MONETARY POLICY (Hansard, 15 November 1979)

§ The MINISTER of STATE, TREASURY (Lord Cockfield)
My Lords, with the leave of the House, I will now repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows: 1404 "With the permission of the House, Mr. Speaker, I should like to make a Statement on monetary policy.
"The figures for October, just published, show that £M3 grew by 2 per cent. in that banking month. The growth since mid-June, the beginning of the target period, has been equivalent to just over 14 per cent. a year. Although the figure for banking October was erratically high, it is clear that the underlying growth of £M3 is still significantly above the target of 7 to 11 per cent.
"There have been two principal causes of this excess: a higher than expected public sector borrowing requirement in the first half of the year and the persistently high level of bank lending.
"Because of the timing of the Budget measures—in particular receipts from VAT and reductions in public spending—the PSBR was always expected to be higher in the first half of the year than in the second. In the event, the PSBR in the first half-year has been further increased by strikes and other industrial action, which have delayed the collection of VAT and telephone bills. At the peak arrears on telephone bills are expected to reach £1 billion.
"A large part of these arrears will be made good in the second half-year. Even so, the best estimate which could now be made of the PSBR for the year as a whole if no action is taken is that it would be about £9 billion, compared with the £8.3 billion Budget estimate.
"The monthly growth of bank lending has averaged about £700 million over the last quarter. Although the timing is difficult to predict, its growth can be expected to fall in due course.
"Nevertheless it is necessary to take action now to bring the growth of the money supply within the target range. The Bank of England accordingly announced this morning with my approval that Minimum Lending Rate would be increased to 17 per cent. This goes beyond the rise in market interest rates at home and demonstrates the Government's determination to act with the firmness foreshadowed 1405 by my right honourable friend the Prime Minister earlier this week.
"The House will realise that interest rates overseas have risen sharply as other countries have moved to fight inflation by limiting monetary growth. In the United States, for example, prime rates have risen from 11½ to 15½ per cent. since the summer.
"In addition to sales of gilts, we intend to secure further funding of the PSBR through National Savings. The limit on holdings of the index-linked National Savings Certificates Retirement Issue will be increased next month from £700 to £1,200. A new ordinary National Savings Certificate will be introduced early next year. The interest rate on the National Savings Bank investment account will be raised to 15 per cent. from 1st January next.
"Although much of the increase in the estimate of this year's PSBR is due to the timing of receipts, further action is required to bring the PSBR down. In the light of this we shall require oil companies to make a payment on account of petroleum revenue tax at the time when they make their returns. This will have the effect from now on of advancing the due date for collection by two months, thus bringing the arrangements for PRT into line with those for collecting royalties. This will ensure that PRT reaches the Exchequer with the minimum of delay at a time when oil prices are rising.
"The Bill to achieve this will be introduced shortly. It will reduce this year's PSBR by £700 million and thus bring the estimated level back to the original Budget figure of £8.3 billion. It will also yield an extra £300 million next year, in addition to £400 million or so from the deferred payment of telephone bills.
"I set in hand some months ago a review of methods of controlling the growth of the money supply. The main instruments must continue to be our public expenditure and tax policies, which together determine both the size and the composition of the PSBR, and interest rate policies. Recently the Supplementary Special Deposits scheme, or corset, has also played a part in monetary control. I am well aware of 1406 the limitations of this scheme and do not believe that it has a permanent role to play. Nevertheless, the Governor and I have agreed that it is right that it should continue for a further six months. The Bank announced the arrangements this morning.
"In the future, other techniques, including one of the variants of monetary base control, could play a useful role, without the disadvantages of the SSD scheme. The Bank and Treasury will therefore shortly issue a discussion paper for consultation. I must, however, stress that no such scheme can avoid the need for the right fiscal and interest rate policies. Indeed, one of the possible advantages would be to improve the response of interest rates to monetary conditions.
"Finally, I am extending the period covered by the present target range for £M3 of 7 to 11 per cent. per annum. That target at present applies to the 10 months from mid-June 1979 to mid-April 1980. It will now cover the 16 months from mid-June to mid-October 1980. The effect will be to avoid building into the target for the new period the excess growth of the money supply in the recent past, while allowing a reasonable period in which to offset that excess.
Mr. Speaker, Britain's future depends above all on mastering inflation. This can only be done if we bring the money supply under firm control, progressively reduce the rate of monetary growth over the years, and pursue the most rigorous restraint on public spending. The supposed alternatives to these policies are a delusion. None of them would be responsible and none of them would be sustainable. The action I have taken today underlines the Government's total and continuing commitment to getting inflation down."
My Lords, that concludes the Statement.

§ Baroness BIRK
My Lords, it is not only the weather that is very bleak today. We have now heard that the minimum lending rate is going up to 17 per cent., which is the highest in the history of the United Kingdom. The Government's rigid stance on monetary policy which has 1407 reached an unenviable peak today, is a major disincentive to investment, resulting in an enormous setback to economic recovery. Higher interest rates will damage our overseas trade, and the ending of exchange controls—which the Government have recently done—means that it will be far more difficult to control the flow of credits. Many small businesses will be unable to afford future credit and I envisage countless bankruptcies and hardship.
At the election the Tory Manifesto said: The creation of new jobs depends to a great extent on the success of small businesses". I ask the Minister, what comfort do the Government have to offer small businesses now? The Chief Secretary estimated the average unemployment for the year at 1.65 million, excluding school-leavers. Will the Minister calculate what unemployment is likely to be now? Two million or upwards? With high interest rates, a fall in exchange rates and no pay policy, does the Minister disagree that inflation could reach 20 per cent. or more next year? With mortgage rates now certain to go above the 12½ per cent. threatened for January—which again will be the highest in history—will the Minister agree that the prospects are horribly bleak for home owners and house builders?
The false election prospectus is now even more clearly revealed. The promise of lower taxation was kept—but at what a social and economic price! It has been completely subsumed by the 15 per cent. VAT and by all the economic events that have taken place since.
In spite of cuts in public expenditure, which will diminish services and increase the cost of living, the staggering increase in interest rates must result in a higher PSBR. I should like to know when the Treasury forecast on PSBR is likely to be announced. I have the feeling that the Government are slightly reluctant about that. Finally, after six months of Conservatism we now see monetarism following a monstrous path and the failure of the Government's monetary policy.

§ Lord BYERS
My Lords, I thank the noble Lord for repeating the Statement, but I must tell him from these Benches that we find the Statement itself, and the 1408 increased rates of interest which arise from it, absolutely horrifying. This particular announcement throws very serious doubt on the Government's competence to direct our affairs, when policy is changed so suddenly and so drastically overnight. That is not what the electors voted for. The Prime Minister claimed before the election that a Conservative Government could control monetary supply without increasing MLR, even after income tax cuts. What has happened to that Conservative belief?
I should like to ask for how long interest rates as high as the ones which are implied in this Statement, can be or are to be maintained? If they continue for any length of time it will become impossible to finance expansion and exports. They must lead to higher prices, which will lead to higher wage demands, which will hit particularly small businesses and small firms. It will certainly fuel inflation, and in my view it will not in any way counter the inflation which we all seek to control. This sort of panic panacea is in our view no substitute for a properly thought out incomes policy. I ask the Government, how long do we have to wait for that and for common sense to prevail?

§ Lord COCKFIELD
My Lords, needless to say, while I have listened with great interest to the comments made by the noble Baroness, Lady Birk, I do not agree with anything that she has said. The biggest danger facing this country is inflation and all our other problems flow from that. The Government remain determined that inflation shall be beaten. There is no question of any change in our policy. In fact, the Statement indicates that the Government are resolutely pursuing their policy and will continue to pursue it towards a successful conclusion.
The present problems arise from two causes. One is an increase in the public sector borrowing requirement over the original estimated level. May I remind the noble Baroness of what happened last year. The public sector borrowing requirement was estimated by the then Government at £8.5 billion; it turned out to be £9.25 billion. They did nothing to correct the situation and the results of that failure to take action are to be seen in the inflation which we face today.
1409 When facing a situation of a rising public sector borrowing requirement, the present Government have taken the action required immediately and at once. It is only in that way that we have any hope of rebuilding our economy. The comment was made that this will have a serious effect on investment and that many businesses will be unable to afford the cost of credit. So far as both those comments are concerned the position is perfectly clear: inflation would have a much worse effect on the level of investment and it would have a much worse effect on the level of output for small, as well as large, businesses. Although nobody likes to see interest rates at the present level, nevertheless to allow inflation to go on would be the choice of the worse evil.
This is not, as the noble Baroness, Lady Birk, suggested, a failure of monetary policy. On the contrary, it demonstrates that monetary policy must be adhered to and that the only prospect of reducing inflation is to pursue a firm monetary policy backed by a correct fiscal policy, and particularly a correct policy in relation to public expenditure, which is what we are doing.
In his remarks, the noble Lord, Lord Byers, was obviously intending to lead to the suggestion that an incomes policy should be imposed. We do, of course, realise that this is a cardinal plank in the Liberal Party's economic platform. In this country we have tried an incomes policy on repeated occasions since the end of the war and every one of them has ended in failure. In fact, the period of readjustment after the end of an incomes policy has always been one of great difficulty and accelerating inflation. If anyone doubts that, let them remember for a moment the facts of last winter, when the final phase of the then Government's incomes policy broke down, ushering in a period of unparallelled industrial disruption and ushering in also a period of rising inflation. In fact, contrary to what the noble Lord said, an increase in the rate of interest is not inflationary. It is deflationary.

§ Lord BYERS
My Lords, it puts prices up.

§ Lord COCKFIELD
My Lords, it is deflationary; it restricts credit and in this 1410 way it will ultimately bring down prices. It is the greatest protection against excessive wage increases and unless one has a strict monetary policy, which needs to be backed by an appropriate interest-rate policy, the effect will be to allow excessive wage increases to be matched by excessive rises in the money supply, this resulting in accelerated inflation.

§ Baroness BIRK
My Lords, once again I want to ask the Minister a question. He did not answer any of my previous questions. As he has made a major point of inflation, will he please answer this specific question: Does he disagree that inflation could reach 20 per cent. or more next year I should like to have an answer that is on the record.

§ Lord COCKFIELD
My Lords, I am not prepared to join the noble Baroness in the forecast that she is making. She must be responsible for her own forecasts.

§ Baroness BIRK
My Lords, what is the noble Lord's forecast?

§ Lord COCKFIELD
My Lords, the forecasts under the Industry Act will be published shortly.

§ Lord KALDOR
My Lords, I have no doubt about the Government's honesty in wishing to fight inflation. However, I am equally convinced about their total inability to do so due to a complete failure to understand both the causes of inflation and the means necessary to control it. As the noble Lord, Lord Byers, said, this 3 per cent. addition to the rate of interest is equivalent—as stocks are turned over twice a year—to a 1.5 per cent. increase in the prime costs of industry. Therefore, it is the same as a 3 per cent. increase in VAT. In what way does the Minister think that an increase in costs will reduce inflation, if there is nothing to prevent it from being passed on in higher wages?
I want to ask the Minister why the purely cosmetic changes in the borrowing requirement, on the one hand, due to the holdup of the payment of telephone bills and, on the other hand, due to the advance payment of the petroleum revenue tax, could in any way affect, favourably or unfavourably, the level of demand, the course of prices or the rate of change in the 1411 money supply? Finally, if the Government believe that the money supply is a controlling factor of inflation, why have they not studied the methods that past governments have adopted in controlling the money supply both during and after the war?—which were infinitely more effective than this very ineffectual policy of trying indirectly to control it through the rate of interest.

§ Lord COCKFIELD
My Lords, there is, of course, a fundamental difference between the noble Lord, Lord Kaldor, and the present Government on questions of economic policy. We reject in toto the kind of economic policy with which the noble Lord is associated. We believe that it is that economic policy which gave rise to the disastrous inflation from which this country has suffered particularly over the last five years, when prices more than doubled. We are determined under no circumstances to repeat the kind of mistakes which were made by the previous Administration based upon the theories of the noble Lord.
We believe that if the money supply is restrained, it will prevent excessive wage settlements and if wage settlements are made at a reasonable level, this will be the major factor in holding prices down. The noble Lord referred to what he described as purely cosmetic changes affecting the public sector borrowing requirement; namely, the delay in the payment of telephone bills and the new proposal to advance the date of payment of petroleum revenue tax. Neither of these is a cosmetic change. A shortfall of £1 billion in the payment of telephone bills—and this is a matter of enormous importance—has a dramatic effect on the public sector borrowing requirement and, therefore, upon the money supply. Equally, if the Government secure an additional £700 million this year from advanced petroleum revenue tax, that will reduce the public sector borrowing requirement and the pressure on the money supply. We believe that it is the rate of interest which in the end rations the use of credit, and in that matter also we differ completely from the noble Lord.

§ Lord WIGG
My Lords, would the Minister not agree——

§ Lord ROBBINS
My Lords, without in any sense subscribing to the pure milk of extreme monetarism, I ask the Minister to confirm my belief that no major inflation has taken place without an increase in the money supply? May I ask him secondly to indicate the relation between the money rate of interest now proposed and the prospective real rate of interest?

§ Lord COCKFIELD
My Lords, I am most grateful to the noble Lord, Lord Robbins, for what he says. I agree with him that no major inflation has occurred without an inflation in the level of the money supply. This is why we are determined that there shall be no inflation in the level of the money supply now. The noble Lord went on to ask how the money rate of interest—that is the nominal rate of interest—compares with the rate of inflation; the difference between the two of course representing the real rate of interest. The present minimum lending rate is only marginally above the last figure for the increase in the retail price index. Currently, therefore, it represents an extremely small real rate of interest. From this point of view of course the effect on investment is of very great importance.

§ Lord WIGG
My Lords, in the Minister's anxiety to blame Labour Adminstrations for the rate of inflation, I presume that, as he did not mention the period of policy during which Lord Barber was Chancellor of the Exchequer, he regards those Conservative policies as wholly deflationery, and the appalling problems which faced the Labour Administration in 1974 were presumably also imaginary. I should like to ask one other question. Has the noble Lord ever considered one simple fact? Over the centuries, the British people have solved all problems. They faced Napoleon; they faced Hitler; they faced the Kaiser, and they pulled through, but there was always one essential commitment, and that was national unity. This Government, if they do not know it, ought to realise that in six months they have smashed all hope of national unity. They have demonstrated, by the policies they have introduced, that those policies are not only inflationary but are a deliberate and major attack on the standards 1413 of ordinary people. If the answer cannot be found, if defence cannot be found through the normal political ways, a defence will be found, and this Government are smashing their head against a hammer that has broken more than enough Governments——

§ Lord WIGG
—and it is going to smash this one.

§ Lord COCKFIELD
My Lords, the noble Lord refers to the need for national unity. On that point, and that point alone, of course I agree with him. But if he seriously thinks that the deplorable events which occurred this last winter under a Labour Administration were a demonstration of national unity, f think he ought seriously to reconsider the ordinary use of the English language. The greatest evil, and the most divisive influence that this country faces, is inflation. It is only by the conquest of inflation that we shall be able to re-establish national unity; that we shall be able to re-establish progress in this country; that we shall be able to re-establish industrial peace; and that we shall be able to offer all of our people a better future. It is for those reasons that we are prepared to face the problems that we do face, to deal with them, and in the end to overcome them.

Lord MORRIS
My Lords, may I ask the Minister whether any consideration was given to the efficacy of restricting bank lending quantitatively in parallel with the raising of the minimum lending rate?

§ Lord COCKFIELD
My Lords, that is a suggestion which has been made on a number of occasions. The problem that one gets into, quite simply, is that the more direct controls of this sort one imposes the greater the ingenuity of the financial community in finding ways around them. We believe, therefore, that the best solution is the one we have put forward; namely, the increase in the minimum lending rate. But there will of course, as I have said, be a discussion paper published shortly on various means of controlling the money supply, including the interesting suggestions which have been made about the use of a form of monetary base control.

§ Lord BOOTHBY
My Lords, may I ask the noble Lord whether, Her Majesty's Government having been driven to adopt a monetary policy owing to the complete failure of the incomes policies pursued by successive Governments over the last 15 years, he will now give us an assurance that Her Majesty's Government will have the courage to see it through, and if necessary to continue it even beyond the period of six months?

§ Lord COCKFIELD
My Lords, I am grateful to the noble Lord for his intervention. It was the failure of incomes policies as well as of other devices which brought it home not only to the Government but to most people that there was no alternative to a strict monetary policy, supported by a proper fiscal policy, as the means of controlling inflation. We shall continue with our policy, and we shall continue with it to the end of defeating the menace of inflation.

§ Lord BALOGH
My Lords, inflation can be generated in many ways. Before you begin to pursue a policy you must find the correct diagnosis of the ill.

§ Lord BALOGH
My Lords, the Minister will agree with me, I hope, that the incomes policy pursued by this country has been defective because it was pursued as a momentary intervention in a crisis with the intent to revoke it as soon as possible. On that basis obviously all incomes policies must fail because the whole thing returns. Does the Minister not agree with me that his incomes policy is what one might call promiscuous? It is promiscuous because it tends generally to affect many people who are not really important in causing inflation. Does the Minister, for instance, think that the coal miners will be restrained by 17 per cent.? The very fact——

§ Lord BALOGH
Does the Minister not agree that the asseverations of the Chancellor—a young and ignorant man—in various public speeches imploring people to make reasonable settlements are an incomes policy? Is this not so? It is only a wrong incomes policy if——

§ Lord BALOGH
I am asking the question. Now we shall see the answer.

§ Lord COCKFIELD
My Lords, the noble Lord, Lord Balogh, asked me whether I agreed with him. The short answer is that I do not agree with him. Most of the proposals he put forward and the arguments he advanced were proposals for dealing with the symptoms of inflation. We believe that, as with any other disease, the correct thing is to deal with the cause, and if you cure the cause the symptoms then disappear.

§ Lord WIGG
What about a bit of diagnosis first, my Lords?

§ Lord O'BRIEN of LOTHBURY
My Lords, for many years—from 1951, when we raised bank rate tentatively from 2 to 2½ per cent.—I have been concerned with the conduct of monetary policy and, later, with its formulation. Is the Minister aware that the Government's present policy in the monetary field has my very strong support?—the more so because for the first time for many years it is being fully supported by fiscal policy, as indeed it should be, because monetary policy alone cannot do the job, but the two together, resolutely conducted as the present Government are conducting them, and I hope will continue to conduct them will in the end I believe do the job. I give them my full support.

§ Lord COCKFIELD
My Lords, I am most grateful to the noble Lord for his support and for the comments he made. On a personal note, I too remember well the occasion when bank rate was increased from 2 to 2½ per cent., as I was then working directly for the noble Lord, Lord Butler of Saffron Walden, who was my senior sponsor when I came into your Lordships' House. It is of course entirely true that a monetary policy needs to be supported by an appropriate fiscal policy, and it is the Government's determination to go on so doing.

§ Lord DENHAM
My Lords, the noble Lord, Lord Stewart of Fulham, has been trying for some time to intervene. I think it might be the feeling of the House that after he has asked his question and my noble friend has replied we might pass on to other business.

§ Lord STEWART of FULHAM
My Lords, perhaps the Minister would explain this to me: If it is so important to restrict borrowing, why are banks always putting out advertisements urging us by means of Access cards and other devices to buy things we cannot afford with money we have not yet got? Is there not something to be said for distinguishing between borrowing to increase personal consumption and borrowing to help the productive process?

§ Lord COCKFIELD
My Lords, the noble Lord's remarks might well de drawn to the attention of the banks, because I felt very much that they were intended to be helpful in a most difficult situation that we all face. We believe the best way of rationing credit is through the price mechanism, that is through the rate of interest, rather than going in for direct control of individual kinds of borrowing, which would require among other things a considerable administrative bureaucracy to operate it and which is unlikely in the end to be satisfactory. The true rate of interest which is paid by people who use these special forms of borrowing—I was about to use a different term but I was very careful—such as Access is in fact very high.