That 17 per cent bank rate
Companies borrowing from banks and householders with building society mortgages naturally like interest rates to be low. So the government’s announcement that the Bank of England minimum lending rate had gone up to 17 per cent, an all-time record, was greeted with an outcry from the borrowers and jeers from the Labour opposition.
But this is only the latest incident in the story of high interest rates. When the rate went up to 7 per cent under the Tories between 1951 and 1964 (then a post-war record), Harold Wilson promised that the next Labour government would “end the present government’s doctrinaire policy of high interest rates”. But under the Labour government between 1964 and 1970 it reached 8 per cent (Tory jeers), making nonsense of George Brown’s hope to see mortgage rates down to 3 per cent. The next post-war high bank rate was 13 per cent under the Tories between 1970 and 1974 (Labour jeers).
Again the Labour Party, in its February 1974 election programme, attacked Tory failure to keep interest rates down; but while the Labour Party was in office between 1974 and 1979 the bank rate went up to 15 per cent (Tory jeers).
It was at the October 1974 general election that Margaret Thatcher promised to keep mortgage interest below 9½ per cent — now it is 15 per cent. So do governments control interest rates and fix them at whatever level they choose? Margaret Thatcher now says no. Replying to Jim Callaghan in the House of Commons on 15 November, she said:
He must not run away with the idea that interest rates are just determined by the government.
She explained that the rates rise when too many people, companies and the government itself are borrowing. She added:
They are determined by the activities of ordinary men and women demanding wages in excess of output and then striking, and also borrowing to keep going.
As the Tory election programme had promised that the government would help to keep interest rates down by borrowing less, Sir Geoffrey Howe had to explain why the government finds itself compelled to borrow more. He said it was due to strikes which had “delayed the collection of VAT and telephone bills. At the peak the arrears on telephone bills are expected to reach £1,000 million.” (House of Commons, 15 November).
The Labour Party has always believed that it could keep interest rates down. A report adopted by its party conference in 1944 promised ‘cheap money’ permanently. “The Chancellor should have statutory powers to require any bank to lend him any sum he likes, for as long as he likes, and on what terms he chooses.”
They appear not to have noticed that the ability of banks to lend to the government depends on offering interest high enough to attract deposits to the banks, which would be impossible if the banks had to lend to the government at artificially low rates.
When Margaret Thatcher says that governments do not determine interest rates she is stating a half-truth. It is true in the sense that Bank of England lending rates merely reflect what is going on in the money market, but it ignores the effect on interest rates of inflation, for which the government itself is responsible.
In the nineteenth century when there was no inflation, bank rate was generally less than a third of what it is now, rising to peaks at times of crisis when companies were forced to borrow at high rates to save themselves from bankruptcy. Inflation has changed the conditions for borrowers and lenders. If prices rise by, say, 25 per cent a year, the purchasing power of money at the end of a year is reduced by 20 per cent.
If someone with £100 lends it at 25 per cent, at the end of a year they have £125, but its original purchasing power is reduced to £100. They will have lent at no real interest at all. To get any real interest they have to lend at something above the rate of inflation. This is why in the past twenty years interest rates have reached record peaks. The responsibility lies with the Labour and Tory governments who have pursued a policy of continuous inflation.
In Germany and Switzerland, where inflation rates are much lower than in Britain, ‘bank rates’ are 6 per cent and 4½ per cent. But in Germany during the hyperinflation of the 1920s people were borrowing at rates of hundreds per cent a month. Inflation, as Marx showed, is caused by an excess issue of paper money. His view is supported by abundant evidence; whenever and wherever excess issue has been stopped, the price rise has been halted.
While Denis Healey was Chancellor, the Bank of England, under his control, printed and put into circulation an additional £4,550 million of notes, and the cost of living doubled. This additional money goes into government revenue and is spent. In 1978 Denis Healey, declaring his determination to curb inflation, made speeches in which he said, “We are not printing money now”. Margaret Thatcher has repeated it in exactly the same words. If inflation results from an excess issue of ‘money’, and if the Labour government in 1978 and the Tory government in 1979 are ‘not now printing money’, why have prices continued to rise?
Here we come to a piece of confusion created by economists and politicians. When governments say they are ‘not printing money’, they are not talking about the excess issue of notes but what they call ‘money supply’, which consists predominantly of bank deposits. In the week in which Margaret Thatcher said “we are not printing money”, the Bank of England printed and issued an additional £150 million of notes. In the first seven months of Tory government the Bank’s note issue went up by £625 million.
In face of all the evidence, they deny that the excess issue of notes has any effect on the price level. So during all the time that governments have been claiming to curb inflation they have gone on promoting it — incidentally causing interest rates to be high.
Workers who think how happy they would be if prices went down instead of up and if mortgage rates were very low are mistaken. They should look at the inter-war years. Prices, including house prices, were only a fraction of what they are now, but so were wages. There were at least as many people homeless, and workers unable to afford to buy a house or take out a mortgage or rent decent accommodation. For the workers, capitalism is just as intolerable without inflation as with it, with high interest rates or low.