INTERNATIONAL MONEY WHY STERLING DEVALUATION IMPERILLED WORLD SYSTEM

Press, Volume CVII, Issue 31549, 11 December 1967, Page 12

INTERNATIONAL MONEY WHY STERLING DEVALUATION IMPERILLED WORLD SYSTEM

IBy

Edwin L. Dale Jun.

. in the "New York Times.”]

[Reprinted by arrangement.]

The International Monetary System, whose quiet but effective operations seldom make headlines, suffered its most severe tremor in nearly a generation last month. By the end of the month it was surviving the shock, but the final outcome would not be known for months. A wave of gold buying in London made clear that matters were still unsettled.

The shock was, of course, the 14.3 per cent devaluation of the British pound, the second most important currency In the world. Although devaluations in Latin America and other parts of the less developed world are common, and there have been occasional devaluations of important currencies (the French franc in 1958 and the Canadian dollar in 1962), this was the first time anything as important as the devaluation of the pound had happened since 1949.

Normally devaluations affect primarily, or only, the people of the countries concerned. But when the value of the pound in international exchange is cut, the whole system is potentially imperilled, and with it quite possibly world prosperity. The very fact that 17 other nations changed their currency values in the first five days after Britain’s devaluation shows what can be involved, even though in this instance they were nearly all relatively small countries. Set Of Rules

To assess what happened, it is necessary first to describe briefly the International Monetary System itself. More than anything else, the system is simply a set of rules for dealings among nations. It is obvious that trade, tourism, international investment and the like cannot be carried on unless there are means of changing one national currency into another. The system sets the rules for this international exchange. By far the most important njle, laid down in the Articles of Agreement in the International Monetary Fund, is that each nation must have a fixed par value for its currency, meaning its exchange rate with all other currencies. At times the world has had “floating” or fluctuating rates, and some economists still back such a system, but the overwhelming majority of traders and government officials believe that fixed rates are Indispensible to an orderly flow of trade and other transactions. Each nation establishes its par value and communicates it to the monetary fund. Then it is not supposed to change the value unless it is in “fundamental disequallbrium” in its balance of international payments. That term means not just a temporary loss of a nation's monetary reserves because of a balance of payments deficit, but a persistent deficit.

Pegged To The Dollar

In such a case a nation can devalue its currency, making it cheaper in terms of other currencies. The change makes its exports lower in price and at the same time more profitable for its exporters, and makes imports more expensive. Its balance of payments then normally improves and Its reserves rise again. In practice nations peg the value of their currency to the United States dollar, which brings up the second basic rule of the system. The

United States, and only the United States, stands ready to buy and sell gold, in transactions with foreign governments, at $35 an ounce. This fact makes the dollar valuable as a “reserve currency” for other nations. They buy and sell dollars as necessary to keep their own currencies within 1 per cent of their par value. Unlike other currencies, the dollar can not be devalued, except by an increase in the price of gold, and no-one knows what would happen to the whole intricate pattern of exchange rates if that unthinkable event were to occur. Growth Of Trade

So much for the system. It has worked well—far better than the chaotic system of frequently changing exchange rates of the 1930 s—and it has been a major factor in the spectacular growth of world trade, now running at $2OO- - a year. This trade, in turn, has been decisive in the prosperity of many nations; the Netherlands, for example, exports close to 40 per cent of its gross national product. The pound was devalued last month mainly because Britain, after a series of balance of payments deficits, was running out of reserves. She kept borrowing to keep the reserves up—and international credit is an essential element of the system—but she finally decided she could not follow that route any longer. For the world at large, and particularly for the United States, the crucial aspect of the devaluation was its relatively small size. Ever since the threat of pound devaluation had begun to confront the world of finance, there had been an unspoken rule that any devaluation of more than 15 per cent would force the major trading countries of Europe also to devalue, though perhaps not as much as Britain, to keep their exports competitive. Threat To Prosperity

And European devaluations would Immediately have left the dollar In an impossible position. The United States already has a serious balance of payments deficit, even though we export more than we import, and it would be bound to get worse if all the other industrial countries suddenly lowered the value of their currencies and thus cheapened their exports. What the United States would do in those circumstances is not known, but whatever it did would radically change the system. In many minds such a situation, with its potentiality of chaos, would pose a major threat to prosperity generally.

possibly including United States prosperity. The problem for Britain was that it had long been part of the “conventional wisdom” that a relatively small devaluation would not work. Speculators and traders, It was feared, would not believe it was the end of the road. They would continue to sell pounds, Britain’s reserves would again come under pressure an .d * further devaluation might be forced. In any case, Mr Harold Wilson s Government, fully aware of the inevitable consequences of a devaluation of more than 15 per cent, cut the pound to only $2.40, or a devaluation of 14.3 per cent. Immediately two things happened.

Best Possible Face First, all the main European countries announced that their currencies would remain unchanged. All of the countries that subsequently did devalue have special trading links with Britain, and none is a major factor in world trade. As a measure of the change in the once great British Empire, Australia was among those who did not devalue.

Second, the International community made known that Britain would get standby credits of $3 billion, part from the Monetary Fund, an. part from individual' central banks. This would be available in case the markets were not convinced that devaluation would hold.

The United States Secretary of the Treasury, Mr Henry H. Fowler, putting the best face possible on a dangerous situation, called the devaluation and its aftermath another triumph of international co-operation, and in a sense, it was. But France, through calculated leaks to the press, kept pressing the view that this was not the end and that the dollar would come under pressure next. Movement From Gold?

In the long run, the world may well move away from gold as a monetary metal and rely less, also, on reserve currencies—the dollar and pound. The recent agreement in Rio de Janeiro of the members of the International Monetary, Fund on the principles of a kind of new international money, to be known as “Special Drawing Rights” (S.D.R.s), points in that direction. But that is for the future,. In the meantime what happens to the dollar and pound is vital for the continued working of the system. [Copyright 1967, the “New York Times” News Service.]