RUN ON THE £ THE SEVENTEEN DAYS OF URGENT STERLING CRISIS

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

RUN ON THE £ THE SEVENTEEN DAYS OF URGENT STERLING CRISIS

(By PATRICK COLDSTREAM in the "Financial Times’ ) (Reprinted bp arrangement)

LONDON, November 28. In a sense never was a balance of payments crisis so long foreseen as this one. As far back as last spring there were memoranda passing through the Treasury pointing out that the balance of payments deficit would probably become critical later in the year. Mr Maudling as Chancellor pressed to get the election over in the summer so that measures to deal with the problem could be taken soon afterwards. Plans were being made to deal with a possible July crisis that might follow a June election. But nothing was done. Publicly it was argued throughout the first half of the year that the stockbuilding in the early stages of an economic recovery was bound to widen the trade gap. A temporary’ balance of payments deficit in such circumstances could, and should, be financed by borrowing abroad.

Gradually the picture grew worse. By mid-year it was evident that manufactured goods were contributing more to the swollen import bill than stocks. Exports, after months of erratic figures, showed no signs of rising. Even though international credits were available, Britain’s ability to repay them looked in doubt. Estimates of the year’s overall deficit grew. By August the National Institute was forecasting .a £soom. deficit and cast doubts on Britain’s underlying competitive position in the world. But little of this showed up in the Gold Reserve, boosted as it was by deposits from other sterling area countries: sterling drifted undramatically downwards.

Reserves Released But by the time of the election campaign it was only by steadily releasing reserves onto the market that the Bank of England was able to maintain sterling around 2.78} dollars. The Chancellor could not avoid letting it be known that the Bank was by September forced to draw on the credits of I,ooom dollars available from European central banks under the Basle agreement. The reserves too began to fall away in spite of this re-inforcement. With the Tories stressing “prosperity,” Mr Wilson found himself in a dilemma To pin responsibility for an economic crisis on the Tories was to risk the accusation of rocking sterling. Not to raise the issue loudly would leave a future Labour Government with little redress. But on September 30, the Treasury decided the issue by publishing figures showing that even in the first half of the year the overall deficit had reached £34lm. Mr Wilson went into the attack: in his Norwich speech he declared that from then on the balance of payments was going “to dominate this election.” He accused the Government of trying to deceive the electorate with “the myth of gently rising prosperity.” Even then, however, Mr Wilson was careful to add some reassuring words about sterling. “I do not believe," he emphasised, “we are facing any danger to sterling, any run on the pound, because the loan facilities available have been increased.”

That was seven weeks ago. On coming to their ministerial desks the new Labour Government found that the balance of payments looked at least as bad as they had thought. They chose — wrongly as it turned out—to stress the gravity of the situation they had inherited and use this as an excuse for immediate action. But the im-

pression or “dynamism,” given by Mr Brown and Mr Callaghan in announcing the import surcharge and export rebate after only 10 days of power, evaporated. The European reaction was two-fold: first it was felt that the Government’s failure to give advanced warning of the surcharge showed an insensitivity to foreign opinion. Second, it became clear that the Government believed the British economy was unsound. The announcement of import controls was evidence that the Government had ruled out devaluation as a possible solution to their problems. The need to protect the pound, stressed daily by the Bank of England, overhung policy decisions. But the Budget 17 days ago again gave the wrong impression. Abroad it was thought irrelevant to the balance of payments, to give evidence of thoroughgoing socialism and to be directed “against” the City. General uncertainties were boosted by specific doubts about the projected Corporation and Capital gains tax.

Mounting Doubts From then on the doubts began to mount. Even then the pound was held, it seems, only by a steady drain on the reserves. The prospect of a quick drawing from the International Monetary Fund under the “standby” arrangement, was jeopardised by the unsympathetic opinion in Europe. But the Government still postponed direct action, despite mounting pressure from the Bank to give reassurance to Europe. Mr Wilson was aware of his problem. His speech at the Mansion House at the beginning of last week broke with convention in that it was not about foreign affairs. Instead it was an apparently untypical declaration of faith in sterling. The pound would be kept “riding high.” Further action would be taken if needed.

Yet any confidence this might have injected abroad was hampered. Economically the following day’s trade figures destroyed any hope that trade might have taken a sudden turn for the better. Politically the Prime Minister’s uncompromising ban on arms to South Africa was taken as more evidence of disregard of foreign opinion. Thursday dawned as a day of hope. Mr Wilson’s remarks on sterling were widely held to herald an increase in Bank Rate: sterling had been rising in anticipation. Nothing happened. The City was quick to grasp that the Bank of England had still failed to persuade the Government of the crucial need for action. The pound began to slide, dropping 3/32 cent against the dollar to 2.78 9/32 dollars. It was not until Friday afternoon that the disappointment over Bank Rate began to crystallise into the final break of confidence. As the afternoon wore on, dealers became aware that the drift of selling of previous weeks had turned into a major flight from the pound and that on top of normal business the first signs of a speculative spiral had appeared. Yet dealings in London were not excessive. It was simply that the selling was in one. direction, and the mood of the market had entirely changed.

Bank Urges Action The week-end Press was gloomy. At the week-end conference at Chequers, the pound had to be discussed as well as defence. The Bank of England insisted that whatever Labour's economic philosophy might be there must be immediate action. As Sunday wore on telephone conversa-

tions began to reveal that pressure on the pound reflected not only narrow economic doubts, but a dissolution of international political confidence. On Monday morning this came into the open. That the Bank Rate should have been raised (almost unprecedentedly) on a Monday and to the “crisis” level of 7 per cent was the sign that things were worse than they seemed. The loss of reserves was clearly already serious. The pound rallied but by the afternoon was falling back. The message was clear. The Bank Rate increase was evidence of real concern about the pound; the underlying position of the British economy remained unchanged; British economic policy still failed to convince the bankers of Europe. But at least at the end of the day sterling showed a net gain. On Tuesday it was hoped that the recovery would gather momentum, but it was the downhill slide that began to gather speed. On Tuesday real doubts hit New York as well as Europe, and the pound was sold heavily all through the day in all the financial centres of the world. It was then that speculators arrived in force selling the pound short without forward cover. But this was not all. Industry and commercial concerns began to telephone banks to buy their foreign exchange for trade purposes as far ahead as they could. Those who owned foreign currency held it back from the market.

Reserves Disappear By the time the pound had fallen J per cent the Bank came in to hold the price by selling dollars. Its intervention was maintained; the drain on the reserves was almost certainly very heavy indeed. By the end of the day sterling had lost 3/32 per cent, the reserves were fast disappearing, and political and economic confidence had gone. In spite of Government denials devaluation had become a major talking point. By Wednesday morning the Government had no choice. If devaluation were not to be forced on the United Kingdom the reserves would have to be fortified at once. The I.M.F. drawing was already needed to repay the Basle credits, and in any case it was not due until next week. The formal international credit machinery was too slow and too lightweight, something altogether more impressive was essential.

Telephone Calls The same morning Lord Cromer and his senior colleagues at the Bank of England began their round of telephone calls to Europe's Central Banks. The United States became head of the rescue operation and began to help in putting together the money needed. There was no time to discuss the niceties of the lending scheme; the Central Banks were asked to give consent to an outline whose details could be worked out later. By the time the New York markets opened in the afternoon, but when the

working day in the United Kingdom was over, the Bank was able to announce the 11country support credit of 3.000 million dollars. It came with little time to spare. Wednesday had been another day of heavy selling in London. With the spot rate still pegged by the Bank of England at 2.78 J dollars, pressure centred on the forward discount which widened steadily. The cost of covering a short position for the weekend with borrowed money had risen to an annual equivalent of 20 per cent. The rumour—untrue—went round the Foreign Exchange markets that Mr Wilson was to appear on television at 8.30 p.m. Devaluation was regarded as a serious possibility. The credits stopped the speculative rot. In New York the rate climbed to well over 2.79 dollars. But even since then there has been no rush to buy sterling. Europe is still waiting to be convinced of a new British economic policy. The events of the last few days can now be seen as only a violent curtain-raiser to the economic problems that have now to be faced.