A GOOD BATTLE TO WIN CHANCES OF AVOIDING DEVALUATION ASSESSED

Press, Volume XCIV, Issue 28159, 24 December 1956, Page 10

A GOOD BATTLE TO WIN CHANCES OF AVOIDING DEVALUATION ASSESSED

[By

"LYNCEUS”

of the '‘Economist"]

(From the "Economist” Intelligence Unit)

London, December 11.—The present battle to save the pound from devaluation promises to be the stiffest that has been waged since the end of the war. At the same time the chances of success are greater than on previous occasions. The strongest card in the Chancellor’s hand is that he is not struggling on behalf of a pound which is obviously overvalued in terms of other currencies. As he has emphasised. Britain’s basic trading position is sound, and this also apulies to the economies of the other sterling-area countries now that India has managed to check the inflow of imports—partly because of the blocking of the Suez Canal. Consequently, any drop in British exports that may occur over the next six months will be due to oolitical factors than to any increased uncompetitiveness, and in any event, such a fall in foreign sales will be mirrored in the trade figures of her competitors. The pre'sure on sterling is at present speculative; the fall in the internal purchasing power of the pound 1946 has not been out of line with the drop that has occurred in the values of most other European and Commonwealth currencies. The figures are as follows: —

The corresponding figure for the United States is 29 per cent., but practically all of the other currencies listed have been devalued by some 30 per cent, acainst the American dollar, while the European ones have mostly been devalued against the Swiss franc. But the main factor in keeping the values in international balance has been the general rise in interest rates over the last 10 years. No figure is available for Germany, but for the other countries the increase has been as follows

If the index of money rates is multiplied by the index of the purchasing power of the various currencies, some rough idea emerges of how far the rise in interest rates has corrected the loss of purchasing power. The figures are:—

The figure for the United States is 106. The bunching of these figures is remarkably close, except for the United Kiafdom and .Australia, and points to the conclusion that Britain has over-corrected the loss of internal purchasing power while Australia has seriously under-corrected. But the pattern emerging shows quite strongly that sterling has not been overvalued. The present sources of pressure are the withdrawal' of such convertible balances as have been kept in London. and the familiar “leads and lags” mechanism, whereby foreign traders expecting a devaluation delay paying their sterling bills as long as possible while collecting sterling debts as quickly as possible, thus opening up a gap in Britain’s balance of payments and causing a drain on the reserves. Today the iirst influence is much less serious than it has been in the past because the size of the sterling balances owed to foreign countries has been greatly reduced. At the end of 1951 these totalled over £1,000,000,000, whereas today they are probably in the region of £650,000.000. And in no forseeable circumstances would all this money be withdrawn, since some would have to be kept in hand as working balances. It is probably an over-estimate to say that another £400,000,000 represents the limit by which these balances could be run down. Another source of loss is the sale of transferable sterling for dollars, but available supplies are now very limited and no great damage can be done in this way.

It has been reckoned that, at the worst, the gap opened up by “leads and lags” is some £400,000,000. At present it is probably about £200,000.000. But the short position that can be built up against the pound cannot be

held forever. Even sterling invoices have to te paid some day; and if traders have to make payment before a devaluation occurs, all the money withheld from the reserves comes flooding back. Higher Price for Gold? The task of defending the pound today is thus one of holding out against psychological pressure that could amount to perhaps another fJfO.OCO.pOO, plus debt payments and obligations already incurred to E.pfj. last month and repayments of the principal of the North American loans. The total is just over 7.000.000.000 dollars, just more than the present official amount of the reserves. Hence the mobilisation of the second line of reserves. If the amount of cold and dollars on hand is greater than the conceivable outpayments, speculation will be unsuccessful. If the reserves were five times their present level, the present pressure would not have arisen—nr if. by any chance, it had, it could have been ignored. But the fact that possible losses are now equivalent to the remaining normal reserves makes the crisis possible, and this is quite apart from sterling’s actual trading position.

Two points must be emphasised. Fnouch resources are to hand to meet any possible run on the nound wltho»»t any devaluation, and it is vital to avoid lapsing into a m**nts deficit on an appreciable scale wh’l® the ngvrhological attack on the po”nd continues so strong. There are also two morals. It is not really possible tn run the sterling ar«»a on such exiguous reserves, and th*» time seems to be ripe tn urge a rise in the price of eold on the Americans. Thev have argued in the past that this would have a violently inflationary "ffect in the United States as the currency was multiplied *o match the new value of gold stocks, but this is unrealistic because existing stocks have never been monetised anywav A doubled price of gold is the best way. and a painless one. for the United States to heln Europe today.

Loss of Purchasing Power Since 1946 Per cent. Switzerland .. 14 Germany .. 28 India .. 28 Netherlands .. 33 Canada .. 35 South Africa .. 35 Sweden .. 35 United Kingdom .. 35 New Zealand .. 41 France .. 42 Australia 54 Rise in Interest Rates

Rise in Interest on Government Bonds Switzerland % .. 4 India .. 38 Netherlands .. 37 Canada .. 48 South Africa .. 65 Sweden .. 24 U.K. .. 76 New Zealand .. 57 France .. 29* Australia .. 56 *Since i948.

Switzerland .. 90 India .. 98 Netherlands .. 92 Canada .. 96 South Africa .. 107 Sweden . .. 82 U.K. .. 114 New Zealand .. 92 France (estimated) .. 90 Australia .. 72 Sterling Not Overvalued