WEAKNESS OF STERLING

Evening Star, Issue 23175, 26 January 1939, Page 10

WEAKNESS OF STERLING

UNCERTAINTY A MAJOR CAUSE DEMANDS OF REARMAMENT FLOW OF “ HOT MONEY " TO NEW YORK The British authorities have brought their heavy guns to bear upon speculators by providing £350,000,000 worth of gold for the Exchange Equalisation Account, with which to support, if necessary, the value of sterling. Such huge resources must bo ample to offset any panic outflow of funds from London and to hold the exchange rate steady for some time to come. The recent tendency of “ hot money ” to seek refuge in New York, together with speculative sales, has led to marked weakness of sterling, but these things are not in themselves the root of the trouble. They are merely an expression of a weakening trade position and of uneasiness and uncertainty over politics and over future financial policy in London. Though the demands on sterling have been mainly due to capital movements, the drain for purely commercial reasons has been substantial. British exports were falling during most of 1938, though there has been a marked improvement in the last two months, and trade figures for the year should be much the same as in 1937. Britain’s earnings on account of services, such as shipping, however, are likely to be lower, and Sir Robert Kindersley, the well-known authority on Britain’s oversea investments, expects a considerable drop in the nation’s investment income in 1939 and 1940. • STUBBORN COSTS. While the requirements of rearmament make it difficult to reduce imports much, it is likewise difficult to increase exports, owing to those stubborn British costs which have given trouble ever since the Great War, and which are once again getting out of line with those of competing countries. Brices of American exports have fallen substantially, and the sterling countries continue to buy from America on the same scale, though they are themselves selling less. All these things have been putting a strain on sterling which is greatly aggravated when the holders of “ hot money ” take fright at unfavourable signs and rush their funds to New York. In a world of fluctuations and-chango no country can help running into such periods of temporary difficulties, which call for adjustment and some little sacrifice. Fear for the future of sterling, however, is due to the financial burden of rearmament and uncertainty as to how it will be met. How is Britain going to provide the £500,000,000 or more which will be needed in the coming year for arms? Can it be done without dislocating the industry of the country, without raising costs and crippling the export industries, without inflation?

A deficit of £250,000,000 seems the least which can be expected next year, and the method which is adopted to raise a sum of this magnitude on top of existing taxing and borrowing programmes must have a profound influence throughout the country. Though the trade balance may not suffer any very severe direct effects, indirect effects may be very considerable. Too much borrowing would tend to raise costs and encourage imports, to depress the gilt-edged market and stimulate an industrial boom. The opposite course of filling the gap by taxation would have a paralysing effect upon industry at the very time when full production is essential, and would deepen the trade recession. PROSPECTS OF ADJUSTMENT. No doubt the monetary authorities in their wisdom will select a suitable middle course. Heavy though the burden may be, once it is clearly defined, exchange markets will adjust themselves, and though political tears continue, the clearing-up of some of the present uncertainty should do much to strengthen markets against political shocks. Sterling has been excessively sensitive of late to rumours and alarms, simply because no one can form any reasonable idea of what its value should bo, either on account of current transactions or for the longer term, until future policy is made plain. Heavy burdens which are being laid upon British industry must have their influence. if Britain wore rearming madly in the midst of a peaceful world the strain would be quickly reflected in a depreciating currency. But Britain is not alone, and with every other country likewise loading its industry witli the heaviest possible public spending there is no reason at the moment to fear that sterling will be unable to maintain about its present position in relation to other currencies, even though all depreciate together. Though the dollar shows considerable strength, in the interests of their own export industries the American authorities are likely to intervene to prevent sterling from becoming too cheap.