Devaluation Scare

Press, Volume CIII, Issue 30619, 9 December 1964, Page 20

Devaluation Scare

As more detailed information comes to hand on the sterling crisis last month, it is apparent that the £ was nearer to devaluation then than at any time since 1949. The crisis was partly, perhaps largely, due to the ineptitude of Britain’s new Government If Mr Callaghan had raised the Bank Rate several weeks earlier, and if he had taken earlier steps to borrow scarce currencies, the crisis might have been averted, though it is true that the reluctance of Sir Alec Douglas-Home’s Government to take remedial steps before the election was the basic cause of the flight from the £ in October and November.

It is also true that the vaunted international mechanism for dealing with such situations performed disappointingly under strain. “The speed “ with which support for sterling was mobilised ”, said the United States Secretary of the Treasury (Mr C. Douglas Dillon), describing the central banks’ 3000 million dollar loans to Britain, “ is yet another “ demonstration that international monetary arrange- “ ments are strong, flexible, resourceful, and respon- “ sive to the needs of the Free World ”. This observation was obviously intended as a warning that international speculation against the dollar—if America should find itself in the same position as Britain—would be no more successful. As an interpretation of the sterling rescue operation, it is derisory. Unexplained delay in raising Britain’s standby credits with the International Monetary Fund, and toll calls in the middle of the night from the Bank of England to other central banks, are no recommendation for these “ strong, flexible, “ resourceful, responsive arrangements ”, The episode is rather a demonstration of the inadequacy of international reserves, or, perhaps, of the need to abandon a fixed exchange rate for the £. The I.M.F. standby credit of 1000 million dollars would not have saved the £; the Bank of England deemed it necessary to raise three times this sum elsewhere. Since the crisis more than one English economist or financial commentator has emphasised the restrictions imposed on domestic economic policies through the supposed need to maintain the value of the £ at its present price in terms of the dollar and in terms of gold. In its determination not to be “pushed around by the international financiers , Britain s Labour Government has so far found no weapon—except for the dubious surcharge on imports—not previously tried by its Conservative predecessors. The electorate has shown itself weary of “ stop-go ” policies. Labour may yet have to consider a floating exchange rate as the alternative.