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Fiduciary Note Issue

Volume 655: debated on Thursday 15 March 1962

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10.1 p.m.

I beg to move,

That an humble Address be presented to Her Majesty, praying that the Fiduciary Note Issue (Extension of Period) Order, 1962 (S.I. 1962, No. 395), dated 26th February, 1962. a copy of which was laid before this House on 2nd March, be annulled.
The waters into which we now move are, perhaps, less stormy but they are somewhat difficult to navigate. The Motion concerns one of a succession of Orders made under Section 2 (7) of the Currency and Bank Notes Act, 1954. The Act provided that the amount of notes in circulation should be the sum of the gold coin and gold bullion for the time being in the Issue Department of the Bank plus the amount of the fiduciary note issue as determined by the Act.

What the Act provided was that there should be a statutory figure, without any Order, of £1,575 million and that that could be added to by Treasury minutes from time to time, that those Treasury minutes should each have a duration not exceeding six months, but might be renewed and that the power to issue the minutes and, accordingly, to raise the statutory limit was to remain in force only for two years, but, at the end of two years, could be renewed by an Order. It is one of those renewing Orders that we are discussing tonight.

When considering the Order, I am entitled to consider what has been happening under the preceding similar Order. There are two points about it which puzzle me and which I ask the Economic Secretary to be kind enough to deal with in reply. I see that in May and June, 1960, the amount of Bank of England notes outstanding, according to Table 142 in the Monthly Digest, was £2,250 million plus £400,000. Those notes were partly in circulation and partly in the Banking Department. There seems to be no reasonable doubt that they were issued.

The authorised limit at the time was £2,250 million and accordingly the authorised limit, so far as it depended on the provisions of the Act, was exceeded by £400,000. Exactly the same happened tin February, 1961, with the same figures, both as to the amount of notes in issue and also as to the authorised limit at the time.

There used to be a considerable amount of coin or bullion in the Issue Department, but, to quote words of the right hon. Gentleman who is now the Minister of Pensions and National Insurance but who at the time, in 1953, was Financial Secretary to the Treasury,
"Since 1939, the gold reserves of the Bank have not been kept in the Issue Department, except to a very trifling extent."—[OFFICIAL REPORT, 3rd December, 1953; Vol. 521, c. 1323.]
One does not know, of course, what is very trifling in the eyes of the Bank of England. To me, at any rate, £400,000 is quite a large sum and more than a very trifling amount.

If one turns to the Radcliffe Report on "The Working of the Monetary System" and the memorandum from the Bank of England, one finds the same thing said, that
"the whole of the gold reserve held in the Issue Department (except for a token amount) was transferred to the Exchange Equalisation Account"
and that is given as the reason why the fiduciary issue had to be raised to a level virtually equal to the total note issue and why it became necessary to make frequent changes, as have in fact been made in the past two years, in the amount of the fiduciary issue.

My first question, therefore, is: what is the justification for the excess £400,000? If I have the figures right, is this what is called a very trifling extent or, in the words of the Governor of the Bank, a token amount? My tokens are not worth nearly so much, but perhaps the Bank of England is in a different position.

I come now to my next question. Section 2 of the 1954 Act provides for the directions given by the Treasury, not, of course, the Order we are considering now but the effective directions which are made by the Treasury from time to time. They are dealt with by subsection (9) in these terms:
"A direction under this section shall be given by a minute of the Treasury which shall be laid before Parliament."
I think that we may take it that it was the view of the House at the time, as it was the view of members of the Radcliffe Committee, that the amount in question is of some importance. I have here the various directions which have been issued. There are two to which I wish to draw the hon. Gentleman's attention. The first is headed, "Copy of Treasury Minute dated 28th August, 1961, relative to the Fiduciary Note Issue", and it is signed at Treasury Chambers, 17th October, 1961, "Edward Boyle". That is a very long interval after the issue of the minute. Moreover, when one turns overleaf—these are single sheet documents and there is no question of misbinding or anything of that sort—one finds on the back not a Treasury minute dated 28th August, 1961, but a Treasury minute dated 19th September, 1961.

From that, one continues to the next in the series, and the sheet is headed, "Copy of Treasury minute dated 19th September, 1961, relative to the Fiduciary Note Issue". It appears to have been signed by the same person in the same place on the same date, 17th October, 1961, which perhaps is not quite so unreasonable for a direction issued on 19th September. Turning to the back of it—I say again that these are single-sheet documents—one finds the missing link, Treasury minute dated 28th August, 1961.

These are documents of importance. They have to be laid before Parliament. When I go to the Library to obtain copies, these are two of the documents which emerge from the search. The conclusion to which I come is that someone in a Government Department made a slip and never bothered to correct it, and that two documents, separated by about a month in their original form, do not appear to have been signed until about a month after the date of the later of them, and then laid before Parliament in a most misleading and inaccurate form.

That is not the way in which matters of this importance should be treated, and I shall be glad to hear the Economic Secretary's explanation of what happened and as to why, if there was an error, it was not corrected. I will now hand the hon. Gentleman the Treasury minutes in question.

That relates to particular points in the use made of these powers. I now turn to a rather broader matter. Looking at the operative documents issued under the power which we are asked to renew tonight, we find that there are, as one would expect, very marked seasonal variations in the note issue—a fairly sharp rise during the holiday season between July and August and another rise in December. But, allowing for those variations and tracing the curve as a whole, there is a steady rise since the last Order was made with effect from 14th March, 1960.

I should like the Economic Secretary to explain how this fits in with another figure. However, before I deal with that, I wish to quote what the Economic Secretary said on 5th April, 1960, namely, that the note issue represents
"a remarkably constant proportion to the size of the money national income… banknotes are… the small change of the monetary system."—[OFFICIAL REPORT, 5th April, I960; Vol. 621. c. 343–4.]
That is exactly what one would expect. But this rise has continued over the past two years, apparently, so far as I can judge from the figures, completely unaffected by any of the Chancellor of the Exchequer's measures.

On the other hand, if we compare it with another figure which appears to be the correct figure with which it should be compared, namely, that for national production, national production was almost exactly the same when the two-year Order was last introduced as it was in the autumn last year, which is the latest date for which figures are available. Adjusted seasonally, it was 112 in March and April, 1960, when the Order was introduced, and again 112 in October and December, 1961. Moreover, during June to August, 1961, it rose by three or four points, but has since fallen.

The result is that the note issue is completely out of line with national production and, apparently, with any measures taken by the Chancellor of the Exchequer.

For the benefit of the House, could the hon. and learned Gentleman relate the figures to national income as opposed to national production?

It is harder to relate them to national income, but I think that the note issue corresponds with the national income much more closely than it does with national production. It appears that the Chancellor of the Exchequer's measures have had no effect on and apparently have made no difference to the national income. All that they have done is to bring down production, keeping it down to what it was a couple of years ago, or to bring it down from the figure which it reached in the interval. That is the conclusion which I draw.

I turn to what the House will be glad to hear is my last point. However, before doing so, I should deal with the evidence of the Bank of England, and particularly of Mr. Cobbold, who was its Governor at the time, before the Radcliffe Committee. Mr. Cobbold said—and I had better quote his own words—
"The size of the note circulation is very important. … I regard the size of the note issue as a barometer of the success or failure of the authorities and a very important barometer but not as a weapon in their hands."
This was in answer to Question 1759 in the Committee's Report.

I would respectfully agree with that, and if the conclusion which I am asking the Economic Secretary to comment on is right, the barometer appears to show that while the national income and the note circulation went up together, production, on the contrary, either stayed put or fell according to the period over which one takes it. When we are told that the note issue is the barometer of the success or failure of the authorities, I would say that that is a barometer which would require someone much better versed than I am in these matters to read with any effective accuracy.

We have to consider at the end of the proceedings today whether we push this Motion to a Division and we have to fact the issue of what is likely to happen if the Prayer succeeds. This is a question that appears to have puzzled Government spokesmen for some time. In introducing the then Bill and in referring to the points which we are discussing today in the 1954 Act, as it became, the right hon. Gentleman the then Financial Secretary to the Treasury said:
"… the lower we place it "—
that is, the statutory limit of £1,575 million—
"the greater degree of control we leave in the hands of the House."—[OFFICIAL REPORT, 3rd December, 1953; Vol. 521, c. 1378]
We must, therefore, assume that in the view of the Government, at any rate at that time, we had some effective control over what is done about this. I am not sure that we have.

Then considering the question which I have been asking today, the right hon. Gentleman the then Financial Secretary, commented on 26th January, 1954, that it was perfectly clear that the consequences of the annulment of an Order of this kind
"might be highly inconvenient."—[OFFICIAL REPORT, 26th January, 1954; Vol. 522, c. 1691.]
I do not think that the Government of the day ought to fob us off like that. I should like to know what the consequences would be if we exercised the degree of control that the right hon. Gentleman hoped would be left in the hands of the House and we exercised it effectively by having the Order annulled.

Am I to be told that the answer is that the Government would issue an exactly similar Order next day? I should regard that as conduct more contemptuous of Parliament than even this Government are accustomed to. I have looked at the 1954 Act and I have had little guidance there. I come to the conclusion, quite obviously, that both the Governor of the Bank of England and, nowadays at any rate, the Chancellor of the Exchequer would be put in the Tower immediately. That is the least that we could do in the circumstances. I agree that when we are approaching the annual Budget that would be highly inconvenient. It would be a form of purdah which would be new to the right hon. and learned Gentleman the Chancellor of the Exchequer. But is that all? What would happen to our bank notes? I have been searching everywhere to find the answer. I am a little reassured—and it is the only place where I could find any reassurance—by the words of a well-known author called Puffendorf who in his "Law of Nature and Nations" wrote:
"The law itself may be disannulled by the author,"—
I suppose that we are the authors—
"but the right acquired by virtue of that law whilst in force must still remain; for together with a law to take away all its precedent effects would be a high piece of injustice."
In the circumstances, I hope that, resting on Puffendorf, I may have in my bank notes, if I happen to have any at the time, a little more confidence than I would have without recourse to that learned and distinguished author.

All the same, it is a very queer way—and here I am being serious—of giving Parliament control over a matter of some considerable importance to present us every two years with an Order without telling us how it is to be exercised in the interval, and with the threat hanging over us that if, by any chance, we exercise control and annul the Order, something too dreadful for words will happen.

The Government are acting as a sort of bogyman in this. They have the most awful consequences in mind—so horrible that they dare not tell us what they are. I am almost forced to the conclusion that not only the Chancellor of the Exchequer but also the Financial and Economic Secretaries might suffer the most grievous capital gains if we carried this matter to a conclusion.

10.20 p.m.

Those who attend these debates are usually few, but fit. There seem to be fewer tonight than ever, but no doubt, having listened to the hon. and learned Gentleman, they are fitter than usual. I remember past debates on this subject, particularly one conducted by the hon. Member for Loughborough (Mr. Cronin), which did not seem to me to be anywhere near the point, whereas tonight the hon. and learned Gentleman addressed himself to it most clearly and directly.

I set the hon. and learned Gentleman's mind at rest on one point. He has referred to the fiduciary note issue as a barometer and, therefore, he is very tempted to use the barometer as a ring gauge. The fiduciary issue is a measure of the loose change in the banking system. The exact parallel to the rise in the fiduciary issue is the graph of average earnings, and I can arrange for the hon. and learned Gentleman to see a graph where there is an exact parallel line on which these two things are plotted, with the average weekly earnings on one side and the size of the fiduciary issue at Christmas—its highest point—on the other. That may be some solution.

I will save the hon. Gentleman the trouble. I have done half of it for myself.

The hon. and learned Gentleman has done a great deal for himself, and a great deal for us, too.

There is no mystery about the fiduciary note issue. It is a requirement of the system. He has posed the question of what would happen if this Motion were to succeed. I hope that no hon. Member is being kept from his bed by fear of that disaster. As I work it out, the fiduciary issue at the moment is about £2,376 million, and the permitted figure, as we know, is £1,575 million. So, if the Prayer were to succeed, £801 million of notes would have to be withdrawn from circulation.

I worked it out, and I based myself on the most recent Bank Rate, but was not able to get the most up-to-date version of the Monthly Digest of Statistics—no doubt because the hon. and learned Gentleman was working on it himself. Basing myself on the latest bank returns, I worked out that there is the £800 million or so I have mentioned, plus about £406 million which is the cash bankers have in their own tills and £63 million in cash held by the Bank of England. This makes a total of £469 million in cash. In addition to that, the banks have £247 million on deposit at the Bank of England. These three figures come to a total of £715 million, and, therefore, there will be a deficiency of £85 million.

I suppose that if we could order every man in the country, or every wage earner, to forward by express post the sum of £5 in notes, if all were equally law-abiding and in a position to pay, they would cover that deficiency, but I hope that, in considering his reply to the Prayer, my hon. Friend the Economic Secretary to the Treasury will not rely too much on the ability of the Post Office to deliver these registered letters at the right time, because we might find ourselves held up by the pools, and in that case very serious consequences;, which the hon. and learned Gentleman has pointed out to us, would follow.

We should find ourselves in the position of having to run our lives with no small change at all, and that would seem to be a great improvement for the prospect of introducing cheques. I can see no other great advantage in it. I suppose that we have departed from the rather unsophisticated days when Governments, hell-bent on inflation, did it by printing notes, but I feel that this Order still reminds us that, though those days have long past, they are still not forgotten We do right to remind ourselves, perhaps once every two years, that the temptation to print notes is one on which we must keep a check, and I can only wish that the Order we are considering tonight were capable of preventing the Government, if in trouble, from having recourse to the printing press. If it were so, we should be doing a really useful service, but it is not, and it is, therefore, merely an academic exercise.

Will my hon. Friend explain one point to me? As he rightly said, restraining the Government in the printing of notes does not have any effect on the demand on resources—purchasing power. Would it not be true to say that if, in fact, the House did have a power to restrain the Government in the issue of Treasury bills, which, working through the banking system, do increase liquidity and the ability of the banks to make advances, then the House would have a direct control on the inflationary tap which it does not have at the moment?

10.27 p.m.

The points which I had it in mind to raise have probably been covered by the observations of the hon. and learned Member for Kettering (Mr. Mitchison), and I look forward to reading what he had to say when I see the OFFICIAL REPORT tomorrow.

Perhaps I may also put this point. The only outstanding matter which I should like to put to the Economic Secretary is that I happen to have two of these Treasury minutes, one dated 4th January, 1962, and the other dated 11th January, 1962. If a glance at the very large figures that are included in the two Orders gives me the correct information, there is a little matter of £50 million difference between the two Orders. As there is only a matter of a week between them, I should like to ask my hon. Friend the Economic Secretary to explain to me why it is that we have to have Orders in consecutive weeks.

10.29 p.m.

I will do my best to answer the several points put to me by various hon. Members. As I think the hon. and learned Member for Kettering (Mr. Mitchison) made clear at the outset of his speech, the purpose of the Order that we are now considering is to extend for a further two years the powers of the Treasury to increase, by direction and on the recommendation of the Bank of England, the amount of the fiduciary issue over the limit, to which the hon. and learned Gentleman referred, laid down in the Act of 1954.

It is now two years since we had a debate on this subject in the House. At the risk of seeming patronising, I hope I can say that I think the House of Commons is becoming increasingly well versed in the technicalities of the matter, though I thought that at one or two moments I detected a point which had been raised on previous occasions.

The hon. and learned Member for Kettering asked whether it really was true that the extent of the fiduciary note issue was in any sense a barometer of economic activity. It has been said in the past by many people—some of whom, I would have thought, ought to know better—that the fiduciary issue is an important economic indicator. I think that this may well have been so at one time, but I should be inclined to agree with what I thought was the sense of the observations of the hon. and learned Gentleman, that today this is no longer true.

There are two reasons for this. First, we have now a great many other economic indicators of one kind or another which are far more important—the index of production, statistics relating to employment, indexes of retail sales, investment expenditure, and so on.

Secondly, while I would agree that the proportion which the total money supply—that is, the volume of bank deposits plus cash—bears to the national income is very important, and also that the volume of cash—which normally has a fixed relation to the total money supply—is a significant component of that supply, nevertheless the volume of the note issue is purely a reflection of the public's demand for cash.

The point was well made by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid). Consequently, as an indicator, the amount of the fiduciary note issue indicates solely the volume and proportion of assets which persons and companies decide at any particular time to hold in the form of cash.

The Bank of England supplies to the clearing banks all the notes which its customers want to hold. This quantity varies according to the demands of such things as holidays and other seasonal events which affect the need of persons and companies to hold more or less cash than normal.

Before the hon. Gentleman leaves the question of barometers, I was only quoting the former Governor of the Bank of England—Mr. Cobbold as he then was—who said that the size of the note circulation is very important and that he regarded it as a barometer of the success or failure of the authorities.

I did not want to weary the House by quoting from what Lord Cobbold said to the Radcliffe Committee, but on the last occasion when this subject was debated I quoted from an observation by the Governor in which he said that "this does not alter the fact that the present rôle of the Issue Department in the supply of currency is passave". This seems to me to be an important and, indeed, overwhelming consideration when one is trying to ascertain what, if any, significance the level of the fiduciary note issue has. What I am saying is that all it does is to indicate, as it were, the amount of cash, or what my lion. Friend referred to as "small change", which at any particular time individuals and companies wish to hold.

My hon. Friend the Member for Rye (Mr. God man Irvine) referred to the fact that between 4th and 11th January this year the fiduciary note issue fell from £2,425 million to £2,375 million.

Although I have not had an opportunity to consider the matter at leisure, I think that this was merely a reflection of the fact that following the activities which preceded and followed Christmas individuals and companies did not require so much cash to carry out their transactions.

If I may take a slightly wider bracket, on 12th December, 1961—that is a few weeks before Christmas—the note issue stood at £2,475 million, I think the highest that the figure has ever stood, and this was because of the coming of Christmas. By 19th January, 1962, it had fallen to £2,325 million. The figures which my hon. Friend gave, and those which I gave, reflect the seasonal demand for cash.

I thought that at one point in the speech of the hon. and learned Member for Kettering I detected a suggestion that somehow the amount of the note issue in circulation was some evidence of inflation. I do not think that he would go so far as to say that it was a direct cause of inflation, because I do not think that anybody would hold that view, but if the volume of cash is related generally to the total volume of money, being the volume of bank deposits plus cash, then, if total incomes increase as a result, for instance, of increases in population and increases in real wealth, so, also, will the supply of cash increase, along with the supply of money generally.

I am told by those who study these matters that the size of the note issue in recent years has borne a remarkably constant proportion to the size of the national income, and I think that this is the result one would expect, taking the view, as my hon. Friend the Member for Walsall, South said, that bank notes are really the small change of the monetary system.

My hon. Friend the Member for Walsall, South referred to the possibility of a Government as it were having recourse to the printing press to get out of their difficulties. He is right. There is no doubt that, in theory, it is possible for a Government to use their note-issuing powers as a means of deliberately inflating the money supply for their own purposes, and this has been done in other countries. Even though I think it is generally agreed that no Government in sight at the present time is likely to use their note-issuing powers in dangerous ways, it is important that there should exist some parliamentary control over this theoretical risk of abuse by an executive of its powers.

My point was that this Order gives Parliament no control whatever in this matter.

If, by joining the hon. and learned Member for Kettering, my hon. Friend means that dire consequences would follow if this Prayer were to succeed, in that sense it is true that those who look at this matter with responsibility and appreciate the consequences which would follow have less control than they might otherwise have.

On the other hand, this gives the House of Commons the opportunity every other year to consider the matter, and I have not the slightest doubt that if the Government of the day were to print bank notes simply for their own purposes—the sort of fears which my hon. Friend had in mind—this debate would perhaps loom larger than it does now.

The hon. and learned Member asked what would happen if the Prayer were to succeed. If it succeeded, the Bank of England might not be able to supply the clearing banks with the notes required by their customers, and this would lead either to increased use of cheques, bankers' drafts, postal orders and other means of payment, or else to a run on the banks, if nothing were done about it. There can be no question of trying to control the volume of money—deposits plus cash—by saying that people who want to withdraw some or all of their bank balances should not be able to obtain banknotes to the value of their credit balances.

Two specific points were raised by the hon. and learned Member. He suggested that the legal limit of the fiduciary note issue was exceeded in May, 1960, and February, 1961. As he no doubt came to this conclusion late this evening, and had no opportunity of giving me notice that he would raise the point, all I can tell him is that, so far as I have been able to ascertain—although I am pretty sure that it is the case—the note issue in circulation has never exceeded the limit set by the Act and by the Treasury minutes. Having said that, perhaps I may be allowed to look into the matter a little further in order to write to the hon. and learned Gentleman and explain the reasons which have led me to that conclusion.

His other point concerned two Treasury minutes laid before Parliament under Section 2 (9) of the 1954 Act. He said that they were laid on 17th October, 1961, although they related to what had taken place a considerable time before. Here again, without notice it is difficult to be sure of the explanation, and I put this forward only as a possibility: it may be that it was because on 28th August and 19th September—the two dates to which he referred—the House was in recess. On the other hand, the hon. and learned Gentleman is always very fair, and I will tell him that I think that that fact should have not have precluded us from laying the minutes.

There is another point—the front of the Order describes the back quite wrongly.

It seems very clear to me. Perhaps the hon. and learned Gentleman would like to write to me on that point.

At any rate, as I think it is abundantly clear from the course of the debate that the matter of the fiduciary note issue is increasingly well understood in this House, I hope that the House will accept the Order, and that the Prayer will be withdrawn.

Not because of any financial purpose, but in order to save the life and liberty of the right hon. Gentleman the Chancellor of the Exchequer and the Economic Secretary, I beg to ask leave to withdraw the Motion.

Motion, by leave, withdrawn.