§ 2.43 p.m.
§ Lord BESWICKMy Lords, I beg leave to ask the first Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government, in view of the damaging effect upon national economies generally of the increase by individual nations of minimum lending rates, what efforts they have made to secure international agreement to restrain competition in this matter.
§ The MINISTER of STATE, TREASURY (Lord Cockfield)My Lords, the increase in interest rates throughout the industrial world reflects the upsurge of inflation and the collective determination of Governments to tackle it by tight monetary policies. High interest rates will continue to be necessary so long as inflationary pressures remain.
§ Lord BESWICKMy Lords, I thank the noble Lord for that Answer. Nevertheless, is it not true that in both Japan and West Germany last month it was declared that the increase in interest rates was due to the staggering increase of the prime rate in New York? Would not the noble Lord agree that these grotesque interest rates penalise productive enterprises? May I further ask the noble Lord whether it is not worth while at any rate trying to get some international agreement, pooling international effort, to secure a more rational mechanism for controlling the rate of money growth?
§ Lord COCKFIELDNo, my Lords; the increase in interest rates in the two cases that the noble Lord mentioned was designed to prevent inflation being imported into those countries. Had that action 1131 not been taken, it would have been necessary to increase interest rates still further to hold down the resulting rate of inflation. Interest rates will come down only as and when we can reduce the rate of inflation. We recognise the burden that high interest rates imposes upon industry, but the results of allowing inflation to continue would be very much worse.
§ Lord KALDORMy Lords, does not the noble Lord agree that interest costs of traders and manufacturers are passed on in higher prices in very much the same way as labour costs are, and to that extent they are inflationary? In view of that situation, does he not agree that our fight against inflation would be far more effective if this country returned to the system of quantitative credit controls which existed prior to the introduction of competition and credit control in 1971, particularly in the light of recent changes in that direction by the Federal Reserve system?
§ Lord COCKFIELDNo, my Lords; I would not agree that that is the best way to tackle this problem. In the very short run an increase in interest rates does tend to be passed on in prices, but the ultimate effect of such an increase is to reduce the rate of inflation, not to increase it.
§ Lord WIGGMy Lords, since in his reply the Minister links the MLR with inflation, and in view of the fact that inflation in this country is certain to rise in the coming months, can we look forward with confidence to an increase in the MLR?
§ Lord COCKFIELDMy Lords, the noble Lord's argument is entirely incorrect. The important factor is to control the level of the money supply. The rate of interest is an important weapon in this regard. There are heartening signs that the level of the money supply is coming down within the target range set by the Government.
§ Lord BALOGHMy Lords, has not the noble Lord seen the newspaper reports about his colleague's statement the other day in which he said that there is no mechanical relationship between the two factors, and that therefore one cannot hope to get to the desired point in a period 1132 of one to four years? Fortunately, we shall have an election before then.
§ Lord COCKFIELDMy Lords, no one has ever pretended that there is a mechanical relationship between the two, nor has it ever been maintained that the time lag is necessarily a fixed period of two years. However, all the evidence is absolutely clear. It is that accelerating inflation is accompanied by an increase in the total money supply; and if the money supply is brought back under control it will ultimately result in a reduction in the rate of inflation. The sooner these facts are recognised, in particular by people engaged in wage bargaining, the quicker will these measures have their effect in reducing the rate of inflation.
§ Lord BALOGHMy Lords, the unions' militancy is increased, not decreased, by the present policy. I think that the noble Minister might have benefited had he learnt some logic in his university days. Nevertheless—
The MINISTER of STATE, MINISTRY of AGRICULTURE, FISHERIES and FOOD (Earl Ferrers)My Lords, it would be helpful if the noble Lord would put his observations in an interrogatory form.
§ Lord BROOKS of TREMORFAMy Lords, the noble Lord has said that one of the reasons for having high interest rates is to contain inflation. As a layman, and in a pure spirit of inquiry, I wonder whether he can tell us why the higher interest rates go, the higher and faster inflation seems to increase.
§ Lord COCKFIELDNo, my Lords; it does not go that way round at all. The effect of high interest rates is to curb the growth in the money supply and ultimately to bring down rates of inflation.
§ Lord MACKIE of BENSHIEMy Lords, the noble Minister is not pretending that there is no connection between the competition for money for balance of payments reasons and high interest rates. Surely many countries are forced to put up their interest rates because other countries have done so, in order to compete for the money moving about the world.
§ Lord COCKFIELDNo, my Lords, I have not said that there is never any connection between the desire on the part of some countries to strengthen their reserves and an increase in the rate of interest. This was in fact a common phenomenon under the old Bretton Woods system, when there were fixed exchange rates and where the rate of interest was a major weapon in ensuring that those fixed parities were maintained. But the Bretton Woods system broke down in the early 1970s, and since then rates of interest have been used primarily—not exclusively, but primarily—to control the rate of inflation, rather than to influence the exchange rate of any given currency.
§ Lord KALDORMy Lords, does the noble Lord agree that movements in the money supply depend on the preferences of the public, to a large extent, between holding Government stock and holding bank deposits; that a period of falling interest rates is far more likely to induce institutional savers, particularly, to convert bank deposits into Government stock than a period of rising interest rates; and that therefore it would have a beneficial effect on the money supply and, if the noble Lord is to be believed, for that reason on inflation?
§ Lord COCKFIELDMy Lords, once people are convinced that the rate of inflation is likely to fall, interest rates also will fall. It is the expectation of a fall in rates of interest which makes people eager to subscribe for gilt-edged securities. We therefore look forward to the occurrence of this happy state of affairs in the future as a result of the policy followed by the Government.
§ Lord HALEMy Lords, the noble Lord specifically mentioned Government securities. Is he aware, first of all, that every issue of Government securities recently (or, indeed, for quite a long time) has been allocated in such a way that the modest saver has not been able to get any participation in it—and that is largely so—and, secondly, that the modest saver who has got some has been out of pocket within about six months because practically none of the Government securities has maintained its value for more than a few months at the most, and many of them have diminished so substantially as to 1134 nearly ruin those of us who have bought Government securities?
§ Lord COCKFIELDMy Lords, I am glad to hear that the noble Lord has a large and unsatisfied appetite for gilt-edged securities—a point which seems to be somewhat in conflict with that made earlier by his noble friend Lord Kaldor.