My Lords, I beg leave to ask the first Question which stands in my name on the Order Paper.
The Question was as follows:
To ask Her Majesty's Government whether they have approved the recent practice of the Bank of England of buying Government stock from and reselling it to those financial institutions who have over-extended their lending facilities.
My Lords, this was essentially a technical measure related to the structure of bank balance sheets. A bank which is short of reserve assets would normally acquire them by bidding for them in the market place. This would have driven up interest rates in the money market above the level thought to be appropriate to control the money supply.
My Lords, while thanking the noble Lord for that very helpful and tutorial Answer, may I ask whether he can help the House a little more? Is it not the case that the Government are attempting to restrict the supply of money? Is it not also the case that excessive bank lending frustrates that policy? Why, then, if some banks have been over-greedy does the Bank of England step in to help them?
My Lords, I am grateful to the noble Lord for his appreciation of the reply that I gave. So far as his supplementary Question is concerned, the money supply is controlled through the rate of interest. The Government do not seek to control the money supply through the reserve asset holdings of the banks, and it would not in fact be possible to do so because the banks could so easily circumvent any such control.
My Lords, the noble Lord says that, but is he not also aware, as I have reason to believe he is, that there are more sensible and direct ways of controlling the money base than by the damaging procedure of high interest rates?
My Lords, the noble Lord is now opening up a wide area of discussion. The Government published in March a Green Paper on methods of controlling the money supply. That Green Paper has been the subject of extensive consultations since then. We are not entirely satisfied with the present methods of control and we are anxious to improve them where possible. I am grateful to the noble Lord for his support in that direction.
My Lords, am I right in interpreting the noble Lord's first Answer to the noble Lord, Lord Beswick, as saying that the Government, or the Bank of England or the Treasury were confronted with the choice either of allowing the minimum lending rate to rise further or supplying the additional resources necessary to prevent it from rising further and thereby adding to the money supply?—in other words, that they subordinate their money supply target to their idea of what is a desired interest rate?
My Lords, no; this is not a complete or accurate assessment of the situation. Indeed, had these reserve assets not been made available to the banks, the banks would have bid for them in the marketplace and in effect they would have obtained the assets by making deposits available to other people. This in fact, far from restricting the money supply, would have increased it still further.
My Lords, it would have raised the rate of interest.
My Lords, it would have raised the rate of interest in the very short term—not necessarily the minimum lending rate. Once a Government decide what is the appropriate minimum lending rate in order to control the money supply, short-term fluctuations of this kind are undesirable, and the action taken was designed, and properly designed, to avoid such short-term fluctuations.
My Lords, may I ask my noble friend the Minister what he would say to those who believe that a degree of reliance on the minimum lending rate as a tool for controlling the money supply is somewhat out of kilter?
My Lords, I am not entirely certain what point my noble friend is trying to make, but the primary method of controlling the money supply must always be the rate of interest.
My Lords, would the noble Lord agree that his statements today have been the best justification for strict Government control of the banking system?
No, my Lords. I do not think that that follows at all. Indeed, the unhappy experience of the "corset" indicates how difficult it is to impose direct controls and what undesirable effects they tend to have.
My Lords, if I may speak again on this matter, the noble Lord is saying that minimum lending rate must always be the main control of the money supply. Is he not aware of the fact that for 30 years in this country, and still in the majority of European countries, the money supply has been controlled not by the short-term rate of interest but by quantitative controls on bank lending?
My Lords, I do not accept the noble Lord's analysis of the situation. But, in any event, I would think it more appropriate to try to tackle the problems with which we are now faced, rather than engage in a historical dissertation extending over the last 30 years.