Economic Policies for an Incoming Labour Government

By Bryan Gould and George Tait Edwards

Part 9 Further Proposals and a Conclusion

The Wage and Salaries Increases Act

One of the main, and perhaps – to western eyes – most surprising features of

Japanese Prime Minister Shinzo Abe’s re-introduction of Shimomuran

economics is his attempt to ensure that there is a rise in Japanese wages.

In marked contrast to Coalition government’s determination to drive down

wages here, he well understands that higher wages are an important way of

raising demand in an economy which is intent on stimulating economic

activity – hence his implication that the advantage of relatively cheap

investment finance will be made available only to those firms that already

pay, or are willing to undertake to pay in the future, a proper level of

wages to their workforce.

An incoming Labour government should take a similar stance, with positive

policies for a greater share of national income by working people. In

particular, there should be an immediate rise in the minimum wage rate to

£8 an hour and an annual incomes and salaries growth target equal to the

estimated rate of inflation plus the estimated rate of growth plus 2% for the

first five years of the Labour Government. This, in the context of the other

policies here proposed, will spread effective purchasing power throughout

the economy and move all families out of poverty within the lifetime of this

government. Zero-hours contracts should be made illegal in the UK. The

disability and unemployment benefits system will so far as possible be uprated

to the levels which would have obtained if the Coalition Government

had never existed.

A second part of wage legislation will be enacted to provide that future

wage and salary increases will be divided, with the increases due to the

estimated annual rate of inflation paid weekly or monthly and the

estimated growth component paid as a lump sum every 1st November. This

measure will ensure the growth of real wages and limit inflation, and

provide earners with lump sum funds, which research has shown are more

likely to be saved, which in turn will increase the emergency funds of

families for holidays or to meet unexpected expenses.

It will also usefully increase the saving of British families, and will, in our restructured financial

system, increase bank funds for industry. That measure has proved very

effective in Japan, where it may have been another policy initiative

originating from the Japanese master economist Osamu Shimomura, and we

think it will be as effective in the UK as it was in Japan.

Improvements in The Machinery of Government

A review of the dominant and self-interested role played in the British

economy by the major banks leaves little room for surprise at the fact that

the various initiatives to support a British economic revival have all failed.

George Brown’s National Enterprise Board, the Industrial Re-Organisation

Corporation, and the more recent suggestion of a National Investment Bank,

all had and have one factor in common – they were inevitably small,

central, initiatives depending upon the co-operation and goodwill of the

Clearing Banks to allow them to work. Not surprisingly, over the last

century and a half, the British Clearing Banks have never had any interest in

permitting the survival of any organisation that could grow to challenge

their virtual monopoly and have ensured that such experiments did not

survive.1

The proposals above for the reform of the banking system will go a

long way towards remedying this situation and allowing genuine reforms to

take effect. If, for any reason, the banks succeed again in frustrating the

flow of lending for investment purposes to industry, it would certainly be

worth looking again at a National Investment Bank which would ensure that

such an objective was met, with that national bank having direct links to

the Local Community Interest Banks.

Finally, there is one additional change

in the machinery of Government that should be put into place.

The Economic Planning Agency

An Economic Planning Agency (EPA) will be set up in the Office of the Prime

Minister to fulfil the following goals:

– to provide competent, timely and accurate advice to the government on

how best to achieve the developing government objectives of increasing

______________________________________________________________

economic growth, managing inflation, and making due provision for the

impact of environmental changes on UK resources

– to report upon the locality and potential of British businesses, particularly

with regard to the development of the UK as a green economy

– to identify and recommend potential and emerging innovations and the

location of key knowledge-based growth hubs in the economy

– to provide a monthly report upon the outcomes of the regional, national

and local investments

– to calculate and comment on, as it may see fit, the capital-output ratios

and other key factors in the economic development of the country

– to identify blockages in the free flow of investment funding for national

and other viable projects, particularly with regard to national sea

defences and the investments required to accelerate the movement into a

greener economy

– to provide an Annual Economic Survey of Britain, summarising the

economic state of the nation and acting to improve the practical

economic understanding of key industries, and

– to report as regularly as it sees fit upon the results of various Government

initiatives and projects, particularly with regard to

– Green energy generation

– The safeguarding of national resources against rising sea levels and

extreme weather events

– The improvement of national education and research and

development facilities and

– Other emerging issues which the EPA wish to bring to the

Government’s attention.

These new institutions will mirror the more competent SME funding

arrangements and other existing industrial funding arrangements in

Germany. These new banks will be guaranteed by government, as in fact all

banks are in the last resort. There can be no foreign objection to the British

Government taking steps to ensure that British domestic industry has access

to financial facilities, similar to those that have existed, and which

continue to exist, to fund foreign industry abroad. Given access to

equivalent funding sources, we are confident that British invention will flow

through to factory floor innovation and British industry will no longer lose

its place in the world and will flourish through the fresh opportunities made

available to it.

Conclusion

It is that fresh economic understanding that should enable an incoming

Labour Government to reshape and reform the future of Britain. The

objective of that Government’s economic policy should be the restoration

of a civilised and progressive Britain where all of its people are free from

want, excellently educated, and achieving their full potential within a

much more prosperous and fairer society. Britain’s place in the world as an

innovative, highly developed manufacturing economy operating at the

leading edge of invention and innovation must be re-built. The fruits of that

success should be more equitably distributed, not only as a matter of social

justice and to secure a more integrated, happier and healthier society, but

also as a stimulus and contributor to continuing economic success.

1 For some of the methods used, see the Henley School of Management

Paper by Peter Scott and Lucy Newton “Jealous monopolists? British banks

and responses to the Macmillan Gap during the 1930s” which is at http://

www.reading.ac.uk/web/FILES/management/036.pdf

© Bryan Gould and George Tait Edwards 2015

Economic Policies for an Incoming Labour Government

By Bryan Gould and George Tait Edwards

Part 8: The Re-Establishment of British Banks Along Four Main Functional

Lines

As previously remarked, the continuation of the existing banking

arrangements, in which the merchant bank gambling function is integrated

within the rest of the banking business, is – as Mervyn King has regularly warned

– not a safe way for the British economy to proceed. A major re-structuring

of the British Banking sector is required, so that each bank is required to decide

whether its primary function is that of a retail bank, a mortgage and

consumer credit bank, a merchant bank or a local community investment

credit bank.

Retail banks will collect local savings and provide a banking service to local

people and industry, providing the money-handling service which enables

wages and salaries to be paid and all other transactions between buyer and

seller to be carried out. Retail banks will be encouraged, if they wish, to

develop close relationships with local industry (as is the norm in Germany)

and to develop an informed view of the prospects of their local enterprises.

Retail banks with many local branches will be invited to consider becoming

local SME investment credit loan banks as they wish. Local authorities will

be invited to consider setting up Local Authority Banks to help support their

economic development. Government guarantees will be available for the

savings and credit deposits in retail banks of up to £200,000 per individual,

but it is very unlikely such guarantees would ever be required.

Investment credit banks will have the primary purpose of extending long –

term loans at an interest rate of 4% pa over terms of between ten and

twenty years to British-based SMEs. These banks will have the ability to rediscount

their business loans up to the official re-discount limits set under

the “window guidance” at the Bank of England. Such banks will be

completely backed by government. SMEs and other companies taking out

loans and the personnel employed by these companies will be expected to

change their bank so that the loans granted, the wealth created in company

accounts and the wages paid will all initially, and perhaps ultimately, be in

the loan-providing bank. Savings kept in investment credit banks will have a

structured rate of interest so that short-term one-year savings will have an

interest rate of 1% and savings over five years will be offered an interest

rate of inflation plus 1% and thus effectively would be better than inflation-proofed.

Mortgage and consumer credit banks would have the major function of

providing mortgages or consumer credit at relatively low rates of interest.

The mortgage section and consumer credit section of any bank should be

legally operated as a distinct entity within any bank which provides any

other functions. Government guarantees will be available for the savings

and credit deposits in mortgage and retail banks of up to £100,000 per

individual, but again it is very unlikely such guarantees would ever be

required.

Merchant banks will exist as entirely separate free-standing institutions not

associated with any other bank and may attract such savings as may be

commensurate with their level of risk. The risks of complete loss of savings

must be clearly explained to merchant bank savers, and no government

guarantee for any savings placed in a merchant bank will be available.

Merchant banks will be obliged to keep reserves, probably in the range of

10%-20% of total bank assets, commensurate with the gambling risks they

undertake, as determined by the Financial Services Authority.

These measures would go a long way towards constructing a banking system

that provides proper security and guarantees to savers, that truly serves

the public interest and that in particular provides much-needed investment

finance to Small and Medium-Sized Enterprises.

© Bryan Gould and George Tait Edwards 2015

Economic Policies for an Incoming Labour Government

By Bryan Gould and George Tait Edwards

Part 7: The Community Interest Bank Key to Local SME Development

Despite the provision to the banks of huge sums by way of Quantitative

Easing, very little of that money has found its way into bank lending for

productive investment. The excuses trotted out for this failure include the

age-old claim by British banks that the comparatively low level of their

lending to business does not evidence any reluctance to do so, but merely a

shortage of demand – or, to put it another way, a shortage of suitable

projects on which to lend. But no sense of this can be made unless we

know the terms on which the banks are offering to lend.

And that is precisely, of course, what we are not usually allowed to know.

The banks have traditionally been very coy about the terms they offer. But

the Bank of England has recently required the British Banking system to

make returns showing the extent and the terms of lending to enterprises.

The information that is now available shows that, by comparison with other

and more successful economies, our banks lend over a shorter term – in

other words, the money has to be repaid faster. The average term loan is

now under two years, with a repayment rate of about 65%. This means

that the annual repayment costs of bank loans for British firms over the life

of the loan are much higher, the adverse impact on cash-flow is therefore

more severe, and the need to make an immediate return on investment

(and a quick boost to profitability) is much greater.

Annual repayment costs that are several multiples lower than British

equivalents are a large part of the reason for the greater amount and ease

of bank borrowing enjoyed by businesses in, for example, Germany and

Japan, and in the new powerhouses of China, Korea and Taiwan – and that

is, of course, why they are able to buy up and make a profit from our failing

assets.

This is the origin of the much-lamented British disease of short-termism.

Short-term cash-flow or liquidity is at least as important to British firms as

longer-term profitability; indeed, it is literally a matter of life and death.

It is a factor that both inhibits the willingness to borrow (and therefore the

access to essential investment capital) in the first place, and – if the loan is

made – greatly increases the chances that it cannot be repaid in accordance

with the loan period and terms insisted upon by the banks.

If, as is all too likely, a business borrowing on these terms runs into

difficulties before the return on the investment funded by the borrowing

becomes available, the news gets worse. British banks, unlike their

overseas counterparts, show little interest in the survival of their business

customers. Their sole concern often appears to be to recover the loan and

interest payments due to them over the short period specified in the loan

arrangement. If that means receivership or liquidation – even if the

business had a good chance of survival were the investment plans funded by

the loan allowed to proceed – so be it. The banks can congratulate

themselves not only on the return of the loan and other payments due to

them sooner than if the business had been allowed to survive but also on

the money to be made from the disposal of the assets (sometimes to foreign

buyers) through the receivership process.

Previous attempts to improve the investment funding of SMEs have failed in

the United Kingdom, in the face of well-funded bank opposition to any

changes to improve the existing situation. The current concentration of 84%

of UK bank savings in six banks and the absence of public local banks of the

Spakassen type is largely responsible for current failings.

Bank branches in the UK at present act as facilities for collecting local

savings and then channelling them almost entirely into London; there is little

direction of such savings into local SME investments. The

millions of VAT-paying SMEs in the UK receive virtually no support from

the branches of the UK banking system except for the standard retail

service of a money transfer system.

By contrast, the more successful German economy has seven regional

banks, 453 Sparkassen (or local savings banks) and a network of 12,600

branches to provide SME loans from German savings. Each Sparkassen – all

453 of them – concentrate on providing business loans to SMEs in the area

where it is located, and each has an interest in, and commitment to,

ensuring the economic success of its native village, city or region.

Britain has nothing remotely similar nowadays, but it had such a system

until the 1880 Bank Amalgamations were put into effect, so destroying

“country banking” and paving the way for the English Clearing Banks. As Professor

Glyn Davies said in his 1979 evidence to the Wilson Committee “If Britain

had had the financial arrangements it has now at the time of the industrial

revolution, that revolution would have been still-born.”

This situation is no longer tolerable. If we are to prosper so as to compete

with powerful overseas competitors, the banking system must be reformed.

Fresh legislation should be enacted to require British banks to operate

mainly in just one of four separate categories – as retail banks, mortgage and

consumer credit banks, merchant banks, and investment credit banks. At the level of the local

community, community interest credit banks,

having the function of supporting and developing all of the local SMEs,

should be created to fulfil that function.

The Creation of Community Interest Credit Banks in Britain

The continuation of the existing banking arrangements, in which the

merchant bank gambling function is a legally allowable integrated division

of Clearing Banks with the rest of their banking business, is not a safe way

forward for the British economy, as Mervyn King has regularly warned us all.

That was the major cause of the credit crunch, because that structure

enabled British Banks to gamble with the savings and the circulating credit

of the UK on the international money, stock and bond markets. The “clever”

re-packaging of poor quality US housing debt, with the mistaken sale of

these mortgages as good quality loans when they were not, was the main

factor in causing the credit crunch.

The six major UK Clearing Banks give no priority whatsoever to providing long-term capital in

relatively small amounts to the 4.85 million SMEs of the United Kingdom.

There is not a single financial organisation in the UK which has the

objective of collecting financial savings and providing it, as required, at

local level to those millions of inventive and innovative local SMEs.

This has been the major conclusion repeatedly found by a number of high-powered

reports, most recently from the Committee to Review the Functioning of Financial Institutions

(successfully renamed the “Wilson Committee” by the British Clearing Banks

so as to imply that report was just a socialist recommendation) which emphasised

the need for patient, major long-term funding for British industry.

The industrial revolution was born from the commitment of local and

“country” banks to the SMEs which then grew into major industries.

All successful economic developments in all countries – in the UK’s

industrial revolution, in the USA, in Germany and in Japan – have depended

not just on the major industries but on the millions of SMEs

which continually provide the wellspring of small-scale services and

manufacture without which major national industries could not flourish.

It is essential that hundreds of local CICs with thousands of branches are

established throughout the United Kingdom. These local CICs should have a

“local first” commitment to the success of local SMEs which should be

provided with the funds required to provide the liquidity, working capital

and plant and equipment investment to improve their commercial

operations.

These local banks could be quickly provided by the nationalisation

of the Trustee Savings Bank and its local branches, which could be

regrouped into quasi-independent local-first CICs committed to the success

of the SMEs and industries in their local area.

© Bryan Gould and George Tait Edwards 2015

Economic Policies for an Incoming Labour Government

By Bryan Gould and George Tait Edwards

Part 6: The No-Cost Keynesian Stimulation of Demand in the Economy

An incoming Labour government could and should stimulate the economy by

restoring all the benefits (worth about £20 bn a year) which the Coalition

Government has reduced or denied to the low-paid, the sick, the disabled,

the poor and the underprivileged. The case for doing so is based not only on

social justice and on restoring the integrity of our society but on making

good the deficiency of demand that has handicapped our economy as a

consequence of austerity.

This would be achieved by creating £20 bn of consumer credit at the Bank

of England to fund the policy during that first year. The costs of that credit

creation for Government expenditure would be nil and the benefits would

be immense. If we assume the average UK tax take of about 42%,

government income would rise by about £8.4 bn; but because much of the

extra purchasing power might be spent on food and other non-taxed

necessities, the tax take might be about half of that – say 21%. On the

other hand, the extra spending would have a multiplier effect of about 2, so

that the total effect on the UK economy would be a stimulus of about

£40bn. Even allowing for a lower than average tax take, the Government

would still gain revenue of £8.4 billion, the economy would receive a

stimulus of £40 billion (a likely addition to economic growth of about 2.6%)

and many of the dire effects of the Coalition’s austerity programme would

be negated. The financial condition of Britain’s poorest would be

ameliorated; the poor would be more able to afford to eat, heat their

homes, pay their bills, and live better lives without worrying where the

next penny was coming from.

That policy could be continued in the following years but, as the additional

government taxes came in from economic recovery, the credit required to

be created would reduce accordingly eventually becoming nil within the

lifetime of the parliament as economic growth increased due to investment

credit economics.

The Credit Restoration of the Royal Bank of Scotland

The bad debts of the Bank of Scotland should be immediately purchased in

their entirety by the Bank of England, using targeted quantitative easing.

Again, it would cost the Government nothing. The Government would have

bought assets worth (say) 50% of their book value for nil expenditure. The

total bad debts of the RBS are estimated at £38 billion, so the Government

would gain assets of about £19 billion in return for no appreciable cost

whatsoever. Furthermore, the RBS would cease rejecting loan applications

from SMEs, where they are urgently needed but where about three out of

four are currently being turned away. There is no good reason why the RBS

should continue to do this, when normal business could be resumed

immediately.

Through this means, which could be applied to stabilise other British banks

as necessary, one of the main and continuing consequences of the Global

Financial Crisis – the overhang of bad debts that inhibit the banks from

lending – can be negated. Interestingly, one of Richard Werner’s major

findings from his inquiry into the reasons for the Japanese stagnation over

recent decades was the inhibiting effect of bad debts on the willingness of

the Japanese banking system to maintain an adequate level of credit

creation and therefore of liquidity. In this instance, we have the chance to

learn from Japanese mistakes. We should be clear that the objection based

on moral hazard pales into insignificance by comparison with the huge

economic advantages from pursuing this course.

Many of those who call themselves economists and many politicians who

imagine themselves to be competent will be stunned by these proposals, if

the past is any guide. As Keynes commented, “the difficulty lies not so

much in developing new ideas as in escaping from the old ones, which

ramify, for most of us brought up as we have been, into every corner of our

minds.” And as John Kenneth Galbraith, who was a member of the FDR

administration when the investment credit creation policy was adopted by

the US Government, has said, “the creation of money is so simple that the

mind is repelled.”

We should remind ourselves that there is nothing new about the creation of

credit by the Bank of England. No less than £375 bn of credit was created

to stabilise the liquidity and preserve the operation of British Clearing

Banks and £80 bn of such credit was created to support Vince Cable’s

proposal to extend business loans to industry.

The novel aspect (in British terms at least) of our proposals is that the

proposed credit is to be focused on useful social and economic objectives –

on the establishment of more prosperity among the poor and

disadvantaged, upon the minimal cost fixing of the RBS and other banks and

upon the creation of the kind of bank support for industry and commerce

that has existed for centuries in Germany, for about a century in Japan and

for about a third of a century in China.

The Mechanisms

The primary objective of the incoming Labour Government’s reforms should

be the establishment of a United Kingdom of abundant capital resources

and the placement of Britain’s future industries on a sound economic

footing. Inseparable from that first objective is the reformation of the

British banking system to ensure its future stability and effectiveness.

Another objective would be the fulfilment of the Government’s duty of care

to the people – the relief of the groups disadvantaged by the actions of the

recent Coalition Government and the restoration of full employment as a

government objective. Finally, measures should be taken to ensure the

permanence and continuity of these reforms through major changes in the

machinery of Government. We set out now our proposals for achieving

these objectives.

The Re-nationalisation of the Bank of England

The Bank of England should be brought once again under Government

control. It is unwise for any government to allow any natural monopoly to

be fully independent, and the control of credit creation is such a central

aspect of government policy that direct control is required.

The operating objectives of the Bank of England, as a central departmental

agency of government policy, will be redefined as the promotion of

economic growth and the control of inflation within the guidelines of a

national industrial and social development plan.

Gordon Brown’s proclamation of the “independence” of the central bank

was widely applauded at the time and remains a cardinal – and

unchallenged – element in policy today. Yet handing monetary policy over

to the tender care of a central bank is simply a reinforcement of the

current and increasingly discredited orthodoxy that inflation is the only

concern and proper focus of monetary policy and that its treatment is

simply a technical matter that is properly the preserve of unaccountable

bankers, and is not to be trusted to politicians. Quite apart from the

undemocratic nature of this approach, we have paid a heavy economic

price for allowing the bankers’ interest to prevail over the interests of the

economy as a whole.

It is easy to see why the bankers – and the economists who work for them –

should support this. It is less easy to see why the politicians should so

readily have accepted it. Yet the answer is fairly clear. It has suited the

politicians well to be able to argue that the travails of the economy arise as

a consequence of inexorable economic forces which must kept in check and

marshalled by expert technicians. Our governments have thereby been able

to disclaim any responsibility for policies for which they should be

ultimately responsible.

As a matter of interest, this very issue was succinctly discussed by members

of the Japanese Committee on Financial System Research (Kinyu Seido

Chosa Kai) as it considered whether to revise the 1942 Japan Law that

established the Bank of Japan’s primary objective as the promotion of

economic growth. On that Committee, Dr Shimomura represented the

Ministry of Finance, while his opposite number was Mr Shigeo Matsumota,

representing the Bank of Japan.

Dr Shimomura is reported as having “stressed the inevitable subordination

of the central bank to the government from two standpoints – that the

policy of the central bank should be managed and operated in

full coordination with the general economic policy of the Government and

that the Government on its part is called upon to hold itself responsible to

the nation for the outcome of its financial policy.”

Mr Matsumoto on the other hand “emphasised the necessity of maintaining

the independence or neutrality of the central bank from the Government on

the ground that the central bank is first of all assigned with the task of

contributing to the stabilisation of the currency value….”1‑

What is clear is that an economic policy that breaks the shackles of current

orthodoxy would necessarily have to be removed from the exclusive and

self-interested control of bankers. It would need to be driven by politicians

who saw the need to ensure that the wider interest is carried into policy

and is an essential element in setting its direction and gaining for it the

necessary support.

© Bryan Gould and George Tait Edwards 2015

1. From “The Political Economy of Japanese Monetary Policy” by Thomas E Cargill, Michael M Hutchinson and Takatoshi Ito, The MIT Press, Cambridge Massachusetts and London, England, p24.