STERLING CRISIS U.S. BANKERS ARE KEEPING A WARY EYE ON THE POIND

Press, Volume CVI, Issue 31139, 16 August 1966, Page 14

STERLING CRISIS U.S. BANKERS ARE KEEPING A WARY EYE ON THE POIND

(By

LEA FITZGERALD.

writing to the Australian -Financial Review” from New Yorki (Reprinted by arrangement'

Although the United States insists it will continue to support the British pound if necessary, American banking and business circles ri c paying increased attention to the pros and cons of sterling devaluation.

On August 5, the two leading financial dailies, the “Wall Street Journal” and the “New York Journal of Commerce." published long front-page articles analysing London devaluation possibilities. Most New York banks were advising their customers against “exposure” in sterling. But the general view was that, in any case, no immediate move toward devaluation was likely, in view of the Wilson Government’s recent measures. In an exclusive interview, Dr. Franz Pick, international gold and currency expert, told the “Review's” New York office: “We don’t look for the pound to be devalued, at least before the big monetary meeting in Washington at the end of September and not this year at all. Beyond that, it’s anybody’s guess.” He added: “The pound is by no means out of the woods. If a sizeable devaluation should come, we think the rest of the European Free Trade area would go along with it —and the dollar, too.” Last Stand ? The “Wall Street Journal” quotes an Australian official as saying: “We certainly would have to take a hard look at our currency in the event of a British devaluation.” Some American bankers believe that, if Australia in turn devalued, it would not go so far as a sterling devaluation might. The “Journal’s” survey found that “on one point, all the authorities are agreed—the devaluation question has not been made academic by Prime Minister Wilson’s tough austerity programme.” The newspaper added: “Indeed, the question may well have acquired increased urgency. For there is wide agreement that Mr Wilson’s endeavours may constitute the pound’s last stand.” It is widely assumed that this question is very much in the forefront of the minds of many United States treasury and Central Bank officials, although there is little outward evidence of it. “It’s not the sort of thing we talk about,” said a Washington official who keeps tabs on international monetary matters foi the Federal Reserve Board. “But we obviously would be fools if we didn’t think hard about the impact of a pound devaluation and what we might do to ease the impact.” According to the “Journal of Commerce,” it would be incorrect to infer that, in spite

of their caution. New York bankers generally fear Britain cannot avoid devaluation. Far from it —many bankers feel the United Kingdom “can and should pull out of this latest crisis” without devaluing. In foreign exchange I circles, however, the “Journal of Commerce” found “much talk of sterling devaluation being unavoidable later this year or in 1967,” Doubts Remain United States observers are acutely aware that even Mr Wilson’s tough measures have not removed world doubts about the pound’s future. When the moves were announced on July 20, the pound rose, in terms of the United States dollar, to as high as 2.7898, from 2.7866 just before Mr Wilson addressed Parliament. Since then, the pound has failed to pick up significant additional strength and has required repeated support from both the Bank of England and the New York Federal Reserve Bank. The crunch will come, it is suggested here, late this year when, regardless of the success of the price-wages freeze, unemployment rises materially. The reaction will then provide a strong pointer to whether Mr Wilson will win his battle.

The impact of a devaluation, authorities note, would depend to a large extent on its nature . . . whether, for example, it would be large or small. For every type of devaluation imagined, observers in the United States and abroad suggest a variety of possible consequences. Pressed to evaluate the effect of a sterling devaluation on trade and the international monetary system, bankers here offered varied opinions.

But all agreed that it was imperative everything should be done prior to any such action to ward off a round of competitive currency devaluations, such as developed in the 1930 s with catastrophic consequences.

The pound was devalued by about 30 per cent in 1949 without dire consequences. Since then, many countries also have devalued their currencies without disrupting world business. The latest major nation to do so was India, whose rupee was devalued by 36.5 per cent early in June. The pound, however, occupies a special position in world affairs. Analysts say its importance has grown since 1949. Reserve Currencies With the dollar, the pound serves as a so-called reserve currency, convertible into other currencies and used by Governments and people of many nations to settle their debts abroad. In addition, about a quarter of the world’s population is tied to the pound through the sterling bloc, whose members generally keep most of their reserves in sterling, banked in London. Most of the world’s traders, obviously, would feel the effect of a pound devaluation. Everything would depend on how it was done. Britain could devalue unilaterally by a large amount—more than 15 per cent—and risk the backlash of competitors devaluing equally and destroying the move’s effectiveness. Or the devaluation could be small and made only after consulting privately with the United States, France, West Germany and other major free world countries. Such action, most analysts felt, might avert counterdevaluations that could severely hurt world business and benefit nobody. Alternatively, Mr Wilson could decide to let the pound “float” within a much wider range than at present. Britain is now pledged to hold the pound between 8U.5.2.78 and 5U.5.2.82 in foreign exchange dealings, by buying sterling when its price drops near 2.78 and by selling pounds when their price approaches 2.82. To let the pound float below the 2.78 level would amount to a form of devaluation, according to analysts. Since devaluation would make British goods cheaper in terms of other currencies, thus encouraging exports, a major devaluation might well trigger counter-devaluations by other countries anxious not to allow Britain too sharp a competitive edge in world markets.

An unknown factor is the amount that other key countries might allow Britain to devalue without counter- devaluing themselves. The “Wall Street Journal” says that, at a private roundtable discussion in Brussels (recently, the consensus of half-a-dozen economists from i Common Market countries was 'that the six-nation European | economic bloc would probably | sit still for a pound devaluation of up to 15 per cent, but that anything more would trigger counter-action.

Sterling Bloc Reserves Especially vulnerable in any British devaluation are sterling bloc members. They would see the value of their reserves in London decline by whatever percentage sterling might be devalued. “Could, for example, the Scandinavian countries, Australia and Pakistan avoid devaluing also?” asked one currency expert in the “Journal of Commerce” survey. The “Wall Street Journal” Observed: “Sterling bloc parti- ! cipants, as well as other countries engaging in extensive trade with Britain, obviously would feel considerable competitive impact from a devalu-

ation. An Australian auto maker, for instance, would find prices of competing British cars lower in the Australian market. Such competition, most authorities say. would soon prompt counterdevaluations among many of Britain’s trading partners." Obvious first gainers from a wave of devaluations would be the world’s big gold producers—South Africa (the biggest), the Soviet Union, and others, such as Canada. Devaluations, of course would mean that currencies, in terms of gold, would be worth less. Gold producers would be able to command a higher price for a given amount of gold. What of the dollar, the world’s key currency? Whymight it be devalued, following the pound? The trouble, experts point out, is that America’s gold stock has dwindled alarmingly in recent years—to about $U.5.13,000 million from a record of about $U.5.25,000 million in 1949. U.S. Deficit For years, the United States, has been spending and giving away more abroad than it has been taking in from foreigners. As a result of this balance - of - payments deficit, dollars have been piling up abroad and many have been used to buy United States gold. Devaluation of the pound and other currencies would tend to aggravate the United States payments deficit, partly by making United States exports less competitive in world markets. Then foreign dollar-holders would become jittery and step up their gold purchases. United States gold stocks would shrink dangerously and the Administration would come under heavy pressure to devalue the dollar to increase the dollar value of its gold supply and improve its competitive position. But Washington has its ace-in-the-hole. The survey warns: “Although the United States pledges to sell gold at 35 dollars it is under no treaty obligations to do so. A United States official, who admits that “secret” contingency plans exist in case there is a devaluation of the pound, declines to rule out the possibility of a dollar devaluation at some point.” Apart from the danger of a run on the dollar if sterling devalued, the loss in value of the pound would have a serious impact on United States companies with subsidiaries in Britain—another reason why Washington is determined to help sterling. American firms’ direct investments in Britain totalled $U.5.4600 million at the start of 1965—up from 8U.5.4200 million a year earlier. Income received from these investments by parent United States corporations, after being changed into dollars, climbed to 5U.5.276 million in 1964 from 8U.5.199 million the previous year. Meanwhile, United States officials, concerned with the threat to the pound, take little comfort in the fact that Britain's 1949 devaluation did not spark off an international crisis.

In 1949, the survey noted, currencies of such war-torn countries as Britain were over-valued in relation to the dollar. The 1949 devaluations simply amounted to a realistic adjustment of sterling and other * currencies to the strength of the post-war dollar. “Today, however, no such situation prevails, it is widely agreed.” the “Wall Street Journal” remarked, “The dollar itself may well be over-valued, some economists say.”