WORLD FINANCE

Otago Daily Times, Issue 26043, 5 January 1946, Page 2

WORLD FINANCE

WASHINGTON AGREEMENT OPENING OF NEW ERA By Norman Crump (Special) LONDON, Dec. 30. Since I last wrote the House of Lords has followed the House of Commons in ratifying both the Anglo-American Loan Agreement and also Bretton Woods. It is clear now that a suffjcent number of nations will have ratified Bretton Woods by December 31 to ensure its adoption. Thus both the International Monetary Fund and the International Bank will shortly come into existence. Like the House of Commons, the House of Lords adopted these proposals only with reluctance. But Lord Keynes returned from Washington just in time to take part in the House of Lords debate. He made it clear that the final agreement fell far short of what he and his colleagues had hoped to obtain when first they reached Washington. He also made it clear that the agreement represented the best terms that Britain was able to secure. I had exactly the same experience myself. At the end of October I arrived in the United States still cherishing the hope that Britain might be able to secure an interest-free grant. I had not been in Washington two days before I became convinced that the most Britain could secure was a loan with a waiver clause. This impression was confirmed -wherever I went. Some Americans frankly said to me: “It must be a loan even although we recognise that circumstances may prevent you from repaying all of it.” One added: “If you are able to repay it, it will mean that we in the United States will be short of sterling, and your act of repayment will help to redress the international monetary disequilibrium.” Lord Keynes went further in his House of Lords speech. He said that if it had been a strictly commercial loan Britain would have secured less favourable terms. There would have been no five-year moratorium, the period of repayment would have been compressed into fewer than 50 years, the interest rate would have been higher and the proceeds of the loan could only have been spent by Britain in the United States, whereas as matters stand Britain can use the dollars in any part of the world. Dollar Pool in Sterling Area The future of the sterling area played a prominent part in Washington discussions. Here a good deal of misunderstanding exists. Originally the sterling area consisted of a number of countries which found it convenient to peg their currencies to sterling, and to do much of their foreign exchange business through London. To achieve these objects they kept part of their monetary reserves in London. The war has not only changed the composition of the sterling area; it has had two further consequences. First, Britain bought far more from other members of the sterling area than she was able to sell to them. This, together with Britain's heavy war expenditure in countries such as India and Egypt, explains the war-time growth in London of balances held by sterling area countries —Britain’s indebtedness to the sterling area, in fact. Next, all the countries of the sterling area paid all the dollars they received into a central dollar pool administered by Britain; and as they paid in their dollars they received sterling in exchange. They further agreed not to draw more dollars out of the pool than they required for really essential purposes. In pursuance of this object, and also for other reasons, such as the shortage of shipping, the Government of each sterling area country instituted a system of import licences. Once an importer got a licence he was free to obtain his dollars or other foreign currency through his own bank. But in many cases an importer could get a licence only if he bought from another sterling area country. These restrictions were abnormal, and were due solely to the war. All sterling area countries, including Britain, desire to modify them as soon as possible. So did American opinion, for Americans are anxious to export to sterling area countries. The loan facilitates some relaxation. ■While Britain cannot use the proceeds of the loan to repay her debts to the sterling area, she can use any other dollars, including those which she either posseses to-day or acquires in future, for this purpose. It is not surprising, therefore, that the Americans asked that the loan agreement should contain clauses relating to the sterling area. _ One such clause provides that if over a year has elapsed since the loan agreement comes into force, all sterling and dollars received by a sterling area country in respect of new trade shall be freely convertible into any other currency. This foreshadows the modification of the sterling area’s exchange restrictions and also the gradual disappearance of the dollar pool. Conversion of Balances Another clause places on record the British Government’s intention to arrange with other countries concerned an early settlement of outstanding British indebtedness to those countries. Part of these sterling balances are to be made convertible upon agreement being reached; another part is to be made convertible by instalments over a period of years beginning in 1950; and the remainder is to be adjusted as part of the general post-wai' settlement. The fact that balances are to be made convertible does not mean that their owners will rush to convert them. On the contrary, they may be more willing to leave them in London once they know that they are free to withdraw them at will. What i envisage. in fact, is the restoration of the pre-war sterling area system, under which a number of countries found it convenient to hold balances in London and to transact their foreign exchange business through London. Nor would this be inconsistent with Bretton Woods. There is nothing to compel a country to use the International Monetary Fund if it prefers to settle its international business through other channels. On the contrary, the fund is regarded as a last resort and not the first resort of countries desiring to remit money abroad.