TRANSFERABLE STERLING BRITISH MERCHANTS ARE FACED WITH DIFFICULTY

Press, Volume XCI, Issue 27593, 25 February 1955, Page 10

TRANSFERABLE STERLING BRITISH MERCHANTS ARE FACED WITH DIFFICULTY

(BV

“LYNCEUS”

of the "Economist”}

[From the Sconomttt Intelligence Unit]

The rise in the bank rate has so far had disappointingly little> effect on the exchange rate of sterling. This fact acquires almost ominous significance at a time when all seasonal factors should be pulling in favour .of sterling. The question is already being asked whether the Hashing of the amber light” of a rise to 3J per cent, was Sufficient and whettier, in the circumstances, the red light of a 4 per cent., or even higher, bank rate may not be required. Beyond this general question, much more specihc questions have been raised about the fundamental reasons for the persistent weakness in the rate for sterling. Probably -the basic reason is that to which the Chancellor at the Btchequer referred recently, namely, that Britain is not fully keeping up its exports with the rate of imports, swollen as the latter has been by full employment, rising production, higher wages and Increased consumption. But according to published figures, the deterioration in the balance of payments has been inconsiderable and would not account for the fact that, although a year ago sterling was bumping along its ceiling in relation to the dollar and had to be kept below it by dint of official intervention, the pendulum has now swung to the other extreme of its arc; the rate is trailing along the floor and is kept just above the 2.78 dollars only by appreciable support from the Exchange Equalisation Account. The immediate reasons for that change lie in part in the realm of psychology and in part in the reappearance of an appreciable discount on the rate at which transferable sterling is converted into dollars. The psychological factors are self-evident. A year ago the whole world was convinced that the pound was moving rapidly towards convertibility. An implication of that conviction was an appreciation in the rate for transferable sterling. That type of sterling was being bought because, in a regime of convertibility, t no distinction would arise between transferable and American sterling; they would become one homogeneous, non-resident sterling, which would be freely convertible at the rate of the day. Today expectations Of convertibility have receded to a somewhat distant future. Not unnaturally, those who had bought transferable sterling have sold it again. In any case, the mood and expectations of the market have so changed as to ordain for transferable sterling a rate around 2.71 dollars, at which it is close to 3 per cent, discount on the rate quoted in the official market.

A Downward Pull This discount, in its turn, is beginning to exert a strong downward pull on the official sterling rate. The reasons are not far to seek. They are to be found in the fact that transferable sterling, which is the sterling normally dealt with by all countries outside the sterling and dollar areas, is now the currency in which a very great deal of the trade of the world is being transacted. Since it can be used by non-residents, but not by residents of Great Britain, the discount is beginning to exercise a very serious and disturbing effect on the normal pattern of international trade. It is setting in motion a wide range of so-called “commodity shunting” operations. These are depriving British merchants of a substantial stream of dollar income, which should be coming their way and which, at the same time, are putting on the British gold and dollar reserve the strain occasioned by a substantial part of Europe’s import from the dollar world. These strains and stresses can best .be illustrated by two simple examples. Tin is a commodity largely produced m the sterling area, which, in the normal course of events, provides Great Britain with a major source of dollar income. In recent months, however, very little tin has been

sold direct through British merchant® to the United States. That trade has been done by Dutch, Swiss and other merchants, who have the privilege not shared by British merchants, of dealing in cheap sterling. What happens is that an Amsterdam firm will buy tin in Singapore and pay for it in sterling in the normal course. It will then ship this tin to the United States, where it is paid for in dollars. The dollars are then converted into sterling, not at the official rate, but at the rate for transferable sterling. If a British merchant had exported the tin to the United States, he would have had to hand over his dollars to the authorities and take sterling at the current official market rate of 2.78 J dollars. The Amsterdam house has the advant-

age of getting its sterling at 2.71$ dollars and it is scarcely surprising, therefore, that it is able to outbid the London firm. In this way the dollars from tin exports are £oing to the Netherlands, to the detriment of the * British! gold and dollar reserve and also of the traditional trading contracts between British trading firms and their clients in the United States. An Example The reverse way in which the prevalence of cheap sterling harms the gold and dollar reserves can be illustrated by an operation in a dollar commodity such as copper. Germany imports a certain amount of copper, for which it normally pays in doHars. The German importer can, however, obtain his copper more cheaply by placing his order through an intermediary in the London Metal Exchange. The copper, when bought by a dealer in Britain, is paid for at the official rate of exchange; and / it is then re-exported to Germany against payment in sterling at a price which gives the London intermediary a profit, and which saves the German buyer the need to produce dollars. In this instance, too, the existence of cheap sterling is a direct cause of losses of gold and dollars to the British reserve. . This is by no means the first time that commodity shunting of this kind has been indulged in; and there have been periods in post-war years when the discount on transferable sterling was considerably wider than it is today. The opportunities for this kind of shunting have, however, expanded considerably, not only because commodity markets have been reopened and freed in London but also because the number of countries in what is known as the transferable sterling area has been increased and now covers the whole world outside the dollar and sterling blocs. As a result, the market in transferable sterling is much larger today than it has ever been in the past. It is even reliably reported that the market in transferable sterling now handles a larger flow of business than the official market in sterling. If so, we have reached the somewhat paradoxical position in which sterling has been devalued—-and made convertible—over a wide range of transactions, but in such a way as to bring Great Britain all the disadvant* ages and none of the benefits. When British exports are invoiced to the dollar area, they must be invoiced on the basis of dear or official Only foreign merchants can lay their hands on sterling goods via triangular transactions and get the advantage of that devaluation. This situation obvi* ously cannot continue indefinitely. It must be resolved either by a move towards convertibility, which would merge the official and transferame sterling markets, or by a general retreat into control of commodity operas tions and into import licensing, re 4 • versing Britain’s progress towarot’; economic freedom, which has made so much headway over the last two j years. The present situation illus- “ trates once again the incompatibility of exchange control with free commodity markets. ... ■