Credit for World Trade TOO SERIOUS A MATTER FOR THE CENTRAL BANKERS

Press, Volume CIV, Issue 30823, 7 August 1965, Page 14

Credit for World Trade TOO SERIOUS A MATTER FOR THE CENTRAL BANKERS

(By

“Lynceus"

of the *’Economi«t.”>

(From the “Economist” Intelligence Unit.)

Ministers of Finance who are bold enough to put their names to schemes for world monetary reform seem to get snubbed for their pains. Three years ago Mr Reginald Maudling. then the British Chancellor of the Exchequer, received what amounted to a public rebuke from the Americans for tabling a proposal for channelling surplus liquidity from the creditor countries to countries in deficit via the International Monetary rund —the “Maudling Plan,” as it has since become known. The Americans felt he was impugning the credit-worthiness of the dollar.

Since then attitudes in the United States have changed: and in July it was the United States Secretary to the Treasury, Mr Fowler, who himself called for a new world monetary conference to consider the case for reform of the gold-exchange standard as established at *he Bretton Woods conference at the end of the war. This time it was the turn of the French to deliver the snub.

Mr Giscard d’Estaing, the French Finance Minister, turned Mr Fowler’s suggestion down out of hand. The preliminary studies of possible schemes of reform earned out over the last' two years by representatives of the Group of Ten leading convertible currency countries, had, he suggested, revealed “profound contradictions between the directions in which the participants believe that reform is required.” Besides, the time was not ripe for an international conference: first there must be assurance that the recent improvement in the balance of payments position of “those countries which have experienced a massive and prolonged balance of payments deficit” (an obvious reference to the United States) was consolidated.” Only then could one “assess” the real needs of the world economy.”

French Attitude

The French and American attitudes are not really as far apart as they seem at first sight. Mr Fowler was careful to emphasise that a new world monetary conference would need careful preparation and evidence of sufficient concordance of views between the main participants to give every prospect of a successful outcome. Moreover it has always been the American position that reform of the existing liquidity system would only become a matter of urgency, once the United States had brought its payments into balance. The difference between the American and French views at present really amounts to this. The Americans, after running an actual payments surplus in the second quarter of the current year, are now convinced that they are, after many false dawns, genuinely moving into balance. The French are not convinced.

Part of the reason for French scepticism lies in past experience. Mr Giscard d’Estaing ' has not been allowed to forget the fact that he told General de Gaulle that the Americans had solved their payments deficit problem back in 1963. The French also evidently expect

that the application of the Common Market’s agricultural policy will, in due course, lead to a sharp reduction in American exports of foodstuffs: and thus that any lasting reduction in the outflow of American private investment resulting from President Johnson's programme of retrenchment on this score will be offset by a reduction in the United States visible trade surplus. On top of this they can point to the rapid increase in United States defence expenditure in the Far East (overseas defence expenditure, unlike aid. being a direct and unrequited burden on the balance of payments). There is something in these arguments—although General de Gaulle's present cold war with his Common Market partners now throws doubt on the long-term effectiveness of the European agricultural policy. But the French probably under-estimate the American President’s determination to eliminate the balance of payments deficit. Effect On Britain

These developments must make particularly uncomfortable reading for Mr Callaghan. The squeeze on American investments overseas is bound to exert an increasingly deflationary effect on many of Britain’s more important export markets—such as Australia. The onset of a trial of monetary strength with the United States is likely to make continental European countries even keener to run a sur-

plus on visible trade —regardless of their lush reserve positions—than they are already. This means that the gentle slide in Britain's exports revealed by the last two month's trade returns can be expected to accelerate. And on top of this the whole weight of speculative attack is likely to be concentrated on the pound as the United States and continental Governments batten down the hatches on their currencies.

In rejecting Mr Fowler's call for a world monetary conference. Mr Giscard d’Estaing also invited the leading industrialised countries to state clearly their positions on the desirable nature of reform. Mr Callaghan has promptly declined this invitation on behalf of Britain. That may be just as well. For if the world economic outlook is really as stormy as it seems to be, Britain will need all the freedom of action she can muster. It is to be hoped that the Labour Government understands that a sufficiently swinging devaluation of the pound, either to give British exports a real competitive advantage or at least to provoke a revaluation of gold, would be preferable to plunging into the morass of world deflation. In one sense, however, the recent exchange of contradictory statements from Paris, Washington and London has been all to the good. It at least demonstrates the growing awareness that the provision and control of credit for world trade is essentially a political problem. Liquidity is too serious a matter to be left to the central bankers.