I think it is appropriate on the Second Stage to refer to the amendments which I have put down for discussion on Committee Stage. The amendments are:—
In Section 3, sub-section (1), page 2, line 24, after the word "Ireland" to insert the words "or any bank or banks",
and—
at the end of sub-section (1) to add the words "provided, however, that in the case of any sum or sums advanced to the Minister for Finance by the Bank of Ireland or any other bank or banks the rate of interest shall not exceed one and one-eighth per cent., and in the case of any sum or sums otherwise borrowed by the Minister for Finance, the rate of interest paid shall not exceed three per cent."
When the Minister for Finance announced to the House on 30th October last that he proposed to invite subscriptions to a loan of £8,000,000 in stock, to be issued at £99 per cent., and carrying interest at the rate of 3¼ per cent. per annum, payable half-yearly and redeemable from 1956 to 1961, I criticised the rate of 3¼ per cent., and the Minister thought I was criticising that rate entirely out of colossal ignorance of these matters. Whether that is so or not, I think we require some explanation as to why we should pay more for money than either the people of England pay for money in Great Britain, or our Irish banks get in Great Britain for the cash they have invested there.
A certain number of questions arise. The Minister indicated that there was no proper comparison to be made between the loan to be opened then and the loans offered on the market of England by the British Government at 2½ per cent. for the war period. The position in Great Britain is that they borrowed a very large sum of money and are likely to be borrowing more. Half the amount of money they are borrowing for the general conduct of the war and the carrying on of Government is borrowed on short term and they are paying slightly in excess of 1 per cent. for it. The other half of the money is being raised through medium-term securities to the public and is being borrowed by the British Government at from 2½ to 3.175 per cent., and the Defence Bonds most current at present are the 2½ per cent. National War Bonds repayable in 1949-51 which are being issued at £100 and the 3 per cent. Defence Bonds which are repayable ten years from the date of purchase at 101 per cent. and of which nobody can hold more than £1,000 worth.
The object of the second amendment is to restrict the Minister in his borrowings in this way: that in so far as he is borrowing from the public, he will not pay more than 3 per cent., and, in so far as he is borrowing from the banks on short terms, will not pay more than 1? per cent. The general question which has to be asked is: why should we pay higher rates for money required by our Government than the British are paying for the money they are getting in such huge amounts and which is to be spent in such an unproductive way? I cannot believe that our credit is less and I cannot believe that, if in present circumstances the British people can lend huge amounts to their Government, the monetary situation here is not such that our people should be able to lend to the Government here in the same way at not more than 3 per cent.
If our Irish banks are lending some of the enormous additional sums they have accumulated in Great Britain at a little over 1 per cent. or 1? per cent., then I do not think we ought to be paying the banks here, for such moneys as they give the Government on short-term loans, more than they are getting in Great Britain. It not only affects our present situation in the emergency but our future position as well. I think it is more proper to raise this matter on the Central Fund Bill than to be going into the intricacies of these things when discussing the structure of, say, a central bank.
The Banking Commission, in referring to the advisability and advantage of this country keeping its interest rates closely in touch with the rates in Great Britain, say on page 130, paragraph 209, in its main report:—
"The maintenance or improvement of the standard of comfort of the Free State population will entail the continuance of a large volume of external trade, and the link with sterling seems most appropriate as a currency arrangement designed to facilitate it."
In the same paragraph, on page 131, it goes on to talk of the discussion at Ottawa:—
"The monetary objective agreed upon in Ottawa to cope with the difficulties of the existing situation included the pursuit of a policy of cheap and plentiful credits, of a recovery in prices and of excluding undue exchange fluctuations, with an ultimate objective of general stabilisation.... Through the attachment to sterling the maintenance of relatively favourable interest rates in the Free State should be facilitated. The London money market as the most important money market of the world is likely to be characterised by a continuation of relatively low interest rates as compared with other markets."
Again, on page 228, paragraph 361, the Banking Commission in their main report say:—
"As the Free State, like the United Kingdom, is a creditor country, the balance of probabilities, in the absence of special disturbing factors, is that interest rates will approximate to the same level and follow the same course in the two countries. Considering the developments over the last 100 years, the London market, which, by reason of its peculiar advantages as a central money market, has attracted liquid funds from a wide area, has naturally enjoyed interest rates among the lowest in the world."
I do not think that the disturbing factors which manifested themselves in the situation since that was written would be factors that would prejudice the credit of this country in the rates at which the Government would have to borrow, or the rates at which Great Britain would have to borrow. Again, it says:—
"In so far as interest rates in the Free State follow the rates in Great Britain, the likelihood is that they will be among the lowest in the world. Given an orderly continuance of business and the maintenance of sound financial conditions in the Free State, there should be no reason to contemplate rates in the Free State rising above the British level.... The Commission regards it as natural that interest rates in the Free State should follow the movement of rates on the British market, and is of the opinion that such similarity of rates will, in the future, as in the past, be to the advantage of the Free State. The fact that the Irish banks' rates follow very closely the rates of similar institutions on the British market does not indicate any subservience to foreign financial policy, but is a natural development arising out of similar basic conditions. It is not to be expected that the establishment of a central bank in the Free State, quoting a discount rate and interest rates for advances, would involve any departure from this close association, at least so long as the financial and economic position of the Free State remained substantially unimpaired."
Since September, 1939, the nine principal Irish banks have increased their holdings in British Government investments by £27,569,000, and have increased their investments here by £2,751,000. The circumstances in which the investments in Great Britain have been increased are perfectly understandable. They are the result of our export trade, but what I want to get an answer to is: why should the banks here get a higher rate of interest for the amount of money they have added to their Irish Government investments than they are getting from the British Government for what they have invested there?
A number of the leading financiers and economists in Great Britain have been directing their attention to the very important question of borrowing for the war, and how that borrowing is going to be paid for. They have drawn attention to the fact that the financial difficulties created in Great Britain after the last war arose from the fact that they had borrowed large sums of money at a high rate of interest, and had to repay this money at a time when the price level had fallen very substantially compared with the price level during the war, and during the period when the money was borrowed.
For instance, it is pointed out that in 1916 wholesale prices were 60 per cent. above 1913; in 1917, 105 per cent.; in 1918, 135 per cent., and in 1919 they were 145 per cent. But, later on, when the bulk of this money was being repaid, the price level was only 50 per cent. above the pre-war figure. The people whose income was at a price level of say 156 were paying for money that had been borrowed in 1918 when the price level was 135 above the 1913 figure. Looking forward to the future, they seem to have decided that after this war the price level is not going to come down: that is, they are going to maintain the price level. One reason for that is that somebody has figured it out that it is going to cost Great Britain £10,000,000,000 to fight a four-year war; that they are getting that sum at an average of 2 per cent.; that they are getting it on the two legs I spoke of: half at 1? per cent. from the banks and the rest at round about 3 per cent. from the general public. When certain allowances are made for the payment of income-tax on dividends, they figure it out that it will take something like £147,000,000 to pay off that debt yearly, but that if the price level remains at, say, about one-sixth above the 1936 level, that automatically, at the 1936 level, income-tax at £150,000,000 more would come in, and that therefore the very fact that the price level remained at about one-sixth above 1936 level would mean that, at the 1936 rate of income-tax, they would be able to pay for the cost of this war. In considering their capacity to pay for the war, as well as the question of the price level, some of them have made up their minds that possibly even more important than the price level is the interest level. To the question: can they continue to finance the war at an average rate of 2 per cent., their answer is "Yes". They ask what is going to happen after the war.
Are they going to be able to keep the interest level down to what it was? They say: So far as the money they borrowed from the public is concerned, since 1932 the public in Great Britain has been accustomed to a low rate of interest and there is no reason at all why that should not continue.
In the Economist of the 23rd August, 1941, a writer says:—
"It is true that the securities being issued in this war are of comparatively short date and it may be thought desirable to convert them into longer term or even completely funded issues. But if the right moment is chosen, it ought to be possible to do this without paying much more than 3 per cent."
So they are deciding to continue to finance this war largely on the War Bonds issued to the people and a restricted issue of 3 per cent. Bonds, together with the very large amount of money they are getting from the banks. They are saying that they intend to keep the interest rates as they are, at 2½ per cent. or 3 per cent., and say they can bridge the war period without paying any higher interest. There is a question then of what they are to do with the large amount of money which has been provided by the banks at a rate of approximately 1? per cent. The same writer says that "the future of the other half is more questionable." He maintains that it is at least as big in size as the amount of money they have got from the public. As a matter of fact, the balance sheet issued on the 31st December, 1941, for the Westminster Bank Limited shows that that bank holds Treasury deposit receipts to the extent of £109,500,000. The writer in the Economist goes on to say:—
"The future of the other half is more questionable. There are three main categories of holders of the floating debt. The first is Government Departments and Treasury Funds: no question of refusing to renew their holding or to accept a low rate of interest arises in their case. The second is overseas Governments and Central Banks: in their case too the difficulties are not insuperable... There remain the holdings of the banks. The Joint Stock Banks will, no doubt, be very unwilling to see a substantial proportion of their assets permanently invested in loans to the Government at 1 or 1? per cent. They will urge that it is contrary to their traditions either to lend so much to one borrower or to put out so large a fraction of their resources at so low a rate. These arguments should, however be resisted. Commercial banking is changing its nature—not only in Great Britain and not only since the outbreak of the war. Traditionally, a bank was an institution which borrowed the savings of the community and lent them at short-term to commerce and industry. But nowadays the deposits of the banks represent, not the public's savings but its current cash. And a long-term tendency has exhibited itself for the demand for bank credit to decline. Industry and commerce, in so far as they are not self financing, increasingly prefer to raise their finance by methods other than the short-term bank advance. A bank is to an increasing extent becoming an institution which holds the current cash of the public and lends it to the Government. The Joint Stock Banks are approaching the state from which the Bank of England started: their main liability is the circulating medium of the public and their main asset is a fixed loan to the Treasury. That being so, the time is approaching when a recasting of the traditional structure of interest rates will be necessary.
"If it is argued that the rate of interest paid by the Treasury to the banks should be increased, because otherwise the banks will not be able to afford the costs that the holding of deposits involves, that amounts to a claim that the State should subsidise the depositor. It would be far more reasonable to require him to pay the cost of the services he enjoys. There may possibly be a case for funding part of the huge mass of floating debt that the banks will hold at the end of the war—that is, for converting it to longer term paper and avoiding the necessity for renewal two or four times a year. But there is no visible necessity for raising the rate of interest that is payable on it."
It seems clear that, as far as the Economist is concerned, and as far as bankers and administrators generally are facing both the present position and the future in Great Britain, they are determined that they can run the war on interest rates of 2½ per cent. and 3 per cent. as far as ordinary people are concerned and 1? per cent. or even less than that as far as money they get from the banks is concerned. In facing the future, they are relying, I suppose, on the experience after the last war, in regard to the new money that was created during the last war and could not be withdrawn from circulation. I think there was something like £1,200,000,000 additional currency issued during the last war, and they found that they could withdraw only 2/10½d. out of every £1. The new money issued during the present war is not likely to be required, therefore there is no likelihood of any great difficulty in converting the short-term loans that the banks have issued to the British Government.
There is the determination that they are not going to be crushed economically by the task of paying for the present war which, in four years, they consider will run to the colossal figure of £10,000,000,000. That shows that a definite financial policy is being pursued there, on the part of a nation that is engaged in a gigantic struggle and suffering enormous losses. We are shouldering a very considerable burden here, and I do not think that even the Minister or his Party, for all the assertions in his speech to-night, thinks that we are getting value from it in a way that has consolidated the real roots from which our people's economy can and will grow in this world and maintain them in the way we would all like to see.
In these circumstances, my complaint with the Minister's rate of 3¼ per cent. was that when he was fixing a rate of 3¼ per cent. for his loan in October last, it was unnecessarily throwing away £20,000 a year. We had to borrow last year and it is likely we may have to borrow this year. If the emergency continues, it is likely we will have to borrow next year. Even though we are borrowing, I think our credit will be able to keep abreast with the credit of the British Government or any Government engaged in this disastrous war. I do not think we should be asked to pay for the money that we are borrowing, from the banks or from private people, more than the British Government is asked to pay by its people and its banks—more than they seem to be promised after the war, or than our banks, in handling the money that comes into their hands in Great Britain, get from the British Government, to whom I suppose a very large part of that additional £27,000,000 that has been invested in British Government securities between September, 1939, and the 31st December, 1941, would find its way.
It is because of these considerations, and because I think these things require to be discussed and that we require to know what exactly we are doing and why we are doing it, that I propose to move, on the Committee Stage of this Bill, the amendments I have indicated.
