(Typed. The first sheet is a carbon copy.)
Reasons for the immediate Socialisation of the Joint Stock Banks.
I am writing on the assumption that the Labour Party has come back to office with a clear majority and that it intends in the first sessions of Parliament to lay the foundations of a general economic plan of reconstruction and development. If this is so, it appears to me that the immediate Socialisation of the Joint Stock Banks as well as of the Bank of England is bound to be required. I know it is often argued that a Government which had assumed the ownership of the Bank of England could by this means and by the use of emergency decrees exert effective control over the Joint Stock Banks and the City Houses, and compel them to do what it wanted. But for several reasons I do not believe this to be the case.
In the first place I very much doubt the effectiveness of ‘open market operations’ in causing an expansion in industry or in the actual use of credit in face of any hostility to this policy on the part of the Joint Stock Banks. It is true that the Bank of England can by buying securities increase the cash resources of the Joint Stock Banks and so enable them to lend more if they are willing to do so. But it cannot compel them to lend more; and it would be well within the power of the Joint Stock Banks to immobilise the funds so created for a long enough time to defeat the Socialist plan for the stimulation of industry. This would of course involve the Joint Stock Banks in some forgoing of profits through their failure to use the cash resources at their disposal; but this loss would not be too large for them to incur without danger if they saw the prospect by means of it of bringing the Government down. Nor do I think that emergency measures of control could compel the Joint Stock Banks to expand their loans against their will. Control without ownership can be used to prevent people from doing things; but it is very difficult to use it positively to make them do things which they do not want to do.
I know it is suggested that, as far as the financing of the Government’s own schemes is concerned, a refusal by the Joint Stock Banks to advance the necessary funds might be met by a resort to other forms of borrowing, e.g. in the bill market. But this argument seems to be based on a misapprehension. For the funds which are available in the bill market, with the exception of balances belonging to foreign banks in London, come for the most part from the Joint Stock Banks, which lend them to the bill market for relending. It can hardly be supposed that, if the Joint Stock Banks were endeavouring to bring the Government down by a refusal to provide credits directly, they would be prepared to place the necessary sums at the disposal of the bill market for relending, and so to provide indirectly the very resources which they were withholding in a direct sense.
Moreover, if the Government is pursuing a definite economic plan, involving a controlled and equilibrised development of different industries, it is indispensable that it should be in a position to control, not only the total volume of credit available for lending, but also its distribution among the various industries and business firms demanding it. It is, however, quite impossible for a centralised and branchless institution such as the Bank of England to exert this control, or for an organisation to be improved side by side with the Joint Stock Banks for undertaking it. The Joint Stock Banks are the natural agencies for this rationing of credit, and I can see no chance of any National Economic Plan working out successfully unless they are acting in full harmony with it.
Finally, in my view there has been a tendency greatly to exaggerate the stimulative, as distinct from the restrictive, powers which can be exerted by the Central Bank in face of any hostility on the part of the Joint Stock Banks. It is of course essential to take over the Central Bank; but this measure will be ineffective unless it is accompanied by complete socialisation of the Joint Stock Banks as well. Given these two things, I agree that the remaining institutions of the City of London—acceptance, discount and issue houses—can be either controlled or superseded by new State-created institutions without immediate socialisation. But this is only on the assumption that the Joint Stock Banks, as well as the Bank of England, have first been completely acquired.
One last word. Whatever may be the ultimately desirable constitution for a socialised Bank of England, I hope it is clear that during the earlier stages of transition the Bank must be brought directly under the control of the Government and its organs for economic planning, and not entrusted to any representative body of a non-political character, which would not be directly amenable to Government control. In the early stages at any rate the control will have to be political if the Plan is to be worked as a coordinated Government measure.