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.
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 say 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 Thomas A. Edison (full Thomas Edison quote), 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 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 2 and a half 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 quasi-automatic 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 [February 1983], 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 23rd 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.