LOSSES ON UNDATED GOVERNMENT STOCKS (Hansard, 8 March 1960)

§ LORD BOOTHBY
My Lords, I beg leave to ask the Question which stands in my name on the Order Paper.

§ THE MINISTER WITHOUT PORTFOLIO (THE EARL OF DUNDEE)
My Lords, it has already been made clear in an Answer given to the noble Lord, Lord Pethick-Lawrence, on February 29, that Her Majesty's Government are entirely content wth the recent action of the Bank of England in the gilt-edged market. It has also been made clear that, in the opinion of Her Majesty's Government, this action cannot be correctly described as a withdrawal of support. With regard to the last part of the noble Lord's Question, Her Majesty's Government have a categoric obligation to carry out the terms of the contract on which the money was borrowed: to pay interest as it falls due, and where a final maturity date is specified, to redeem the stock on that date. But Her Majesty's Government have never accepted, nor can they ever accept, responsibility for profits or losses incurred by those who buy or sell Government securities, whether dated or not, and whatever the grounds on which they made the investment. The best service Her Majesty's Government 862 can render to holders of gilt-edged securities, as to all other members of the community, is to direct their efforts towards maintaining the purchasing power of the pound.

§ LORD BOOTHBY
My Lords, while I appreciate that Her Majesty's Government cannot differentiate between different classes of security, I wonder whether they really appreciate the immense suffering and anxiety that a very large number—perhaps millions—of small savers, who have invested all their savings in Government securities, are undergoing at the present time, not only through the fall in the value of the securities themselves on the market but also through the fall in the value of the pound, which has been superimposed upon it. In these circumstances, I wonder whether the Government could not give some assurance that there are limits below which they are not prepared to see the gilt-edged market fall, and, in the meantime, until conditions radically change, that they will not use the gilt-edged market as an instrument of monetary policy.

§ THE EARL OF DUNDEE
My Lords, the Government do most sincerely appreciate and sympathise with the losses which have been incurred by all holders of long-term fixed interest securities, including holders of Government stock, and including those affected by the recent loss—the week before last—when War Loan fell from, I think, 6311/16 to 627/8. But this is not a very big loss compared with what has been suffered on account of inflation in the last fourteen years, and I do not think it would help holders of stock if the Government, by buying at an artificially inflated price, were to encourage a renewal of inflationary tendencies.

§ LORD PETHICK-LAWRENCE
My Lords, would the noble Earl at least go so far with me as this? There are a large number of people of slender means who have suffered grievous loss owing to what has taken place, which has meant that their misplaced confidence in Government stocks has brought to them a serious reduction in the wealth they have set aside for their old age. Will the noble Earl, therefore, convey to his right honourable friend the Chancellor of the Exchequer that he might at least, as a 863 measure of good will, offer to persons who have suffered in this way an exceptionally generous arrangement by which they may convert their Government holdings, which have so depreciated, into annuities for their old age?

§ THE EARL OF DUNDEE
My Lords, I am sure that the noble Lord is better aware than most of us of the difference between dated and undated Government loans. People who desire to conserve their capital, and who wish to confine themselves to the gilt-edged market, will normally buy dated stock. Those who buy undated stocks more frequently do so because they desire to ensure a fixed annual income which is probably slightly higher than they would get from dated stock. I do not see how we could give preferential treatment to one class of investors in undated fixed-interest securities without giving similar preferential treatment to all holders of undated stocks of every kind.

§ LORD PETHICK-LAWRENCE
My Lords, I am quite aware of the facts which the noble Earl has stated, but the people I am concerned with are quite humble people, with no expert Stock Exchange knowledge, who have invested a few hundred pounds, or maybe a thousand pounds, as a nest egg for their old age. I would suggest to the noble Earl that the Chancellor of the Exchequer might meet the case of these people by exceptional treatment, in enabling them to purchase annuities at better figures than those which would normally be available for them, in exchange for their holdings of Government stock.

§ LORD BOOTHBY
My Lords, before the noble Earl replies, may I add one word? He was inclined to belittle the fall that took place a few days ago. I admit that it was not substantial, though it caused additional anxiety and alarm. Would the noble Earl agree that the average fall in undated gilt-edged securities since the war amounts to over 40 per cent.? This is a very serious thing for a great many people.

§ THE EARL OF DUNDEE
Yes, my Lords. But this fall in capital values from round about 100 to round about 63 is a direct consequence of the rise in the long-term rates of interest. One must always expect that the selling value of 864 undated fixed-interest securities will go up and down in inverse ratio to the prevailing rates of interest. That is something which is not new; it has always happened all through our financial history. Of course my right honourable friend the Chancellor of the Exchequer has given much sympathetic consideration to people of small means who have invested in Government stocks which have gone down in value. He has not been able to see his way in justice and equity to adopt any of the suggestions which have been put to him; and although I am sure he will gladly consider anything which comes from so old and distinguished an economist and member of past Governments as the noble Lord, Lord Pethick-Lawrence, I do not think, having heard what he has said, that his suggestion would overcome the difficulties of dealing with the one or two special cases of hardship.

§ VISCOUNT ALEXANDER OF HILLSBOROUGH
My Lords, would not the noble Earl agree that the Government have some duty to control very large and grave financial trends? Is it not a fact that the five big banks, or, at any rate, those five plus a few smaller ones, have sold on the market hundreds of millions of pounds' worth of gilts in a comparatively short period; that that has forced down the price on the market; that they, as our principal banks, have put money into hire purchase companies in which they can get a much larger return and that, as a consequence, the five big banks have all been able to issue bonus shares and higher profits in the last few years? Why do not the Government consider the whole situation and exercise some financial control?

§ THE EARL OF DUNDEE
My Lords, that is exactly what the Government are doing, and that is just what is now complained of by some of your Lordships. The five banks sell not, as a rule, undated stocks, but short-term dated securities, and the week before last they offered an exceptionally large quantity of these securities to the Government broker who accordingly marked down the price by one point, because he felt it was undesirable that an artificially high price should be maintained by the Government when so many securities were being offered. That is precisely the way in which the Government can control inflationary tendencies.

§ LORD STRATHCLYDE
My Lords, could by noble friend say whether this fall has been occasioned during recent months or whether it has been continuing over a considerable number of years?

§ THE EARL OF DUNDEE
My Lords, of course it has been continuing over the last ten years, during which prevailing long-term interest rates have risen from 3 per cent. or thereabouts to 5 per cent. or 5½ per cent., and that has the inevitable corollary of an inverse reduction in the capital value of fixed-interest securities which have no date of redemption.

§ LORD PETHICK-LAWRENCE
The noble Earl seems to forget the fact that Government policy has brought about this change. It is not an accident that the bank rate has gone up and the whole level of interest on gilt-edged securities has decreased. It is part of the overall policy of the Government. They cannot get away from that fact.

§ THE EARL OF SWINTON
My Lords, before the noble Earl answers, may I put this question, in general fairness? Is it not the fact that the securities which have suffered most are those non-dated securities which were issued by a Government on a wrong idea that you could have artificially cheap Government money?

§ LORD BOOTHBY
My Lords, before the noble Earl replies, I must reply to the other noble Earl by saying that perhaps the worst case of all was the conversion of 5 per cent. War Loan to 3½ per cent. War Loan on patriotic grounds, by a Government of which he was a member before the war, and which has caused the most catastrophic fall of the lot.

§ THE EARL OF DUNDEE
My Lords, perhaps I may be allowed to reply before the number of supplementaries reaches double figures. I could not accept the assumption of the noble Lord, Lord Boothby, that the conversion of 1932 was in any way a reprehensible thing. It is true that people were appealed to on 866 patriotic grounds not to be paid off, but rather to accept conversion—

§ LORD BOOTHBY
And it was a fraud.

§ THE EARL OF DUNDEE
—and it was in their interest to do so, because at that time they could not have got a better yield with the same money from an alternative gilt-edged investment; in fact, for the next twenty years the value of 3½ per cent. War Loan remained round about par, and for more than half the time, from 1939 to 1949, it was substantially over par. So that at any time in those twenty years they could have sold, sometimes at a substantial profit. With regard to the supplementary question of the noble Lord, Lord Pethick-Lawrence, I could not accept at all that the main reason for this fall in long-term interest rates is the policy of the Government. The main reason is that there is a growing demand for capital and that interest rates are going up all over the world; and if we tried to keep them down artificially here, it would mean a run on our reserves and we should have another balance of payments crisis.

LORD KINNAIRD
My Lords, I should like to say one word, because the noble Viscount, Lord Alexander of Hillsborough, has painted such a misleading picture of the banks. As a very old banker—I am no longer one—I should like to ask whether it is not true that the banks in the time of war, at the request of the Government and for patriotic reasons, put their money into Government stocks. Was it not the case that the banks subscribed for these stocks at the price of issue? They were not making money by doing so. It was for patriotic reasons, and they paid dearly for it. That is a truer picture than that painted by the noble Viscount.

§ VISCOUNT ALEXANDER OF HILLSBOROUGH
My Lords, I should like to ask the noble Lord whether he is not aware that as a matter of fact in those days the banks never invested large sums by way of share or loan capital in hire purchase firms, to get a higher profit than patriotism would otherwise require. Has the patriotism gone?