The Press FRIDAY, SEPTEMBER 13, 1968. The Sterling Area

Press, Volume CVIII, Issue 31783, 13 September 1968, Page 14

The Press FRIDAY, SEPTEMBER 13, 1968. The Sterling Area

The SUSI7B6 million loan negotiated by Britain with the Bank of International Settlements is the sequel to British attempts to persuade 30 countries in the sterling area to stabilise their holdings of sterling. A British Treasury mission has visited Wellington and other financial capitals in the Commonwealth in recent months to explain Britain’s predicament: if too many official holders of sterling convert too much of their holdings into other currencies, a new run on sterling will be started. Provided these holders will undertake not to convert too much of their holdings into other currencies, the British have suggested, Britain will guarantee a proportion of their holdings against a further devaluation of sterling.

The Treasury mission was largely successful. Two months ago the Governor of the Bank of England (Sir Leslie O’Brien) returned from Basle with a conditional offer from the Bank of International Settlements of a medium-term standby credit of $2OOO million —the estimated amount of the volatile portion of the sterling area’s official reserves. The difference between the $2OOO million sought and the $1786 million granted probably represents the amount of volatile sterling funds which the holders have indicated they intend to convert to other currencies or gold. The Bank of International Settlements now has a direct interest in the stability of the pound, and has, indeed, become the main guarantor of the pound.

Western Germany and the United States, providers of most of the loan funds of the Bank of International Settlements, have more at stake than any of the other members of the bank in this standby credit for the United Kingdom. Any further weakening of sterling would at the same time threaten a devaluation of the United States dollar and a revaluation of the deutschmark; and both countries have formally announced their opposition to any change in their present exchange rates. To maintain their preferred exchange rates they were prepared to go to some lengths to prop up sterling, hence their support for the B.LS. loan. Support from Germany and the United States for the pound cuuld not, however, be continued indefinitely in the face of further British balance-of-payments deficits and speculative selling of sterling. The Bank of International Settlements will surely require evidence in the next few months that the British economy is being managed so as to produce an early surplus in the balance of payments. Devaluation has so far not turned the trade deficit into a surplus, and the introduction of an import surcharge or of import controls is now being widely predicted. Two weeks ago “ The Times ” spoke of the “ growing campaign for encouraging greater “ substitution of British-made equipment, machinery, “ and goods of all kinds for imported items ”. Such a substitution on a considerable scale is urgently needed if the promised surplus in the balance of payments is to be secured.

The performance of the British economy must be the principal influence in restoring and maintaining foreign confidence in the pound; others include the stability of other major exchange rates — mainly the United States dollar, the deutschmark, and the franc—the level of international trade, and the early addition to international currency reserves of the International Monetary Fund’s special drawing rights. For all members of the sterling area it is important that the latest move to stabilise the pound should be effective, and should be seen to be effective.