GOVERNMENT ECONOMIES URGED“Devaluation Will Not Solve Britain's Problem"

Greymouth Evening Star, 20 September 1949, Page 6

GOVERNMENT ECONOMIES URGED—“Devaluation Will Not Solve Britain's Problem"

LONDON, September 19- —British hc-wspapeis receivedjlie of the devaluation of sterling with grim resignation. The Times said it would have been far better if pleasures of retrenchment at Home could have come first, so that the guiding hand of disinflation could have played its part in restraining any advances in wages and prices that might threaten. The Financial Tinies said-: “The need is greater than ever for the retrenchment of Government expenditure, for curtailment of unrequited exports, for the limitation of over-ambitious programmes of capital investment, and for effective incentives designed to encourage ah ever-increasing emphasis on exports to the dollar area.’"

The Daily Mail declared: “Britain’s difficulties will not be solved by devaluation. The remedy lies in ourselves as a nation.” The British Communist Party’s newspaper, the. Daily Worker, claimed that the United States imperialists wanted devaluation because “they propose to invest their capital in the , overseas empires of the West European Powers.” _ ; The British .Labour Party's news- ; ..paper, the Daily Herald, says:■ “The £ had to- be devalued because the Government is determined to maintain full employment. Something had to be done to lower the Ipricos of. British exported goods.” i Effect On Share Prices I The City editor of the Daily Herald says that in the City a fall in Bri- ■ fish funds must be expected, because they are the nearest securities to actual money. Other fixed interest bonds will also reflect the fall, but gold shares will boom, as the devaluation of sterling means a rise in the sterling price of gold. Ordinary or equity shares should rise slightly, because they represent shares in fae- ! tories and businesses, the money value 1 of which is increased by devaluation. ■ The Daily Express says devaluation , shows that Britain need not have given herself over to Wall Street domination. The £ in the markets of' the world would have proved more; valuable if it had been allowed to go . free, but “the deed is done. The So- I cialists wanted American tobacco, fdms from Hollywood, and other soothing amenities for the electorate to whom they will shortly have to appeal.” “Semi-Police State” The newspaper continues: “The Socialists will never consent to free the £. It would mean the abandonment of their system of controls. If you set money free, you set the people free, and in a semi-police State, the people can never be free.” The Daily Telegraph says: “Devaluation shows that the honeymoon time of dollar-subsidised Socialism has drawn to a close, and that there is no alternative now but to face up 1o the harsh realities of our economic situation. How harsh they are can scarcely be exaggerated. We are. right up against things, and there is no way out, save hard work and tight belts.” “One effect of devaluation should bo to attract more American tourists to Britain,” says Reuter’s financial correspondent. “The tourist who previously kept away from Britain because he heard that British hotel charges and other prices were too high at the old exchange rate, will now be able to buy more pounds for his dollars, and will find a holiday in Britain mucTi cheaper, “Imports from the hard currency countries will not. cost any more dollars than before, though dollars will, cost more sterling. If wheat cost two dollars a bushel, it will still cost two dollars. Hope For Reductions “When sterling was devalued in 1931 ' almost the whole effect was to reduce dollar prices rather than to raise

sterling prices. This cannot be expected to the same extent this time, but some reductions may be hoped for. Not all British exports will bring fewer dollars than before. “Some Continental middlemen have been? buying British goods for soft currency and selling them to Americans for dollars. Devaluation should help to stop this and divert these dpi- , lars to Britain. The main reason for ; hoping that, on balance, devaluation will increase Britain’s supply of dollars is the fact that more of her exports will go to dollar markets, instead ' of soft currency markets.” Washington Approves Step In Washington, the news of sterling I devaluation was received with general approval by United States Congressmen, who considered that the ' British action would improve and strengthen the. relations between America and Britain. Some senators, while welcoming the devaluation, emphasised that such a move could not alone solve the current economic problems of Britain and other parts of the world, although it would help i towards that end. I Reuter’s Wall Street correspondent Lsays that there is not the slightest doubt that the new rate of 2.80 dol- ' lars to the £ sterling came as a shock to Americans. Even a large section ’ of the American financiers and econo- ; mists who had been urging devalua- ; lion as one of the prerequisites for i closing Britain’s dollar gap, did not ! expect such a low rate. Bankers and industrialists interpreted the new parity as grim factual evidence that Britain acknowledged the probability of smaller dollar loans from the United States and that all foreign aid would be terminated in 1952/ Although ihe devaluation announcement was not a surprise, Wall Street generally did not expect it for some months. The American demand foi- British goods had contracted severely during the recent, devaluation scare, and losses by importers because of the devaluation Will not be severe. Two-fold Effect Now that devaluation has been accomplished, there will be an immedi--1 ate two-fold effect which will benefit Britain:—(l) Britain may expect a revival of American merchandise buying, especially in bulk crude products quoted on a sterling basis; and (2) the new exchange rate will result in the immediate elimination of all -’cheap” sterling. In the “cheap” sterling category, Americans as well as European traders have been buying merchandise in the sterling area through payment in transferable or blocked sterling. Through these three-cornered transactions, Britain was able to reduce her sterling debt, but received no dollars. In all likelihood, the transferable sterling markets which operated in New York s and overseas will disintegrate almost immediately. Wool brokers said the cheapening of Dominion wools by about 30 per cent, as a result of the devaluation of sterling would induce American mills again to compete actively in the Dominion raw wool markets.

WHAT IS INVOLVED IN DECISION

LONDON, Sept. 19.—The die is cast. The devaluation of sterling and of a number of other currencies in terms of gold and United States dollars is an accomplished fact, and the new rate is 2.80 dollars to the ■£, instead of 4.03 dollars. This is a rather bigger cut than had been generally expected. When making the cut, however, there is everything to be said in the present circumstances for making it slightly greater than a strict calculation of economic parities would seem to require. This reduction in the rate of exchange is, in fact, the movement against which the British Chancellor of the Exchequer (Sir Stafford Cripps) has so long fought a stubborn rearguard action. The decision which has just been announced has become increasingly probable for some weeks past. But it became virtually inevitable from the moment the annual report of the International Monetary Fund was published. That report set the exchange pate factor in its true context, ns one of the reasons for the world disequilibrium of balances of payments, it showed how wide a gap separated the prices of manufactured goods in dollar markets from the export prices of Western European countries calculated at the now defunct official parities. Ways To Close Gap The report argued with inexorable logic that there were two ways in which this gap might, be closed, and

in which therefore the deficit countries might begin to pay their way in their relations with, the hard currency countries of the Western Hemisphere. The first was a vicious deflation in the deficit countries, reducing tjieir costs to a point at which they might again compete in the hard currency markets. That was swept aside, and with obvious justification, as being politically and socially impracticable. The second was an adjustment of exchange rates which would, in fact, take into account the existing purchasing power of all the currencies concerned. It is this second alternative to which the member countries of the International Monetary Fund have been driven. The realignment of currencies, whether it be regarded as a devaluation of some or, an upward valuation of others, is not more than the acknowledgement of an. accomplished fact, The relative changes in the domestic value of those currencies had already occurred. Unofficial Currency Markets Wherever free foreign exchange markets were allowed to function, the external value of those currencies showed their true relation. For a long time past, an increasing volume of international trade involving sterling had been transacted at rates other than the official exchange rate. These _ unofficial transactions had caused concern to Britain and the rest of the sterling area. The adjustment of,_the official rate to something like true economic parity should have the immediate result of allowing British traders to recover

the business they had lost in the last two years by this development of free and unofficial markets, to which they wore not allowed access. While devaluation is the official acknowledgement of an accomplished fact, it is also an opportunity. It is an opportunity to Britain and the other countries which have been running a dollar deficit to enlist the price mechanism in their attempts to close the gap in their balance of payments with the dollar countries. Hitherto, exports which should have gone to hard currency'.markets have been attracted by the unduly high prices offered in. soft currency markets. The realignment of exchange rates should remove some at least of these handicaps to a more normal and desirable pattern of international trade. It should no longer make the direction of imports to hard currency, markets dependent upon exhortations and appeals to patriotism. Economic incentive should again be pulling in the right, , and not the wrong, direction.

Many Factors Involved i But "if this opportunity offered by i exchange Adjustments is realised to the : full, devaluation must obviously go hand in hand with a policy of retrench- ! m°nt on the part of the deficit counI tr its. Without that, and without peri sistent attempts to increase produc- ' tivity, devaluation will merely be a I “shot in the arm.” to be repeated in i ever stronger doses, and at ever shorter : intervals. . The economic consequences of devaluation depend upon the interaction cf a good many factors whose behaviour it is extremely difficult to predict. Tire effect on the level of sterling prices, for instance, depends upon the extent to winch the rest of the world follows, or in some cases exceeds .sterling in readjusting the gold parities. It depends upon the extent to which we can divert our purchases from dollar sources which will now become much dearer, to others which will be no dearer, and majf even be cheaper. It depends also upon the extent to which there is a really clastic demand in dollar markets for goods of the deficit countries, goods which will now be considerably cheaper in terms of dolJars. ' ‘ Finally, it depends also upon what i happens to the level of dollar prices themselves. That is perhaps the most important and uncertain factor of all. Experiences After 1931 In assessing the likely impact of this 'realignment of world exchanges in ; terms of dollar prices, the experiences I of the post-1931 period may have someto teach us, though conditions in the two eras are not exactly comparat>After sterling left the gold standard in 1931 and depreciated in terms of gold and United States dollars, the effect was to accentuate the forces of deflation acting in the gold currency countries. Sterling prices remained relatively steady. It was gold and dol- : lar prices that plunged down, to achieve a readjustment with the lower exchange value of sterling. This, in its turn, led to an intensification of the economic depression in the dollar and other gold bloc countries, until later in the 1930’s they were themselves compelled to devalue their currencies in terms of gold. It would be Unreasonable to expect an exact repetition of this experience, but it would be unwise to dismiss its relevance out of hand. What the re-

alignment of exchange rates is mtendedto achieve.is the readjustment of the pattern of.intemational trade which is necessary to remove the abnormal surpluses and deficits now spattering world-payment accounts. This will be done by encouraging exports, from the deficit to the surplus countries—from those which have devalued to those which have not. . . , . The American ■ Economy It still remains to be seen how the United States economy will adjust itself to the two-fold impact of restricted exports and a larger inflow, of imports. If, as is possible, dollar prices can take part of the impact of this exchange realignment, irs effects on terms of trade and on the costs of livin'? of those countries which have just, devalued, will he correspondingly minimised. . I'-roin the point of. view, of Britain, the devaluation profit and loss account is charged with items on both sides of the ledger. There, are some that are unconditionally unfavourable. The weight of Britain’s dollar obligations—and they are formidable—will be proportionately increased. The cost of some e'ssential imports, such as Canadian wheat, will rise, though all such contracts should be renegotiated at the earliest opportunity.. There are substantial British outlays, such as contributions to international organisations, that have to be paid in dollars, and they will cost more. The potential advantages to Britain, on the other hand, are substantial. But their weight depends upon the vigour with which the opportunities, presented by devaluation are used. There must, be none of the psychological “let-up” which might so . easily derive from a feeling that devaluation will do for Britain. what only hard work, abstinence, and efficiency will achieve. But if those solid dualities come into play, the advantages of allowing economic incentives to guide Britain’s trade where it should go, to encourage her to produce the things for which she is best fitted to make and sell, there should be no cause to regret the decision which has just been made. World confidence in sterling should not be adversely affected by a decision which gives sterling something like its real value, and which should nave the effect, of removing the black and free markets which have for so long undermined confidence in the I’.