The Press THURSDAY, MARCH 13, 1969. The Franc, The Pound, And The Dollar

Press, Volume CIX, Issue 31936, 13 March 1969, Page 12

The Press THURSDAY, MARCH 13, 1969. The Franc, The Pound, And The Dollar

The “ Domino Theory ” has been put forward by some commentators on military and foreign affairs—usually when discussing communism’s expansion in South-East Asia. Financial strategists, too, hold a domino theory about rates of exchange. In today’s circumstances the franc is the weakest of the world’s major currencies. If the franc is devalued this will put renewed pressure on the British balance of payments, and the pound might have to be devalued. If the pound is devalued the United States dollar might have to be devalued—and then practically all the remaining currencies of the Western world. It is therefore in the interests of the world’s central bankers, traders, and governments to shore up the tottering franc.

As in its military or political applications, the domino theory of successive devaluations needs considerable modification if it is to be used as a practical guide to policy. For all its over-simplification, however, it is a valuable first step to policy formation, if only to dramatise the world-wide consequences of a major alteration in the exchange rate of even one currency. There need be no doubt that the franc — for all the $4OOO million in gold and other reserves held by France —is under heavy pressure. If the current industrial unrest lasts long enough to curtail exports seriously, or if industrial peace is bought by big wage rises which price French goods out of their export markets, the franc must be devalued.

Although neither of these possibilities can yet be ruled out, devaluation does not seem imminent. Monetary authorities in other countries have time to prepare—even to concert —their actions in the event of a French devaluation. If the franc were devalued 15 per cent, the "Economist” estimated recently, the pound might have to be devalued; if the franc were devalued only 10 per cent the pound would not. Similar calculations, no doubt, are being made in Washington in regard to the pound and the American dollar.

The situation is also being watched closely from Wellington. A devaluation of the New Zealand currency in the event of a devaluation of the pound is by no means as certain this year as it was in 1967. The recovery in the New Zealand balance of payments and in overseas reserves since then would enable New Zealand to withstand a further —moderate— devaluation of sterling, provided other exchange rates were not altered. In particular, parity with Australia has now assumed a higher priority than the maintenance of the existing exchange rate between New Zealand and the United Kingdom.

All these considerations are unsettling for bankers and traders, and the sooner the present uneasiness over exchange rates is settled, the better. Speculation on changes in exchange rates is an anti-social pastime which diverts the attention of the business community from international trade; trade benefits the economies of the countries taking part, but speculation merely puts windfall profits into the pockets of a few individuals.