THE STERLING CRISIS EUROPE’S PART IN THE BATTLE FOR THE POUND

Press, Volume CVI, Issue 31123, 28 July 1966, Page 16

THE STERLING CRISIS EUROPE’S PART IN THE BATTLE FOR THE POUND

(By the European correspondent of "The Times”) i Reprinted from “The Times”/

The struggle to hold the parity of the pound has been the outstanding event on the Continent these past two years. As seen from the far side of the Channel, it has been—it still is—a. great spectacle. It has had drama, suspense, and thrilling last-minute escapes. And just when it seems a happy ending is in sight, the story is given a new twist, just like a comic strip.

The latest twist came as no surprise to European financial circles. It was not caused by the seaman’s strike, though that may have brought it on a little earlier. This coming autumn, which for seasonal reasons is generally regarded as a bad time for sterling, was always going to be the crunch. It was the same last year, when a July budget had to be brought in. It' was bound to be worse this year, because, on the one hand, the progress towards eliminating the British balance-of-payments deficit was slower than predicted by the Treasury and it had been clear for some time that the Chancellor was not going to reach his target of getting the balance of payments into basic equilibrium this year; and worse on the other hand, because the removal of the import surcharge this November, necessitated entirely for political reasons (namely, the need to keep Efta [the European Free Trade Association] together), would open the way to even more imports. No Financial Islands If European circles saw the crisis coming, and the British Government did not, that is because the whole story has been viewed at a slightly different angle from Europe. There are three sides to the story: the action of the Government, the reaction of the financial markets, and the high-level discussions of the international authorities. All three sides wanted to save the pound and the fascination of the struggle has been in the play of relationships between them. This aspect of international finance is new: it is a reflection of a modern truth which the Labour Government have been slowly learning since they took office, that we now live in a multilateral world where everyone is inter-dependent. No country, in this sense, is an island.

To begin with “the gnomes,” as some of the foreign exchange markets now proudly call themselves: it is convenient to have a villian in the piece and it has been popular with some people to invoke a sort of financial conspiracy in which the international bankers behind the scenes manipulate the world for their own sinister ends. But, alas for romance, it is rather simpler than that. The markets are what their name implies, markets. They simply handle orders, and on a tremendous scale. A big Swiss bank may turn over up

jto $2OO million a day in buying land selling orders. Moreover, because Zurich is such an important centre, the role of the Swiss has been rather exaggerated. It is indeed extraordinary that a country of five million people should play such a vital part in international monetary dealings; but it is essentially an entrepot business, buying and selling for outside clients. The banks take a commission. But they never speculate. Why should they? They do very well indeed in their proper role. Moreover, far from being wizards of monetary dexterity, the market is as fallible as any other human organism. It is sometimes slow to see what is coming. It set great store by the fact that Britain reduced her payments deficit by half last year. But this so-called improvement was always expected to take place anyway. For another example, the market greatly fears nationalisation of steel, as an indication of out-of-date doctrine, without appreciating the political significance of this act in Britain, and which anyway is not a direct factor in the balance of payments.

Gnomes Do Their Job No, the gnomes do their job, which is to buy and sell currencies. It has been axiomatic among businessmen to sell their sterling. No European bank could advise its customers otherwise. For the Swiss, it seems virtually an article of faith not to hold any foreign currency. All that can be said is that there are two sorts of gnome: the optimists and the pessimists, depending on temperament. The optimists try to see everything the British Government have done in the best possible light; the pessimists seem to feel that some kind of moral judgment is going to fall on the world for the sin of inflationary behaviour. But the market decides the price of sterling.. It is working party three, ai little known group of 0.E.C.D., (Organisation for Economic Co-operation and Development) where the evaluation in depth—what is called multilateral surveillance of national economic policies is carried out. This group meets every six weeks or so in Paris; it is, necessarily,- a secret conclave. Its members are directors of central banks and top officials of the economic ministries of the countries concerned. They com-

’ prise some of the best work- , ing economists in the world i and their discussion is at a f commensurately high level. • The aim is to keep each other - in touch and to exchange 1 ideas backed by—and this is I its special merit—a remark- ■ able frankness on the latest ; economic information to hand ■ in each member country. . Conflict Of Judgment Central to the course of the > sterling crisis is the fact that • the judgment of this group has been consistently at vari- - ance with the judgment of ‘ the Treasury. The European i members, notably France, i Germany and Holland, have i all along argued that the level . of demand in Britain was too t high. The British have all ■ along replied that the t measures in hand would i reduce the level of demand. The most notable instance ■ of this difference of opinion , occurred at the end of 1964. ; Everything that has followed i since then has been the cont sequence of it. The group • was sceptical about Labour’s i autumn Budget. The British I had on their side the experi- : ence of the past, the feel of • the economy at home, and their own statistical predictions. They got the benefit of the doubt. But over the ■ months the economy did not turn down. Demand not only . continued to boom but unemployment reached a . record low. It would be Instructive to know why. The answer to this riddle would explain the failure of much subsequent policy. One suggestion is that nowadays people have a cushion of savings behind them and the old-style credit squeeze no longer has the same impact. Similarly, raising bank rate no longer seems to have the same dampening effect on industry. This points to a general weakness in the whole British armoury of economic weapons: a suspicion that they are not always up to date and as flexible as they could be. I “You may well ask why we didn’t restrict hire purchase months ago," one of the most eminent financial authorities in the country remarked that when this action was taken in a previous bout of the crisis. But answer came there none. Moral Obligations Instead, the British have made great play with their incomes policy. A good deal of gardening was done on this tender plant, with many a pause to stand back and admire its growth, both for its own sake and as a psychological indication of the British will to get down to work. This part of the debate reached its climax at the time the Government were persuading the unions of the crucial importance of the early-warning system to wage claims. Britain’s creditors chose to swallow the story. Nobody has ever thought that the incomes policy could do more than make export prices marginally more competitive, say by one per cent a year. But after all this fuss, when the incomes policy began to blow up, the impression left was the more damaging. It is extremely Important for economic co-operation that multilateral surveillance has advanced so far. But it is necessary to emphasise how very gentlemanly it is. It is not and never can be a matter of people telling other people what to do. It is simply a process of question and answer. Similarly, in the meeting of central bank governors at the start of each month in Basle, no conditions can be laid down on a country’s conduct. Central bank governors can propose, but they do not dispose as governments do. In fact, part of the difficulty is that, while the experts may be exposed to multilateral surveillance, the politicians are not. Thus everyone strenuously denies that Britain received the central banks’ help “on conditions.” There could not be any conditions beyond the kind of moral obligation, which is certainly very strong, to put the house in order. The help came, as it had to come, because Britain's strength lies in her weakness. It is not worth anyone's while throwing a spanner into the international monetary system by a false devaluation.