FUTURE OF STERLING A TOUGHER DOMESTIC ECONOMY IS ESSENTIAL

Press, Volume XCII, Issue 27736, 13 August 1955, Page 6

FUTURE OF STERLING A TOUGHER DOMESTIC ECONOMY IS ESSENTIAL

IBP "LYWCBUS" of the "Economist"]

(From the Economist Intelligence Unit)

London, August 2.—A new attitude towards sterling exchange policy was defined in the recent debate in the House of Commons which followed the statement of the Chancellor of the Exchequer on the measures to be taken to arrest the drift towards inflation in Britain. The special note of urgency in the statement was due less to the need to arrest inflationary developments at home thah to the necessity for countering rumours adverse to sterling which have been circulating in the capitals of the world for some weeks. These rumours have been intensified by the economic difficulties that have recently fallen on* Britain, and not least by the railway and dock strikes which had so adverse an. effect on the trade figures for June. But the crux of these rumours lay in the debates which have recently taken place in Paris concerning the shape of the renewed European Payments Union and the extent to which it would have to be adjusted to greater flexibility of rates of exchange if and when a number of its member countries* currencies became convertible. In this debate it had been widely .reported that the British representatives pleaded for flexibility and, indeed, urged that sterling could be safeguarded in a convertible world only ft it were allowed to fluctuate within a margin of rates greater than is now allowed. This debate, it should be eniphasired. Was highly hypothetical. It did not presage an early move to flexibility but concerned the nature of exchange arrangements when sterling and other currencies became convertible. When, therefore, Mr Butler made his first statement on the economic situation in the House of Commons and announced various restrictive measures including a general tightening of facilities on hire-purchase operations, he deemed it sufficient to counter these rumours by saying that there was no question of a further move towards convertibility until a great deal of hard work bad been done in consolidating the position in the domestic British economy, and particularly until domeatic demand had been compressed sufficiently to allow more resources to be channelled to the export markets. -Flexibility” Bunosra This denial, by implication, of tiie "flexibility” rumours did not, however, satisfy the Opposition in Parliament which, in the debate which followed the Chancellor’s statement launched a general attack on the Chancellor as the instigator of the Very rumours which he was endeavouring to suppress. The accusation suggarted that It was the Chancellor and hi* adviser* who, during the O.EJtC. diaciuaion* on the extension of E J.U, had ventilated official British view* on tile advantages of flexibility, and were, therefore, the real authors of there adverse rumours. The Chancellor, vehemently denied that he had" made • any such statement in Paris, though < he admitted that in the-discussions on the extension of E.P.U. some representatives in Paris had favoured i flexibility while others had upheld the virtues and advantages of fixed rates of exchange. He went on to compliment the Dutch delegation on hairing i advanced a plan; which appeared to < reconcile successfully these clashing i views and. allow them to coexist in a new clearing mechantem that : would supplant the European Pay- 1 ments Union when one or more of its i member countries became convertible. : In answering these attacks, the i Chancellor gave the clearest statement i which has yet been made of the ex- i change polity of the British Govern- • ment. He said that he could give this ' policy in one sentence: "It has been i and will continue to -be the main- . tenance of the exchange parity of 2.80 i dollars to tiie £, either in existing : circumstances or when sterling is con- i

vertible." That statement undoabton. dismisses any possibility of a "floatiSJ ?f°^u‘. - exchange fluctuations within whiS ■ sterling might move. It would still 2 ■ possible, while adhering to the pig ; °f 2.80, t 0 ““ounce that &n2 forth, or over a given period, the S - change would be allowed to fluctul<2 range Ot ’ 2.70 ■ to 2.90 dollars or even 2.60 to 3 00 ThJ i sanction of the International Mon'eti? Fund would have to be obtained 1.-i such a move, but it would preserve nominal parity of 2.80. It would alm fit into the pattern of the Dutch com. ■ promise plan, which provides advance notification to all countria concerned of the margins within wbick a country will allow its exchange rati to fluctuate over the ensuing settle ment period. Euphemism for Depreciation The Chancellor’s statement, nonethe. less, should clarify the position com siderably. For the near future, theft is evidently no question of a move to. wards greater flexibility. A first priority must be given to the toughen. Ing of the domestic economy. Untfl success is achieved in this direction flexibility of exchange rates would to merely a euphemism for depreciation This fact should have been clearly i£ cognised during the negotiations - £ Paris. However hypothetical academic these discussions of flexibillto may have bear, the fact that ofictil views should have been advanced * the advantage of flexibility at a’UM* when the domestic situation in Gnat Britain raised serious doubt* about th* future of sterling must be deemed to have been highly inopportune. It* got to work and should have made an attack on sterling, the extent of is impressively illustrated by the end. rroviaM mere u no cuciulinv, and self-propagating character in thte not on sterling, it need cause no undue con. cern. If foreign countries »» down their working balances in ing, those balances must sooner *r later be reconstituted. Sterling, tot ,fi the criticism hurled against it, not least in Britain itself, is still far and away the most widely used currency In international commerce. The Ban of England, in it* annual report pub. Itahed recently, drew attention to AM enormous increase in the use of sterling in payments between ntep sterling countries, and pointed out that in 1953 such transfers of stenita amounted to about £800,000,000. TS trend has continued upward and S 1954 the sterling transactions Mt through the commodity market* Ila Britain for non-sterling countries**. porarily short of sterling, its value is the foreign exchange market must, til the weeks ahead, get the benefit' ot ths covering operations which are bound to take place. The prospect* for starling, therefore, are by no mean* unfavourable, It I* true that the difficult months ot autumn lie ahead; but this year the autumn pressure has in substantial part been anticipated. The foreign ex) change market has already experienced demands for dollars for grain and tobacco shipments which would normally be paid for later in the year. This year, therefore, the seasonal presmice may not be a* great a* usual Beyond that, all depends on the effect of the measures taken to harden the domestic economy in Britain. It they succeed tad there are good prospects that they will—then all will be writ If they do not, then all the gold ami dollars in the Exchange Equalisation Account cannot prevent an ultimata slide of sterling, despite any promises and assurances to the contrary that may have been made officially.