Money Supply (Hansard, 28 April 1977)

§ 11. Mr. Watkinson
asked the Chancellor of the Exchequer if he is satisfied with the growth in money supply.

§ Mr. Denzil Davies
Yes. The Government have shown their determination and ability to keep monetary expansion under control, and this has made possible the recent substantial falls in interest rates.

§ Mr. Watkinson
Would not my hon. Friend agree that the growth in money supply even now is well below the target set in the Letter of Intent to the IMF? Would he not further agree that this will have disturbing implications for the economy in the latter part of this year, particularly for unemployment? Does the Chancellor of the Exchequer intend to take any steps to increase the growth in the money supply?

§ Mr. Davies
I agree with the first part of my hon. Friend's supplementary question. The growth of the money supply is rising at present at a rate below the target of 9 per cent. to 13 per cent. which we wish to maintain. But I do not agree with him that this will make the recession worse. In fact, one of the components of the money supply figures is the figure for bank lending to the private sector. Recently, there has been very little bank lending to the private sector, which is one reason why the growth of money supply has been fairly low. However, with interest rates falling substantially, we hope that bank lending will increase, which in turn will increase the money supply and enable the growth to be kept within the target of 9 per cent. to 13 per cent.

§ Sir G. Howe
Will the hon. Gentleman recognise that the present low growth of the money supply should certainly not be regarded as an 1475 excuse for creeping towards expansion of the rate of growth of the money supply as the year moves on, and that to go down that course—even to go as far as the 13 per cent. upper limit set for next year—would be to stoke the fires of the next round of catastrophic inflation?

§ Mr. Davies
I never cease to be amazed by lectures from the Opposition Front Bench about the money supply. Their record was appalling in that regard. My right hon. Friend and I have said that we mean to keep the growth within the target of 9 per cent. to 13 per cent. Also, as the right hon. Gentleman knows very well, the main indicator, as a result of our agreement with the IMF, is domestic credit expansion, and we mean to keep that within the ceiling imposed in that agreement.

§ Mr. Pardoe
Will the Minister say what rise in average earnings between August this year and July next year would be commensurate with the money supply guidelines that he has just stated?

§ Mr. Davies
This is not a matter that can be looked at in that way. We have said clearly that we regard the money supply as important. It is one important factor in ensuring that the rates of inflation come down, and we mean to keep the money supply within those limits. That is separate, to some extent, from any agreement that will be reached in relation to phase 3.

§ Mr. Atkinson
Will my hon. Friend reconsider the answer that he has just given? As a Socialist, is he not horrified to have announced to the House that he and his colleagues in the Treasury are now satisfactorily keeping down the level of demand in slump conditions? Will he now, on behalf of the Government, say to the world that this Government dissociate themselves entirely from the money supply arguments that we heard advanced from hon. Members opposite, since there is now no relevant relationship between money supply and the rate of inflation and between money supply and any of the developments within our economy? The sooner Ministers at the Treasury release themselves from the dominance of the outmoded and outdated theories that seem to manipulate 1476 this Government into slump conditions, the better we shall all be.

§ Mr. Davies
I disagree with my hon. Friend. The Government are not keeping demand down to the money supply. What we are doing is ensuring that the money supply is kept under control. My hon. Friend asked me why, as a Socialist, I can support that kind of policy. I had always understood that it was not part of Socialist philosophy to print money, either. It is not part of the philosophy of the Labour Party. What we want to do is control the money supply and ensure that our production and productivity improve so that we can have real growth in this country.