentleman need not have too many worries on that score. The borrowings longer-term than a year which appear in them are specifically visible. When we talk of a balance of payments figure running at the rate of more than £200 million by the end of this year and at £500 million per annum in 1969 and 1970, we do not believe that what we have in mind is the attraction of either short or long-term funds to produce a paper surplus. We have in mind a trade improvement in our visible exports, a reduction in our visible imports, and an increase in our invisible exports to bring about a genuine surplus of £500 million a year from 1969 onwards. It is certain that if we achieve those targets the high interest rates that are now prevailing could be reduced, and I am confident that they will be reduced.
1302 I should clear up one or two small points. It is not the Government who have driven local authorities into the Euro-dollar market. They are free to borrow anywhere. It is not a very helpful suggestion that we should hand local authority building to private builders, thereby avoiding local authority borrowing from abroad. If we think that the local authorities should not borrow from abroad, we can stop them. At the moment they are free to borrow short term where they will. But it seems an unnecessary and undesirable effort that we should immediately bring to an end local authority building because we do not want them to borrow from abroad. Contrary to the fears which have been expressed about local authorities borrowing heavily from abroad, the covered rate of interest from abroad is not such as to attract funds to the local authorities on short term. Therefore, there is no need to worry about a vast flood of Euro-dollars coming in in the interesting way that has been described.
I have been asked to acknowledge that the high interest rate has an effect on costs. I do so acknowledge.
My hon. Friend the Member for Stoke-on-Trent, Central talked about having a dual rate for external balances. I am not sure what he means by that. Does he mean that we should select some external balances and pay them at one rate and others at another? They may not be willing so to be paid. He suggests that we should have a zero rate for 30-day balances. I do not know all the effects of that, but one thing is certain: if one has a zero rate for 30-day balances one will have a zero amount on the 30-day balances which will match the rate with a precision which would surprise my hon. Friend. Therefore, I cannot wed myself to the concept of a number of rates of interest from abroad, though I entirely—

§ Mr. Cant
I went into this in response to a question. But it is not inconceivable to me that one might have a reduced rate for hot money which is deposited, say, for periods of less than 28 days.

§ Mr. Lever
I took a careful note of what my hon. Friend said. He said a zero rate for 30-day balances. If he has a reduced rate, it will depend on what alternative competition there is for this money from abroad. If the reduced 1303 rate is enough to attract them, there is no point in paying anything higher. But if one wants money, especially from the Euro-dollar market, one of the harsh facts of life is that one has to pay the going rate. If a man does not want to pay that rate, he has to find some other way of carrying on his affairs so that he can manage without the money.
My hon. Friend and others must not believe that there is a quixotic desire on the part of the Government to overpay foreign lenders to attract their money. At the present time the covered rate on short money would not make it profitable to lend money in London.
I have done my best to cover the points which have been raised. Concerning local authorities, my personal view is that we should move to a situation where they get all their funds from the central government. This hotchpotch of local authority borrowing, which was largely introduced by the Conservative Government after 1951, should be brought to an end. We are steadily bringing the matter back into order. Again, this is not a party political point, because I know that many hon. Gentlemen opposite share the view that public borrowing should be centralised and run in a sensible and central manner. Local authorities should not be haggling in the market place with advertisements for different rates of interest on different amounts in different localities competing with each other to push up the rate of interest. I should like to see all public borrowing centralised under Government auspices and supervised by the Government in lending it out.
I think that I have dealt with the points which were made, other than those which were out of order, or innocent party debating points to show the disreputable and incompetent character of the Government. I understand that the debates on this Bill, among other things, have as their object the provision of a suitable and genial forum for such suggestions, and hon. Members will not think it discourteous of me if I do not attempt to respond in kind, because this is private Members' day, and they are right to castigate the Government, of any political complexion, with as much ferocity as they can sum up on this occasion.