Devaluation Of The Pound

Grey River Argus, 13 October 1949, Page 8

Devaluation Of The Pound

The High Commissioner in New Zealand for H.IVI. Govt, in the United Kingdom states: The decision to fix a new rate and what that rate should be was taken entirely on the initiative of the United Kingdom Government. The Cabinet decided on the change in principle before 4he Chancellor of the Exchequer left for Washington. The International Monetary Fund was consulted and has concurred in the Government's decision.

The change of attitude on the part of the Government has been adopted to meet the changed .turn of events. The Government have always made it clear that progress towards closing the dollar gap depended essentially on a steady and continuing increase in exports to dollar markets. Far from an increase, the sterling area suffered a severe reverse in the’kecond quarter of this year, when the gold and dollar deficit of the sterling area rose to an annual rate of £628 million (almost double the annual rate of £328 million in the/ first quarter). This was partly due to increased payments the United Kingdom for imports of dollar goods, but also and in large P art to a fall in the dollar income of the United Kingdom and other sterling area countries mainly due to the following three factors:-

(1) The expectation of \a change in exchange rates. Rumours and expectations of a change in the rate encouraged people overseas to whom the United Kingdom owes dollars to press for payment, while those who owed the United Kingdom dollars tended to delay payment. The existence of unofficial cheap rates for sterling was a further factor causing a loss of dollar earnings for it enabled merchants in third countries to buy sterling commodities cheaply to sell them at cut prices in dollar markets and so to deprive the sterling area of dollars.

(2) A sharp fall both in the prices and in the amounts of sterling area raw materials sold to the United States.' This reduced the dollar earnings of the rest of the sterling area by one-fifth. (3 A reduction in shipments of United Kingdom goods to dollar and other hard currency markets as a result of more competitive selling conditions. (The price of United States manufacturers has been falling since the third quarter last year, but British export prices were rising till the turn of the year and have since shown little change).

United Kingdom exports to North America were running at an annual of £143 million in the first quarter of this year; they fell to £ll9 million in the second; and at annual rate of £ll7 million in July and August have shown no signs of recovery. The gold and dollar reserves of the sterling area at mid-year stood at £406 million and they have continued to fall even after allowing for Marshall Aid. To buttress the reserves which serve the whole sterling area (and the continued existence of the sterling area is essential to the stability of world trade) immediate action had therefore to be taken to reduce dollar imports and to increase dollar exports. In Mid June the United Kingdom Government ordered a standstill on dollar purchases and it was later agreed with the other Commonwealth members of the sterling commonwealth to aim in 1949/50 at a reduction in dollar imports to a level 25 per cent, below the 1948 rate. But a balance cannot be created simply by cutting dollar imports. Cuts are inevitable but they do not provide a solution.

’Die sole remaining lino of attack —the rapid creation of an increased opportunity for expansion in exports to dollar markets— lay in lowering the dollar exchange rate of the pound sterling, which will make British goods more attractive in dollar markets and, at the more favourable exchange rate, will provide a powerful new incentive for exporters to earn more dollars. What the change does is to make British exports more competitive in the dollar markets of North America and in other markets —such as Belgium, Switzerland, Persia, South Africa —where dollars or their eqt'.ivalent can be saved or earned.

The price of bread in the United Kingdom is being immediately raised. Other retail prices will ultimately tend to increase as a result of increased raw material prices, but there is no reason to expect a . significant increase in the cost of living; The United Kingdom Government is appealing to all sections ol the community to refrain from increasing prices in the shops and to refrain from pressing for increased wages and other personal incomes. The success of this policy is of first-class importance if the full advantage from the adjustment of the exchange rate is to be achieved.

The following are the answers to some likely questions: (a) Won’t other countries devalue and offset our advantage? Answer: The decision affects only the United Kingdom and Colonies but many other Commonwealth Governments and Governments of foreign countries are following suite. As regards the sterling area countries the effect of their following the United Kingdom lead is to stimulate their exports to the dollar area, to make their imports from the dollar area more expensive for them, and to tend to maintain the prices which their goods will sell in the United Kingdom market. As regards other countries we should not expect adjustments of their exchange rates to have detrimental effects upon the United Kingdom. They will like the United Kingdom to better able to compete in dollar markets, which will help them to improve their dollar position and thus help us all to move towards world equilibrium. United Kingdom exports to the dollar area will compete more with United States and Canadian suppliers than with other European exporters. (b) What about countries which quote sterling at the wrong exchange rate with the dollar? Answer: We hope that this problem will no longer arise.

(c) What about countries which have been given revaluation guarantees? Answer: These guarantees will of course be honoured by the United Kingdom Government. (d) Will th e change in the rate affect the value of Marshall Aid? Answer: Marshall Aid is paid in dollars and the quantity of goods which the United Kingdom receives it will be no different whatever happens to the value of the pound sterling. But the United Kingdom Government will collect a larger equivalent in pounds sterling from the sale of goods in the United Kingdom and that will increase the amount of money in the counterpart fund. In the present circumstances the effect of that is disinflationary, as the fund is used for the retirement of debt.

(f) What about repayment of the American and Canadian loans? Answer: The burden will be increased in that the fall in the dollar price of British goods in the North American market will require more goods to be shipped to wipe off these dollar debts when they come to be repaid.