§ 5.18 p.m.
§ Lord Beswick rose to call attention to the statement made by the Chancellor of the Duchy of Lancaster on 23rd July 1985 that the 96.9 per cent. increase in money supply over a five-year period has been created by the private banking system and without Government authority; and to move for Papers.
§ The noble Lord said: My Lords, on 10th June this year I asked Her Majesty's Government by what amount the money supply had increased in the five-year period to mid-April 1985. Interestingly, they gave me the answer in percentages and not in pounds. Having given him prior notice, perhaps the Minister would be good enough later to give me the answer in money terms.
The Government reply on 10th June was that the increase had been by 101.9 per cent., and that of that very large amount only 5 per cent. was accounted for by the state minting of more coins and the printing of more notes. That 96.9 per cent. increase represented not only an enormous sum of money but also a crucially important factor in our economy. I wanted to know by whom it had been created, and on 23rd July I again asked Her Majesty's Government to what extent this increase had Government approval. I was told by the Chancellor of the Duchy, speaking for the Government:
The 96.9 per cent. represented new bank deposits created in the normal course of banking business and no Government authority is necessary for this.
§ Had he said that some counterfeiter of coins or forger of notes had been at work there would of course have been an immediate and indignant outcry; yet here we have a government statement that private institutions have created this enormous amount of extra purchasing power and we are expected to accept that it is normal practice and that the government authority does not come into it.
§ When I asked whether we ought not to consider more deeply who was benefiting from this money-creating power, the Minister said that the implications, though interesting, were maybe too far reaching for Question Time; and so I raise the matter again in debate and hope to get more enlightenment. The issues are important; they are certainly under-discussed; perhaps not adequately understood; and I hope that I am not being unduly unfair if I sav that those who understand the mechanisms often do very well out of them. I make no party point; it is all much bigger and wider than that.
§ From what point should we start? There is the elementary fact that in a sensible, civilised society, with a steadily expanding economy, there must be a proper and agreed relationship between money available to buy goods and services and the volume of goods and services that may be bought. At any one time it can be a matter for argument that the money volume should be increased or decreased, but that does not diminish the importance of the relationship; and of course it leaves open the question as to who should have the responsibility for managing the volume.
Over the years very interesting people have recognised that there was a problem and that new ideas and new machinery were needed. The late James A. Edison, whose inquiring mind cannot be belittled, once said:
It is absurd to say that our country can issue 30 million dollars in bonds and not 30 million dollars in currency. Both are promises to pay. But one promise fattens the usurer and the other helps the people".
§ President Abraham Lincoln apparently thought the same. According to a United State's Congressional sub-committee report that I was reading recently, he insisted upon the government issuing 346 million dollars in money—the so-called greenbacks—instead of issuing interest-bearing bonds and paying interest upon them.
§ Before the 1939–1945 war, in a time of unemployment, poverty, unused resources and deflated prices, I recall that there was widespread demand for increasing the volume of money. People like Major Douglas, Oscar Sachse and the late Sir Stafford Cripps, I recall, once advocated the ingenious mechanism of Silvio Gesell to increase purchasing power by quickening the speed of circulation. In more recent years, but again in times of unused resources but this time with rising prices, there has been another movement, with Professor Friedman to the fore, for example, which appears to be saying that all could be well if we reduced the volume of money supply.
§ I do not claim that any of those people has the whole truth, but it seems to me that each of them knew the direction in which the truth lies. For myself I say strongly that, given the importance of the money supply, that supply should be under the effective and 937 professionally responsible management of the state. Moreover, I hope to get agreement from the Minister that we do not now have such effective and responsible management. I do not think that I need to spend much time in proving that the indirect and almost apologetic devices used by the Treasury in recent times do not bear the stamp of effective professional management.
§ The almost comic story of the discarded monetary indices justifies that statement. My noble friend the other day asked what was happening to M1, M2, M3, PSL1, PSL2 and PSL3. The Minister's reply was that there had been some eccentric movements of M3 but that the newly created category of Mo had behaved impeccably. No doubt when Mo goes the way of all such indices we shall be told that MX or something else is an absolutely reliable measurement. The fact is that there is this increasing volume of money, no matter what measurement is used; and as for the volume being under an effective and responsible national control, the Chancellor of the Duchy gave the game away when he said that no government authority was needed for this present system of credit creating.
§ Of course it can be said, and it has been said to me with varying degrees of kindness and patience by some of the most exalted persons in the financial hierarchy, that without such money supply increases the industrial structure would be stifled. Of course there is truth in that, but that does not invalidate my case that any increase should be under effective control and in line with the carefully considered policy of some national authority.
I cannot claim to be an authority on the techniques involved, but from what some recognised authorities have said it seems that my case has merit. In the days when I used to speak from the Government Front Bench for the Treasury, I recall having some dispute with the noble Lord, Lord Cromer, but I learnt to respect his knowledge. It was he who at a CBI dinner in May 1966 said:
Unfortunately we have a system under which Treasury financing does lead to the creation of money quasi-automatically to the extent that the requirements of the Exchequer are not met by the genuine savings or by taxation".
I am also indebted to the Economic Research Council for this extract from Bank of England evidence to the Radcliffe Committee. It said:
If the Exchequer borrows by issuing Treasury Bills which are taken up by the banks and spends the proceeds (so that the cash borrowed finds its way back to the banks) the liquid assets and deposits of the banks will be increased and they will be put in a position to increase the supply of bank credit. Indeed, as only a portion of the bank deposits requires to be covered by cash and other liquid assets, a given loss or gain of liquid assets by the banks has an effect several times as great on the potential volume of bank credit".
§ That would seem to be a most respectable description of the multiplier effect of Treasury bill borrowing. That is what happens now.
In an earlier debate I called attention to what happened in the time of war. We then had all the classic ingredients of runaway inflation, and yet we had extraordinary success in curbing interest rates and prices. The Congressional sub-committee report to which I earlier referred and which was published on 21st September 1961, told of a similar significant experience in the United States:
the period from late 1939 to 1951 was as violent and catastrophic as any in the entire history of the United States. At the beginning of this period millions were still unemployed from the
great depression. A short time later we were shooting away 250 million dollars every day on the battlefield … Then came the Korean conflict. Yet during this entire period of economic stress and turmoil the interest rate on long term Government bonds never exceeded 2½ per cent. And those bonds never sold below par".
The report adds:
The Fed can restrain higher interest rates when it wants to".
§ That is a point which I hope to make. If the will is there, we could do something about the step forward that is needed in the management of our money supply. In wartime Britain a significant factor in keeping down the cost of money and other essentials would seem to be the substitution of Treasury Deposit Receipts for Treasury Bills when the Treasury borrowed from the private banking system. I hope that this evening the Minister will explain, carefully and helpfully, the basis for this use of the bill against the TDR. What exactly are the benefits?
§ It follows from the present practice that not only does Treasury Bill borrowing facilitate this quasiautomatic extra lending by the banks; but, in the course of things, the Treasury will be borrowing, and paying current excessive interest upon, the money that it has enabled the banks to create. It is worth reminding ourselves of some of the figures involved. Estimates for this year and next year are distorted by the receipts from the sale of national assets. But looking at 1983 as an example, there was an excess of receipts over expenditure in this country before debt interest of £4,234 million. The interest on debt was £14,658 million, leaving a deficit of more than £10,000 million. To a significant extent, the £14,000 million paid out by the Government on that debt was interest on money created by the private banking institutions—in effect, as I am claiming, in breach of the state's prerogative in the issue of money. If we could change this situation, we could change the whole character of the public sector borrowing requirement.
The line of action needed to reform this unacceptable state of affairs was indicated, I believe, by the late Sir Arthur Bryant, Companion of Honour upon whose clarity of language I cannot improve. In the London Illustrated News, he wrote:
What seems required is a public body removed and divorced from political pressure, staffed by Treasury officials, invested by Parliament with the duty of creating, free of interest, as much money for necessary government purposes as the country at any given time should, in their considered judgment, need to ensure the maximum possible employment of its productive resources".
Sir Arthur also said:
The exercise of the right inherent in every sovereign state of creating and issuing a sufficiency of money to make financially possible what is physically possible and morally desirable, would enable as much real wealth to be brought into existence as, with its immense inventive and scientific potential, it is capable of making".
I know that there are highly qualified experts, whose vision maybe is as narrow as their eminence is high, who would dismiss this concept of Sir Arthur Bryant. Nevertheless, I should like to quote from a research report of the Economic Research Council published in December 1981 which gave some figures that might be borne in mind when we are considering the practicalities. The report said:
If the Government had followed a policy of extensive fiduciary control and had itself issued credit rather than allowing the banks to do so, it could, for example have made a net reduction over the period 1970–1980 in the need for Government borrowing from the £48,578 million securities issued to about £22,000 million, a saving of £27,000 million on the national debt over the period.
The council went on to say:
The effect of implementing the proposed move now would be that a net amount of £20,000 million of national debt would be cancelled. The consequent reduction of interest payments on the national debt, and therefore of taxation or further borrowing, would help to bring about reflation without inflation".
§ That is, of course, what we all want.
§ I have said previously that it is not only a question of what we want but also of having the will to bring about the radical policies that are necessary. I accept immediately that we need a wider and deeper examination of the issues involved. Can the Government spokesman this evening give some hope that we might get the inquiry that is needed—a Royal Commission, maybe. The Macmillan Commission in the 1930s made quite an impact upon thinking. I am not sure that the same can be said of the Radcliffe Commission. But is it not now time to give fresh consideration to a serious independent attempt to sift out the facts? What about a Select Committee of this House? It is not unknown for such an inquiry by a Select Committee of this House to stir up some national thinking. I look forward to the noble Lord's account of the Treasury attitude to these issues. In particular, I await answers to the questions that I have posed.
§ I have summarised them here, and maybe I can repeat them—helpfully, I hope. What was the amount of money represented by the reported 101.9 per cent. increase in the money stock? Is it still agreed, after the period of reflection from 23 rd July, that this quasi-automatic creation of such large sums of extra credit should be outside government decision? Would the Government spokesman not agree that if economic growth requires an increase in the money stock this should be created interest-free to the credit of the state?
§ Is it not quite illogical, indeed indefensible, that the state should be so concerned to maintain its sovereignty in the issue of coins or notes that it allows this new form of money, used overwhelmingly today, to be created outside its control? Can the Government not at least agree that the facts known and the implications involved merit early and authoritative inquiry? Would not a committee or commission, authorised to consider and report, be of great national value. My Lords, I beg to move for Papers.
§ 5.38 p.m.
§ Lord Tranmire
My Lords, the House is greatly indebted to the noble Lord, Lord Beswick, for initiating the debate—and not only for that but for the great clarity with which he expressed his mind in dealing with what is a very complicated problem. I have no doubt myself about how complicated it is.
I have considerable sympathy with the noble Lord's proposition that the supply of money should be under effective and nationally responsible control. To illustrate my anxiety, I can perhaps pick up a figure that the noble Lord gave. The noble Lord said that the 1983 cost of servicing central government debt was £14,658 million. Going back and looking at the figures, we find that the cost of servicing central government debt in 1955—that is, 30 years ago—was £705 million. In 1980 that figure was £8,661 million.
940 I would ask my noble friend who will reply to this debate whether these figures are comparable, because it is a staggering increase in debt. It is a burden that we in this generation will transfer to the shoulders of the next generation. It has gone up by 20 times in 30 years. This makes me think that the time is overripe for a review of monetary policy.
The anxiety is nothing new. It has a very long history. There was a proposal to set up a currency commission to regulate the growth of money in relation to the growth in productive capacity as long ago as 1824, when an eminent economist, David Ricardo, called for the establishment of a national bank and for the right to issue money to be returned to the state and exercised on their behalf by a body of commissioners who should be completely independent of government. That is a long time ago.
Professor Irving Fisher of Yale University 111 years later proposed that a currency commission should be appointed to issue the money of the American nation. The noble Lord, Lord Beswick, has mentioned the very wise words of Sir Arthur Bryant. I remember that in April 1976 Mr. Peter Jay, when he was economics editor of The Times, advocated the creation by law of a currency commission to regulate the growth of the money supply. Not unnaturally his paper, The Times, in a leading article on 27th April gave it support. I quote that leading article.Were such a policy to be introduced and followed serious inflation would literally be impossible".I notice that my noble friend Lord Bruce-Gardyne, whose column in the Sunday Telegraph we enjoy so much every week, will follow me and give his views. I do not know what views the Sunday Telegraph has compared with The Times. It will be interesting to know whether he agrees with Mr. Peter Jay or not, but I do not want to anticipate my enjoyment of listening to him.
I have one small worry. I do not believe that this inquiry should be conducted by a committee of this House. I think that might be a very dangerous and perhaps rather useless experiment. It matters so much what members are on the committee. I always think that, if one looks at the Radcliffe Committee and compares it with the Macmillan Committee, the Macmillan Committee wins every day. It was composed of people who knew what they were inquiring into, whereas I do not think that we got the results from the Radcliffe Committee. But I am sure we should do well in this House to listen to the very wise words we have heard from the noble Lord and to thank him for the way in which he has put them before the House.
§ 5.44 p.m.
§ Lord Bruce-Gardyne
My Lords, I should like to thank the noble Lord, Lord Beswick, for introducing this topic this evening. I shall be very interested to hear the reply from my noble friend at the end of the debate. I confess that I personally have slightly more qualms than my noble friend Lord Tranmire about the notion of a super quango to produce such credit and money as the nation might require according to its own august and independent judgment. It sounds rather like the kind of body that used to be presided over by the noble Lord, Lord Williams of Elvel, and I 941 shall be very interested to hear his views on the matter. I have an instinctive distrust, I must honestly admit, of these august men of wisdom who are to tell the rest of us what we are to think and how we are to behave.
Apart from some far too kind comments about my scribbling, my noble friend Lord Tranmire invited me to respond. I would not dream of giving a Sunday Telegraph view about the works of The Times in days gone by under its distinguished economics editor, Mr. Peter Jay. All I would say is this. In a sense what Peter Jay was saying, as I recall it, at the time was that it would be so much better if we had a much more autonomous monetary authority than we have in the Bank of England, because of the nature of the relationship between the Bank of England and the Treasury. I must say that I have much sympathy with that. I have often wished that we could have in this country a monetary authority more akin to the Bundesbank or the United States Federal Reserve. I must honestly confess that I sometimes worry a little that far from moving towards a greater degree of autonomy for the central bank in this country, we are moving towards a greater degree of subordination to the Treasury; and I am not sure that is altogether wise. As I say, I shall be very interested to hear my noble friend's response to the most interesting suggestions advanced by the noble Lord in his opening speech.
I hope that it will not be considered inappropriate if I turn for a moment to the rough, rude world of our current monetary condition, with particular reference to the very interesting speech which my right honourable friend the Chancellor of the Exchequer gave to the Merchants and Adventurers in the City of London in the Mansion House a month ago. I believe this has been referred to in certain quarters as the death of monetarism, to the glee of some and the gloom of others. I must say that to my mind this seems rather like the reports of Mark Twain's death, because I think that the Chancellor very fairly pointed out what he had himself said to the gnomes of Zurich in 1981. He quoted a passage from his speech in 1981 to demonstrate the continuity of monetary policy. It is a passage in which he said:It has always been a grotesque caricature of the present Government's economic policy to pretend that it consisted of leaving everything to an automatic pilot known as sterling M3 … In a world in which the monetary system is in a constant state of evolution, the exercise of judgement and discretion is inescapable. The important question is: who is exercising that judgement and that discretion?As I understand it, the position is this. If it were the noble Lord, Lord Barnett and his friends, as we know, such is their joy of the fleshpots that if we see them entering the brothel we are entitled to assume the worst; but if it is my right honourable friend the Chancellor—whom we all know to wear a hair shirt beneath his coat—we can be satisfied that if he is going into the brothel it is only to save some of the little girlies from sin. So it is the operator rather than the message that matters. I think perhaps there is some logic in it. I would also accept—I think many of us who have watched these things have accepted—that there is a great deal of verity to the famous Goodhart's law and whenever one picks an aggregate and makes that one's target, by the fact of making it a target one distorts it. I am sure we would all agree that sterling M3 has been 942 highly distorted and that no doubt to some extent it contains within the aggregate what is a store of value rather than a source of immediate expenditure.
I make only two comments of caution on that. The first is that what is today's store of value can indeed become tomorrow's spending money. Secondly, I have always been a little worried about the ancient classical concept of shooting the messengers whose message you dislike. Therefore, while I am sure that we should, as my right honourable friend the Chancellor suggested, pay attention to all the aggregates—as we should always have done—I do not think that we should wholly ignore the messages which are coming through on the sterling M3 side.
However, it seems to me—and my noble friend will correct me when he replies to the debate if I have misunderstood the position—that perhaps the most significant aspect of what the Chancellor was saying at the Mansion House was that since we could ignore the performance and behaviour of sterling M3, we were no longer going to go in for what is called "over-funding". When I was in the Treasury I was the victim of trying to explain in another place—and I found it a highly embarrassing experience—why it made sense, on the one side, to over-fund to get the sterling M3 right and, on the other side, for the Bank of England to give assistance to the money markets, which had the effect of precisely countervailing the over-funding. I am bound to confess that it was not an altogether convenient experience, but we got through it one way or another.
It seems to me—and again my noble friend will correct me if I have got it wrong—that there is another very interesting aspect of the abandonment of the concept of over-funding or more precisely the abandonment of direct homing in on sterling M3, and that is (as noble Lords will be aware) that if you fund to any extent overseas, from the overseas investor, it does not help you with sterling M3; it does not come out in the sterling M3 statistics. However, if you are not worrying about the sterling M3 statistics you can fund overseas to your heart's content. I am bound to say that I have a sneaking suspicion that that is precisely what my right honourable friend the Chancellor is minded to do. He is saying: "The dollar is through its peak. Everybody wants to get out of dollars and so I am setting up my stall on the highway and let the world come hither and lend me their cash." That may well be a strategy which has much to commend it. Admittedly, it implies that interest rates stay high to attract the external finance. It also implies a willingness to see sterling stay strong or perhaps become stronger.
There are two potential difficulties. One difficulty is what happens if—as might well happen—next spring or early next summer, OPEC fails to get its act together and there is a major collapse in the oil price? In those circumstances will the foreigners still come to feed at my right honourable friend's stall on the highway? If they do not do so, would he not have to put interest rates up very substantially to persuade them back again? That, it seems to me, is one slight problem.
The other slight problem is that I suspect that there is a small hole in the bucket. It is related to the question of the famous European exchange rate 943 mechanism. I must admit that I am not one of those who believes that entry into the exchange rate mechanism will cure anything from juvenile delinquency to king's evil, not least because I notice that precisely the people who are telling us that it would do all those wonderful things tend to be those who told us 15 years ago that those remarkable achievements could be performed simply and solely by moving to a floating exchange rate. One should be cautious about these assumptions.
Nevertheless, it seems that one thing that could be said about the exchange rate mechanism in these circumstances is that if we were inside the exchange rate mechanism, as I see it, then my right honourable friend the Chancellor could turn round to the CBI when it bleated about the level of the exchange rate or the level of interest rates and say, "Sorry chums; it's the club. Those are the rules. I have no choice. Bad luck. Furthermore, that was what you, the CBI wanted". Whereas, as it is, if he is successful—as I hope he will be—in bringing in this money from overseas and in holding up interest rates and the exchange rate, and the CBI yells blue murder (as I have a nasty suspicion it may do) he will not have a precisely logical position from which to defend himself. He cannot say that the club rules deny it. He cannot say, as he could have done in the past, "We must observe the performance of particular monetary aggregates". I detect a small hole in that connection, and the logic of filling that hole, at the present moment at any rate, may come from membership of the exchange rate mechanism for that purpose and for that purpose alone.
Having said that, it seems to me that this strategy—counter to what some people have said—of a relative stringency, perhaps a greater stringency than we have had hitherto in monetary policy, and some relaxation of fiscal policies and some degree of higher borrowing, may well be effective in abating inflation expectations, maintaining the pressure on the CBI to hold down costs and enhancing, perhaps quite rapidly, the living standards of those who are in employment. As successful as that very well may be in achieving those objectives, it could be rather like the teacher called Virginia whom the pupils called Virgin for short—but not for very long.
How long, in practice, would that be sustainable? It is rather akin to the strategy which President Reagan pursued, at any rate throughout most of his first term of office and perhaps until very recently. It certainly worked for President Reagan in 1982, but it is beginning to come apart at the seams now in the United States and I rather wonder whether it would last quite as long as that for us in this country.
I come to my concluding thought and I apologise that it is a very long way from the subject which the noble Lord has raised this evening although, as I see it, it is connected with our estimation of the present condition of monetary policy. The conclusion which I would draw is that perhaps my right honourable friend the Chancellor could do worse than have a word with the Prime Minister and say that there may be something to be said for February, 1987, at the latest.
§ 5.58 p.m.
§ Lord Killearn
My Lords, as so often happens, my initial difficulty is that most of what I want to say has already been said, and rather better. However, it needs to be said again and again, and I am very glad indeed to support and echo the words of the noble Lord, Lord Beswick, to whom we should all be very grateful for raising this matter—first, in a Question on 10th June, which I recall received a fairly brief Answer, then in another Question on 23 rd July, to which he received a slightly fuller Answer, and now today in this short debate, for which we are all especially grateful.
The noble Lord has referred to the valiant work done over the years by various people, including the Economic Research Council, in researching and ventilating this particular question. I was delighted to see that they have recently appointed as president the noble Lord, Lord Ezra, who took part in the previous debate. The noble Lord is not present at the moment because he has another very important speech to make elsewhere this evening, but we are pleased that he has been so appointed.
Throughout history all governments have been tempted to inflate the currency in order to survive from one year to another—sometimes it is from one month to another or from one day to another. Our record now is better than most, but it is still far from perfect. Uncontrolled inflation such as we have seen elsewhere, in South America, Israel, and so on, does not justify our feeling smug any more than did the hourly depreciation in the value of the German mark which took place in the early 1920s. We have had our inflators in the past—leaving aside the middle ages when it was usually short term—when even well-funded monarchs required extra cash for a ransom, or a dowry, or a crusade. We find Henry VIII and Charles II, who were both on the whole good kings, overspending agreed crown revenues not only for personal aggrandisement but in order to furnish fleets capable of defending our shores from predatory neighbours. Inflation is nothing new.
We are looking today at three aspects of parliamentary control on Government spending and overspending. Two are of fairly general application, and the third is concerned particularly with the subject of the debate and the Motion as moved. First, the Government should balance their own books. Essentially, revenue through taxes, tariffs, etc., should balance current account expenditure, assisted by long-term borrowing for necessary long-term involvement and investment in necessary long-term national services, with the floating debt acting as a sort of bridging loan between short-term budgets. And certainly the privatisation of state enterprises that has been going on recently is in no degree comparable with selling the family silver. I would say that it is rather more comparable with the restitution of goods held in pawn to their rightful owners. I think that is a better description. In the case of domestic sales, there is no change in the total capital stock, while with properly monitored sales to outsiders (the Americans, the Japanese, or what have you) there can be a net gain. There should be a net gain.
Secondly, the Government have a duty to control the national economy, which means in essence keeping prices, interest and exchange rates steady 945 while encouraging production and profits (in real terms) to grow, and to grow at a reasonably steady rate. Any growth in money in circulation, however defined—M3, M1, Mo; I got lost after that-multiplied of course by its velocity, which is also important, should be balanced by an equivalent increase in production at sales cost as valued by the international market.
Thirdly—and this is the case in point and the subject of this debate—if and when the Government fall short on either of the foregoing—or indeed if they do not, but decide to borrow within their budget—the key question is: why borrow? And why call a deficit a borrowing requirement? It is just muddling up words, is it not? Deficit financing has always been a bad habit for individuals and for governments. But, internally at any rate, governments have no need to live on debt. They are better off than we are. In the past the Government themselves turned the handle—the handle at the Mint, or at the printing press—that much faster, and issued the extra coins or notes through the Treasury, the Exchequer or the Bank of England. One thinks immediately of the Bradbury one pound notes and 10-shilling notes issued by the Treasury during the First World War.
Naturally such issues will lead eventually to a tenfold increase, through the banking system's multiplier, in cash and credit available to the public, and the penalty of any such inflation—if there is inflation—is a fall in the value of money and a general increase in prices. It stands to reason. However, and this is the whole point, under the scenario I have mooted the Government would not have incurred the additional and continuing incubus, the interest charge on their borrowing. That is a very heavy extra.
I have deliberately refrained from using figures in the argument so far. I am glad, because obviously other speakers know their figures better than I do. I should soon have been way out of my depth and should have run the risk of confusing if not others at least myself, and confusing what is basically a simple argument. But I cannot at this point refrain from quoting one final set of figures. They are not quite up to date; they are up to 1980. Between 1945 and 1980 the Government incurred £31 billion—I am using the American billion; that is, £31,000 million—of indebtedness to the banks, of which £14 billion were new funds and £17 billion were interest. Need I say more? I should have thought that that was perhaps the final word. All I need say to wind up is that I strongly support the demand of the noble Lord, Lord Beswick, for some authoritative and high-powered inquiry, be it by commission, committee or whatever, into this whole rather hidden and esoteric field of Government finance.
§ 6.5 p.m.
§ Lord O'Brien of Lothbury
My Lords, although my name does not appear on the list of speakers in this debate I hope I may have your usual indulgence for the few remarks that I would like to make. I did not expect to be able to be here today, which was why I did not put my name down; and it is possible that I may have to leave before the debate ends. I hope your Lordships will excuse me for that too.
946 I had been a central banker for some three years when the Macmillan Report came out; I read it avidly, as did many people in those far-off, rather unhappy days soon after the Wall Street Crash in 1929. It was a report prepared by distinguished people, including Maynard Keynes and Ernest Bevin. It was a wide-ranging report covering not only the monetary system but industry as well, and that increased its interest to the general public. Twenty-seven years later I was the principal witness for the Bank of England to the Radcliffe Committee in the sense that I gave most of the evidence. I do not say it was necessarily the most important, but I believe that the portion which the noble Lord, Lord Beswick, quoted was almost certainly something that I said, and I stand by it. It is as true today as I believed it to be then.
A number of speakers, including the noble Lord, Lord Tranmire, have yearned for some independent commission which would regulate these things far above the market place, free from the usurers and all the things usually said about them. Reference has been made to the Federal Reserve Board in Washington and to the Bundesbank in Germany, and the independence that they have. The independence of the former, as everybody knows, arises from the American obsession with the necessity to separate powers so that no one becomes too powerful, which is the reason the Federal Reserve has the independence that it has. The independence of the Bundesbank is entirely due to the preponderant influence of the American occupying forces at the end of the war, which ensured that the Bundesbank should be built on the model of the Federal Reserve Board.
The Bundesbank's responsibility for the health of the currency is one which every central bank would desire to have. Ours does not have it. I gave a lecture to the Belgian Economic Society about 10 years ago about the independence of the central banks. It was a lecture delivered long after I ceased to be a central banker. I concluded that however much a central banker might desire that independence and authority, in fact he would find it difficult to exercise it, and if he exercised it with complete independence he would soon find that this Parliament would take that independence away. Therefore, he had better be content with the influence he had, and get on with it.
The noble Lord, Lord Beswick, spoke about the desire to have a government who could issue the money themselves. Talking about notes and coin is irrelevant. You cannot have a monetary system where people cannot go to their banks and say, "I want to withdraw part of my deposit. I will have it in notes, and I will have it in coin." If the notes and coin were not there, the system would collapse, so they have to be provided. In any case, they are entirely marginal.
What we are really talking about is bank credit. As your Lordships have heard, bank credit is pyramided on a minimum liquidity ratio, which years ago used to be 30 per cent. but I believe is now less. The banks' liquidity is provided in substantial part by the short-term borrowing of government. It is untrue to say that governments do not have any influence on the credit created by banks. They have a potent influence.
I was closely concerned, in various capacities, with the exercise of monetary control between November 1951, when monetary policy was revived after the war 947 with that very tentative increase in bank rate from 2 per cent. to 2½ per cent., until 1973. Throughout that whole period one was trying to do one's best to control bank credit in a way which was suitable to the economic health of the country at the time. It was not a perfect and exact process. It was not like the system for which the noble Lord, Lord Beswick, yearns, whereby the tap is turned on precisely every day and the market receives exactly what the Government say it shall have.
I do not think one can take this business of credit creation and the use of credit away from the banking system. Who will decide who are the proper borrowers of money? Not the Government. Governments have tried to decide that, and the result has been disastrous. There must be the individual decisions of the people who work in money to tell borrowers whether they may or may not have the money. But that does not alter the fact that the government of the day can influence how much credit is available. We have seen that clearly, for example, at the time of the expansion of credit ordained by the Government in 1972. There was vastly increased expansion of credit and, one could say, bad use of credit.
This brings us back to the question of monetarism: a term that has made me very tired over these years. Monetary policy is an essential part of every government's policy, and a combination of monetary and fiscal policies are the weapons with which government seek to ensure the health of the economy. One cannot get away from it. Having terms of abuse like "monetarism" does not alter anything—
§ Lord Beswick
My Lords, I hope the noble Lord is not suggesting that I have used the term "monetarism" in any abusive sense.
§ Lord O'Brien of Lothbury
I am not suggesting that, dear Lord Beswick, but it has certainly been used in this House and elsewhere ad nauseum over the past four or five years because too much faith had been placed in a particular instrument.
I was going on to the question of whether there should be a Royal Commission on the monetary system. There was Macmillan in 1930, Radcliffe in 1957, 27 years later, and here we are 28 years after that. There would be a case for another Royal Commission. In my opinion a Select Committee of this House would be totally unsuitable. One must have in such a committee a broad selection of people of first rank with knowledge of these matters and able to make contributions. I suggest that with the so-called "Big Bang" awaited in the City next year and all the changes in the financial system which may well result from that—and certainly will result from it—it would hardly be timely to set up another such committee or Royal Commission now; but at some time in the reasonably near future it would be a useful thing.
§ 6.14 p.m.
§ Lord Williams of Elvel
My Lords, my noble friend Lord Beswick has done us a great service in tabling this Motion for short debate. He is quite right in his assertion that the commercial banking system has been creating money in a somewhat uncontrolled 948 manner. This has been happening to a greater extent, as the noble Lord, Lord O'Brien, will remember, since the paper, Competition and Credit Control, was issued in the 1970s. In practice this seems to have meant competition without a great deal of credit control.
My noble friend Lord Beswick has gone rather further than that. I think what he is asking us to consider is something like a requiem for the financial policy that has governed government thinking since 1979 and 1980. I shall follow the noble Lord, Lord Bruce-Gardyne, in straying into those paths. They have been increasingly wobbly paths. We started out with firm assertions about what was possible, and those assertions have gradually been whittled away. It was the poet, A. E. Housman, as I remember, who wrote of a celebrated classical scholar on some obscure point of textual criticism that he used manuscripts as drunkards used lamp-posts, not to light them on their way but to disguise their nefarious activities. I think the noble Lord, Lord Beswick, might substitute the Government for the classical scholar, monetary variables tor manuscripts, and apply that description to financial policy as it has come through over the past few years.
I shall return in a moment to the specific questions that my noble friend asked at the end of his speech, but before doing so I should like to devote a minute to investigating the last vestiges of monetarism (if I may use the word without offending the noble Lord, Lord O'Brien). In passing, I note that those commentators who are trying to dissociate themselves from that expression now use the phrase "crude monetarism". This suggests that there is something which is uncrude and something which is crude. Let us call it the requiem for crude monetarism. Your Lordships will remember consistently reiterated statements—
§ Lord O'Brien of Lothbury
My Lords, perhaps I should make it clear. I suppose the correct definition of "monetarism" is a belief that the monetary weapon can do the whole job. People such as myself who have spent our lives in this field do not believe that. It makes a contribution but it does not do the whole job.
§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord, Lord O'Brien, for his intervention. That is exactly the term in which I used the expression, the policy being that the monetary weapon can do the whole job without accompanying fiscal policy or even physical controls.
To refresh your Lordships' memories, I shall quote reiterated statements from the Government from the economic Progress Report No. 166 of March-April 1984:the medium term financial strategy sets out the approach for bringing inflation down through steady reduction in the money supply".I lay emphasis on those last words. Since the summer, as the noble Lord, Lord Bruce-Gardyne, pointed out, it has been clear that the target of a steady reduction in sterling M3 has been abandoned. M1 has been abandoned as being, in the Government's own words, "increasingly difficult to interpret" (that is to say, they do not know what it means); M2 and PSL2 have hardly rated a mention outside the Bank of England, and we have been invited to concentrate our attention on what must be the last of the seven veils, Mo.
949 I shall not weary your Lordships with the elaborate technical definitions of the various M3s, PSL1s and PSL2s, and so on, or the other six veils which are now cast aside and piled in an untidy heap on the floor. But we have to realise what Mo is in its new elevated status. It is notes and coin in circulation plus money held in bank tills plus bankers' balances at the Bank of England. Of those categories, by far the most important is notes and coin, which accounts for more than 90 per cent. of Mo. Given that Mo has become central to the Government's medium-term strategy and is therefore to be targeted, the Government have to show two things, both of which were formerly claimed for sterling M3: first, that there is a stable and predictable relationship between Mo and prices; and, secondly, that rises in Mo cause prices to rise rather than rises in prices causing Mo to rise.
Common sense would argue against both these propositions. Common sense would say that in our increasingly cashless society, with the use of credit cards showing explosive growth, holdings of notes and coins must be on a relative downward trend. However, let us not rely on common sense; that is far too easy. Let us look briefly at the state of the art in this very technical field of econometric research.
I am afraid the news here is not very good for the Government. The most favourable is the Treasury, which claims that there is a reasonable, stable relationship between Mo and nominal spending (that is, real output multiplied by prices). However nowhere is it claimed, even in the Treasury, that nominal spending on inflation depends on the present and past growth of Mo. The Bank of England is even less convinced about Mo. Mr. Charles Goodhart, who, until very recently, was a chief adviser on monetary policy at the Bank of England, says, in his recent book:With high powered money"—which is his word for Mo—largely consisting of currency in the hands of the public and the latter being demand-determined … the direction of causation runs clearly from nominal income to notes and coin in circulation and high powered money".Private institutes are even less convinced. I shall now quote from the Henley Centre for Forecasting, which did a major study of Mo. I apologise for the English in which the Henley Centre put its conclusions but I shall read it out as it stands:Given the lack of supportive evidence in favour of a stable and predictable association between Mo growth and price inflation and with the causation seemingly running from the policy goal to the intermediate target,"—and this is the important sentence—it would appear that the role of Mo as a monetary target is redundant".In short, as far as I can make out, though I stand ready to be corrected by the noble Lord, Lord Brabazon, when he replies for the Government, there is nobody who has shown that Mo causes or how it causes changes in price inflation. In other words, the last veil is not just transparent to the point of indecency: it does not exist. And if it does not exist, then there is no basis at all for paying further attention to the medium-term financial strategy or the central proposition on which it was based.
All this goes to show that the reduction in inflation that we have seen is not at all due to the steady 950 reduction in money supply. It is due, as I have argued before, and as I think the noble Lord, Lord Bruce-Gardyne, was starting to argue, not only to a severe depression in demand in the United Kingdom but to high interest rates causing a highly valued pound, and, particularly of late, depressed commodity prices. I believe this policy is continuing and is the central thesis that the Chancellor was setting out at the Mansion House.
If this analysis is correct—and I look forward to the noble Lord's reply on that—it gives added point to the questions asked by my noble friend Lord Beswick. He is saying that a large element in the money stock—and I think he was referring here to sterling M3—is outside the Government's control. Indeed it is, and this is why a policy based on that money stock inevitably runs into the buffers, since supply cannot be controlled but only the demand.
The situation is even worse than my friend says. Not only is bank lending outside the Government's control but the whole measurement of these very important monetary variables is highly suspect. At this year's Financial Statistics Conference organised by the Bank of England, this became apparent. Mr. Alec Grayson, head of the Committee of London and Scottish Bankers Statistical Unit, set the tone of the conference by assessing the quality of financial statistics as used by the gilts market and he rated them from A down to D in terms of their reliability. Less than 13 per cent. of the entries in the country's financial accounts attract Grade A. Roughly 33 per cent. are graded "reliable"; 35 per cent. are graded "less reliable", while just under a fifth fall into the D category. Mr. Grayson went on to say that obtaining good financial data from the personal sector is virtually impossible.
§ Lord Bruce-Gardyne
My Lords, will the noble Lord give way? I apologise for interrupting him. However, I was a little concerned by what he said about the inability of the Government to influence the level of bank lending. I should have thought that experience surely has suggested that this was not entirely the case; but the ability of the Government to influence bank lending and, in effect, to steer by the sterling M3 monetary aggregate also, incidentally, depends on the willingness of governments to allow short-term interest rates to fluctuate very substantially, and the problem is of course that governments tend to be reluctant on that point.
§ Lord Williams of Elvel
My Lords, I am grateful to the noble Lord, Lord Bruce-Gardyne, for his intervention. I hope I did not say that the Government had no means of control over the sterling M3 or whatever other monetary variable it might be. The point I was making was that the method of control was by acting on the demand side rather than the supply side. That is to say you choke off with the demand for money by high interest rates rather than controlling the supply. If you want to control the supply, then you get into problems with monetary base control which is another problem altogether, with which I did not deal. Following on this question of the reliability of monetary statistics, Mr. Peter Bull, of the Bank's Financial Statistics Division, found flaws in nearly all the monetary dials which, until quite recently, formed the basis of policy planning.
951 In truth, we have no reliable figures at all for money supply, by whatever definition. I think this is where I join my noble friend Lord Beswick and the noble Lord, Lord Tranmire, in trying to see whether there is a mechanism by which we can actually grasp what the problem is with which we are dealing.
Let me come now to my noble friend's next question, which is as to whether or not it is quite illogical that the state allows new forms of money to be created outside its control. It is a fair question. Who says whether or not Marks and Spencer, Shell, or for that matter anyone else, shall or shall not issue credit cards, thus creating money; just like banks, as and when they will? Do we really have to rely on the specific responsibilities in this area of the Director-General of Fair Trading, who is the only competent authority? Where is the Bank of England in all this? Where is the Treasury? It really seems to come back again to what the noble Lord, Lord Tranmire, said. There seem to be areas where there are gaps in our knowledge.
I referred at the outset to this debate being something of a requiem on government financial policy since 1979. Unlike the noble Lord, Lord Bruce-Gardyne, I believe that the patient has now succumbed. There are many, including myself, who do not lament his passing. Yet the legacy remains. We, as a community, have paid an enormous price for this experiment at a time when North Sea oil should have allowed us to forge ahead of our competitors by providing an enormous source of wealth which started to be realised precisely in 1979. We find that, instead, we have record unemployment, a growth record over the period 1979 to 1985 that is pitiful compared with others, decaying inner cities, and so on; indeed, all the symptoms of an impoverished nation.
I can now completely align myself with my noble friend Lord Beswick at this point. The patient is dead but there must be an inquest. The Select Committee of your Lordships' House has performed an admirable task in its analysis of the trade balance. Some other body, maybe another Select Committee or a Royal Commission (I do not make any preference on the issue) could perform the same task for monetary policy. I think that there is a case for an independent inquiry to analyse what have been the effects of this financial policy, what indeed the monetary aggregates really mean, and to what extent my noble friend Lord Beswick is right in his complaint that the Government have no control over a large section of the monetary aggregates. I also believe that it would be right to assess the effects of what I regard as the perverse and doctrinaire financial policy that is now shown to have no basis in theory and to be impossible to apply in practice.
§ 6.30 p.m.
§ Lord Brabazon of Tara
My Lords, I am most grateful to the noble Lord, Lord Beswick, for initiating this debate this afternoon. Although his Motion refers to a reply given by my noble friend Lord Gowrie to the noble Lord on 23rd July 1985, as he has said it in fact goes back to a Question which the noble Lord asked me on 10th June 1985 and which I attempted to answer. I am aware that the answers I gave on that day 952 were not to the satisfaction of the noble Lord. I apologise to him and can only say that I hope to do better this evening. If I do so, it will mainly be due to the noble Lord's kindness in having given me advance warning of one or two points he was going to raise, and for that I am most grateful. May I answer one of those points straight away?—that is, to quantify in cash terms the percentage rise referred to over the period mentioned in the Motion. During that period, sterling M3 rose from about £56½ billion to about £114 billion; in other words, a rise of some £57 billion.
We have had an interesting debate. We are very lucky to have had a former Governor of the Bank of England and a former Treasury Minister and I understand, if I read the papers correctly, that the noble Lord, Lord Williams of Elvel, is widely tipped to become head of the national investment bank, should any Labour Government get in in the future. Of course, I only believe what I see in the press.
One line of argument has concentrated on the size of the increase in broad money in recent years, and has raised questions about the Government's policy towards the control of monetary conditions. My right honourable friend the Chancellor of the Exchequer addressed these arguments in his recent speech at the Mansion House in the City of London, to which my noble friend Lord Bruce-Gardyne referred. He reiterated the Government's firm commitment to policies which will exert continuing downward pressure on inflation by ensuring appropriate monetary conditions. In that speech, my right honourable friend explained some of the factors that determine the growth of broad money, in particular sterling M3, which was one of the two monetary aggregates for which targets were set in the 1985 Medium Term Financial Strategy—the "MTFS". Indeed, targets for sterling M3 have been set each year that the MTFS has been rolled forward.
However, over quite a long period it has become increasingly evident that people wish to hold an increased proportion of their savings in liquid form, to a degree not anticipated when the target was set. In view of this, my right honourable friend decided, and announced in his Mansion House speech, that it would be unduly restrictive to attempt to reduce the growth of sterling M3 to within its target range for the current financial year and accordingly that he would not attempt to do so. The Government, however, continue—and I give this assurance to my noble friend Lord Bruce-Gardyne and to the noble Lord, Lord Williams—as they have always done, to monitor all the indicators of monetary conditions and to set short-term interest rates at a level which will sustain the downward pressure on inflation, which my right honourable friend, in his Autumn Statement in another place, has forecast will fall to below 4 per cent. in the course of 1986.
The noble Lord, Lord Beswick, contrasted what he called the current practice of finance through Treasury Bills with that of Treasury deposit receipts as operated during the war. I shall have a little more to say about the Government's financial policies later on, but I should say at this point that Treasury Bills play only a small part in Government finances. The Treasury Bill issue varies little from year to year, being set at the minimum level required to preserve the market in 953 them. The Government's borrowing is financed rather by sales of gilt-edged stock and national savings to non-banks. The position has changed radically since the Radcliffe Report in 1959, which the noble Lord quoted. Treasury deposit receipts were, of course, as the Radcliffe Report observed, always regarded as a wartime expedient.
I think the better analogy is with special deposits, which the Bank of England can call on the commercial banks to make with it. The noble Lord is, in effect, arguing that the Government can mop up excess monetary growth by insisting that the banks lend to the Government at unattractive rates of interest, or—in the case of the so-called corset—the system of supplementary special deposits first introduced in 1973, which bear no interest at all.
This was indeed the policy of successive Governments, but it was not so effective as it sounds. Such controls are not proof against devices to avoid their effects. For example, banks could lend in the form of acceptance credits without incurring the requirement to make supplementary special deposits; or marginal lending could be shifted offshore, through the eurosterling market. The Government recognised these distortions and did not renew the controls when they expired in 1980. They do little, at least in a system without exchange controls, to affect monetary conditions, while distorting the operation of the financial system.
So it would be quite wrong to infer from the size of the increase in the stock of sterling M3 that has occurred over the period to which the noble Lord, Lord Beswick, has referred that the Government are following lax monetary policies, still less that they are powerless to influence monetary conditions. On the contrary: these policies have been, and remain, firm and they have been very effective in the objective of bringing down inflation, while the economy is entering its fifth year of steady growth.
The other main line of argument drawn from the Motion concerns responsibility for the creation of money. In earlier exchanges following Questions, the noble Lord, Lord Beswick, has asked how private financial institutions create extra money, and whether it is not absurd for the Government to leave the creation of money to private institutions and then for the Government to pay interest on the money they borrow. This conjures up a vision of banks printing their own notes and making them multiply by lending them back to the Government at interest.
I hope I can deal with these points quite briefly. Sterling M3 consists essentially of notes and coin in circulation and of the sterling bank deposits of United Kingdom residents. There are a number of ways in which it can be increased. Under this administration, government borrowing is not one of them. It would be possible for a government to finance itself by printing money to pay for the excess of its expenditure over its income, and I think this is what my noble friend Lord Killearn was getting at. Then they would pay no interest. But the result would be a rapid increase in the monetary base, and a sharp rise in inflation. Or the Government could borrow directly from the banking system to pay their bills. But the result would be to add further to the growth of broad money.
954 My right honourable friend the Chancellor of the Exchequer outlined the Government's financial policy in his Mansion House speech. My noble friend Lord Bruce-Gardyne has already referred to the change in funding policy which my right honourable friend announced in that speech; namely, the abandonment of over-funding. The Chancellor explained that the broad aim was to fund the public sector borrowing requirement by raising finance outside the banking system, from the United Kingdom private sector and from external flows. In that way, the public sector's finances would have an entirely neutral effect on broad money.
I am sure that my right honourable friend will take note of my noble friend's elegantly phrased warning about the dangers of the new approach and his recommendations on United Kingdom membership of the EMS. This is kept under continued review and I am sure that my right honourable friend will give due weight to my noble friend's views. The funding policy that I have explained is concerned with the public sector's contribution to broad money.
But, of course, the private sector can still generate additions to sterling M3—for example, when banks increase their net lending to their customers. No Government authority is needed for commercial transactions of this kind, although of course the Government do monitor changes in monetary conditions, including changes in broad money, and take these into account as appropriate when forming policy on interest rates, and deposit-taking is supervised by the Bank of England under the Banking Act 1979.
This is some way from the nightmare vision conjured up by the noble Lord, Lord Beswick. The banks charge interest on their advances and pay interest on most of their deposits, earning a margin for their services which is controlled by the forces of competition, as the noble Lord, Lord O'Brien, pointed out. When the Government borrow, it is entirely right that they should pay interest and indeed it is inevitable if the Government are to find takers for their paper.
The noble Lord, Lord Beswick, has argued that the Government should strip the banks of their ability to create money and should reserve this to themselves. He has argued that this would save vast sums of public expenditure on debt interest. My noble friend Lord Tranmire, who argued in favour of a currency commission, also argued that the Government should borrow interest free by monopolising money creation. That is a seductive proposition but its implications, if we reflect on them, are quite unpalatable. It would mean preventing the banks from lending, leaving governments to take responsibility for all loans.
I believe that such monolithic control over lending would be very inefficient and inflexible. Moreover, it is hard to see how the banks could maintain their deposit-taking services if deprived of the ability to on-lend the funds which flow in. It would be hard to exaggerate the damage which policies of that kind would do if any government were so ill advised as to take them up. At the very least it would mean a major reduction in banking services, greatly reducing the freedom of choice available to savers and striking directly at the economy by its effect on the scale of the banks' operations. Your Lordships will already have 955 given great weight to the remarks of the noble Lord, Lord O'Brien, on this proposition.
The noble Lord, Lord Beswick, has argued that there is a contradiction between the Government's concern to retain sovereignty over the issue of notes and coin and their approach towards the creation of money in the form of bank deposits. I hope I can clear this up. The Government supply the banks with the quantity of notes and coin that the public requires. The banks pay for the notes and coin issued. The point of the Government's protection of their sovereignty over the production of notes and coin is to prevent fraud. There are other different protections against fraud in the case of settlements not in cash. That is the point of the distinction to which the noble Lord has drawn attention. The difference he alleges in the control over the quantities of the two types of money does not exist.
Several noble Lords have asked for an inquiry into the process of credit creation. I have of course also taken note of the support given by the noble Lord, Lord O'Brien, for a Royal Commission, but—and this is in part thanks to the improvement in monetary statistics set in hand by the Radcliffe Committee—this must be one of the most exhaustively studied areas of economics and economy policy. The literature is vast.
I do not believe that a formal, government-sponsored inquiry into the questions raised by noble Lords in their remarks today would be justified. The substance of monetary policy and the rate of monetary growth are continually subject to informed discussion in your Lordships' House, in another place, in the universities, in the press and in brokers' circulars, to name but a few. I think the ground is adequately covered already.
I hope I have answered all the points that were raised by noble Lords. My noble friend Lord Tranmire asked me a question about the growth of interest payments since 1955. I am afraid I have not got that information with me but, if I may, I will write.
§ Lord Williams of Elvel
My Lords, would the noble Lord give way? Would he be kind enough to say something about my remarks on Mo and the reliability of Government financial statistics?
§ Lord Brabazon of Tara
My Lords, I hoped I had already covered that when I said that we would continue to monitor all the Mos and M3s but that at the end of the day what we were really trying to do was to ensure that inflation would continue to fall. We will continue to monitor all the various matters. As to the reliability of the statistics, I take note of what he says and I shall certainly draw his remarks to the attention of my right honourable friend.
We have had an instructive and interesting debate on the Motion of the noble Lord, Lord Beswick. He has expressed some doubts about the conventional approach to monetary policy and the role of the banking system. I hope that my remarks will have gone some way towards reassuring him that our commitment to pursue counter-inflationary policies in the context of free competition and thriving markets is indeed the correct approach to take.
§ 5.45 p.m.
§ Lord Beswick
My Lords, it is not for me to make a second speech, but I should like to thank all those who have taken part in the debate. The fact that the noble Lords, Lord Tranmire, Lord Bruce-Gardyne, Lord Killearn, Lord Williams of Elvel and Lord O'Brien, voluntarily took part increases the appreciation I should like to express towards them. I am sure we were particularly appreciative that a former Governor of the Bank of England, the noble Lord, Lord O'Brien, was stimulated to take part. The fact that the words I extracted from the Bank of England's evidence to the Radcliffe Committee were apparently words he had used representing the Bank of England I think goes to show that when speaking in this House one ought to check one's references and be extra careful. I was glad to find that he did not attempt to suggest that I had made a mistake on this occasion.
I was moved by the kind words that were uttered by the noble Lord, Lord Tranmire, from the opposite Benches. I listened especially carefully to what he had to say. I recognise the doubts which he expressed about the suitability of a Select Committee as against a Royal Commission, and of course those doubts were supported by the noble Lord, Lord O'Brien. It is a commission of inquiry I am after, but maybe both noble Lords are right and a Royal Commission would be more appropriate.
If I may say so, I thought the noble Lord the Minister did endeavour to be helpful, and I shall certainly not try to answer him this evening. I shall look very carefully into what he said. I was rather disappointed when the noble Lord, Lord Bruce-Gardyne, argued so well that we needed some more strict independent control over the issue of money and then went on to say that the kind of control which had been indicated by the noble Lords, Lord Tranmire and Lord Killearn, and by myself was setting up another quango. I am not sure that we do not use that phrase a little too easily when we have not got other arguments in mind. The noble Lord, Lord Killearn, said, very properly, that all Governments tend to inflate, but the damage caused when they inflate through the procedure we have been talking about is of course an inflation upon that inflation several times over.
As I understand it, the Minister was saying that the Treasury bill mountain was in fact a very small mountain and that therefore its influence was that much less than I had indicated. That may be so, but there is still the multiplier effect, and he did not attempt to deny that there was this multiplier effect.
There is also another development which perhaps I should have mentioned a little earlier. I believe it to be true that, the banks having used this technique with the Treasury bill, there is now growing in the banking system the practice of using some trade bills in much the same way. Of course, we have some very great commercial organisations now developing, and their financial soundness cannot be challenged; but if this is a procedure which is being developed then it means that Government control is going one step even further away.
My noble friend Lord Williams of Elvel earlier in the week called our attention to what had gone wrong 957 in the metal market, especially in regard to tin. What he was saying, as I understand it, is that there is now developing, or there did develop in that market, a practice not of dealing with the metal for the purpose of facilitating the supply of tin for the production of goods and for the production of real wealth, but of trading in paper. I suspect that this is what is now happening in the money market. It is not a question of trading in money for the purpose of facilitating investment in industry: it is a question of trading in money itself, not for creating real wealth but for making some money for some people.
I heard the other day that the volume of money crossing the international exchanges has multiplied twice over the past two years and that there is now three or four times as much money going backwards and forwards across those exchanges than in the total trade being done between the different countries in the world. This practice cannot persist for much longer without causing trouble. I would hate to think that we shall reach the situation in the money market that is now being faced in the tin market. I hope that the Government will look further at the support that has been given by my noble friend Lord Williams of Elvel and by other noble Lords for an authoritative committee to look into the matter.
The Standing Orders insist that I move a Motion asking for Papers. I have already said that there is too much paper about, and I therefore beg leave to withdraw my Motion.
§ Motion for Papers, by leave, withdrawn.