DEVALUATION REVIEWED

Te Awamutu Courier, Volume 79, Issue 7146, 16 December 1949, Page 4

DEVALUATION REVIEWED

HISTORY, REASON AND POSSIBLE RESULTS ADDRESS TO ROTARY CLUB BY J. HAMMOND The following is an address bn the reason for, the history leading up to, and the possible repercussions of the devaluation of the pound sterling. The address was delivered to the Te Awamutu Rotary Club recently by Mr J. Hammond. On Monday, the 19th of September last, Sir Stafford Cripps surprised the world by announcing that £1 sterling would in future exchange for 2.8 dollars instead of for 4.03 dollars. To consider the devaluation of sterling, we have to start somewhere and there can be no better time than when Britain’s greatness began—tne 17th century, when, following the early exploration of Frobisher, Drake, Raleigh, and others during the 16th century, colonies were founded and great trading companies such as the East India Trading Company and the Levant Company were formed to set up trading- stations and open new markets. Al) this was done, mark you by private enterprise and not by the Crown. By the treaties of Utrecht and Paris, a share was taken of the markets, hitherto closed, and England became a seafaring nation. Her merchant fleet expanded and gained a monopoly under the Navigation Acts so that by half way through the 18th century, the old methods of production were unable to meet the demands of expanding trade and there followed an era of invention and a revolution in methods known as the Industrial Revolution, dating roughly from 1770 to 1830. The inventive genius of Englishmen was given full scope and Kay’s Flying Shuttle, Hargreave’s Spinning Jenny, Arkwright’s Water Frame, Cartwright’s Power Loom, and Watt’s Steam Engine combined with England’s access to raw materials gave her an enormous lead over the rest of European countries, leading to a great increase in the country’s wealth, the growth of free | trade principles and the conversion of England into predominantly a manufacturing country, thus making her the world’s unrivalled banker, invester, middleman and shipper. The earnings of her exports, services and investments abroad gave her security, incentive and strength. It also brought bad conditions of labour and the growth of the struggle between labour and capital. Rise of Competition

Then, in the last decades of the 19th century a mighty competitor arose to threaten British trade. U.S. productivity, combined with almost unlimited raw materials caught and then surpassed Britain’s, so that as the 20th century progressed Britain found she was increasingly unable to earn enough abroad to pay for what she needed abroad to maintain her living standard. Her imports became double her exports, but she was saved by her enormous overseas investments which produced a balance of trade which helped Britain to carry on fairly comfortably until the impact of World Wars I and II enabled America to produce heavily for expert. Britain, meanwhile, manufactured almost entirely weapoans of war, and Britain’s manpower went into uniform. Heavy British shipping losses durWorld War II not only resulted in millions of precious dollars of cargoes being lost on the ocean floor, but as America demanded a cash and carry basis, Britain had to sell those overseas investments which she had been building up since the industrial revolution. Finally she had no disposable overseas assets left • whilst lack of manpower and the devastation of her industry through bombing prevented her from supplying would-be customers. Her ships, which continued to be sunk, were replaced by American ones until the latter country dominated the sea lanes and thus the three outstanding points of Britain’s greatness, her productivity, her overseas interests, and her. command of sea trade had disappeared and, except for her ability to fight, she was impotent. Damage of War

Lend-lease and big loans from India kept her going until the warfinished. She then found herself impoverished, devastated and unbalanced and with the knowledge that even when she did recommence production, bankrupt Europe, previously a great buyer of British goods, would now be able to take little of them. In the New World, suspension of British supplies in 1939 had brought forward a crop of new industries which had displaced Britain from many markets. And the United States had become a Colossus. However, only dimly realising the tasks ahead, British workers courageously faced up to long years of uninspiring food, deprivation of many luxuries and the annoyance of seeing the goods they were producing, and needed so badly, being shipped overseas to pay for the food, raw materials' and equipment which it was essential for them to have. Propped up by $2 billion of lend lease, an extra $3.75-billion loan, the Canadian $1 billion loan, and later the Marshall Plan which produced $1.25 billion, Britain was able to avert an otherwise hopeless position. Britain’s will to recover distinguished her from many of the other devastated areas, and her postwar recovery progressed favourably until April, 1949. Shipbuilding was stepped up, and in 1948 she built 55 per cent, of the world’s ships, attained world supremacy in cycle and motor-cycle manufacture, increased tractor production from 59,000 in 1947 to 118,000 in

1948, operated her extensive overseas oiiwells, increased her coal production by 11J millions, and dn balance a slow steady gain in overall productivity took place, industrial and agricultural production being up in Britain by about 20 per cent, over prewar, and British exports 50 per cent, above the 1948 level. The overseas deficit fell from £630 millions in 1947 to £2BO millions in 1948. Hope of a Balance

At the beginning of 1949, however, Britain could only hope to strike a balance —< including a dollar balance <-by 1952. Even this left unsolved the problems of raising significantly her attentuated standard of living and repaying external debts contracted during and after the war. When clothes rationing ceased early in 1949,

observers noted that high living costs and taxes had 'so cut the average British family’s purchasing power that very little money was left for the high-priced clothes available.

Throughout this period, Britain’s 23 million labour force remained fully employed. Material prosperity was absent, but security existed in that unemployment was negligible. Although wages remained fairly stable and inflation was avoided, very stiff pressure continued for pay increases all round and many were granted. • The improvement in export figures early in 1949 gave rise to hopes that Britain was gradually reducing the gap between the value of imports and the value of exports. Dollars were still being provided by the United States, but reserves of gold and dollars were being held at somethingmore than £5OO million, which was considered to be the minimum compatible with safety. Suddenly the reserves fell away to £351 million, which was /lot much more than twothirds the safe minimum, financial circles spoke in terms of crisis, confidence diminished and Britain was teetering on the verge of bankruptcy, and, since she acts as banker for the whole sterling area, her plight also meant the danger of panic and dire economic distress from Manchester to Melbourne. Dollar Gap Crisis

The cause of this crisis was the “dollar gap” which is due to the fact that Britain, like most X)f the rest of the world, spends more dollars than it can earn in the United States. More correctly, we should speak of the “hard currency gap” of which the dollar is a major part. To be even more precise we should speak of the “nett gold and dollar deficit of the sterling area” which is calculated before taking account of receipts from dollar loans and from Marshall Aid. In 1947 this deficit or gap was £1024 million and in 1948 the deficit was £423 million. For the first threequarters of 1949 it was £372 million, which works out at about £5OO million for the year and means that the improvement of 1948 had not been maintained. And it was this factor that had brought the reserves down to £351 million, despite Marshall Aid and the Canadian dollar loan. Britain had tried to meet this situation by more production, increased exports and by cutting dollar expenditure, but her efforts to get dollars were lessened on the one hand, by the fact that the British manufacturer has «uch an easy and profitable market in Britain and the area generally; full employment in Britain and large sterling balances held by the Dominions and other soft currency countries means that British business Interests can earn big money easily in the sterling area. On the other hand, competition in the United States is keen, prices are lower and a very | high quality of goods and attractive merchandising are essential. The British are not good salesmen and do not adapt their products to what is wanted in the United States. In addition, British goods are kept out by United States tariffs and unfair administration of them. The American tariff has been reduced, through trade agreements, and price changes, from a weighted ad valoren equivalent of 48 per cent, in 1930 to one of 15 per cent, in 1948, which is approximately the average level of the New Zealand tariff. Even a tariff as low as 15 per cent, makes the task of the British exporter difficult, whilst American customs officers are adroit in interpreting their duties for the benefit of United States manufacturing interests Shut out goods on such flimsy grounds as that some small'part ef their fabrication offends certain health regulations. Britain could, not and would not be permitted to borrow dollars indefinitely; yet if she wished to maintain her by no means high standard of living she must-have dollars, and the only way she could get them would be by securing entry for more of her imports into the United States. • She could do this only by lowering her costs of production or by currency devaluation. Reason for Devaluation

Let us examine the former remedy. British industry had grown ineffllcient and complacent long before Labour come to power, and this was one big reason why her goods could not compete overseas. But her prices were also high because British industry helps support Labour’s elaborate welfare State, and Government over-ex-penditure had driven up costs ‘produced inflation, swollen civil services, and deprived industry of man-power, thereby increasing the costs of Britains exports. To get herself into trim, Britain would have had, at least temporarily, to lower her standard of living, cut down on her hard currency expenditure by the development of. alternative sources of the supply of goods within the •sterling area abandon some of Labour’s pet projects, re-dep’.oy British workers to industries where they were needed most-, causing temporary unemployment, and compete for overseas markets, especially in the hard currency areas for all she was worth. These measures, designed to close the dollar gap, though they are of the right kind, would probably have been too slow, and too small, and in any event the Labour Government was neither prepared to, nor capable of, taking them. So their only alternative was devaluation. Now, in the post-war seller’s market, devaluation could have given no advantage, since it could not have reduced world prices of British imports, nor could it have helped to sell British goods which were already finding a ready market. To-day, however, we have moved across to the buyer’s market, and sales resistance is growing. Currency devaluation would tend to encourage exports and discourage imports, which is what Britain wants. To earn the same number of pounds, British exports could be sold for fewer dollars and thus sell in America at competitive prices, although if Britain’s dollar earnings were to be increased the volume of goods sold in the United States would have to increase by more than the fa’l in price. At the same time, imports from the United States would cost more pounds, and as a result the demand for some of them would be lower; but since most British imports from dollar sources are already cut to a minimum their vo’ume could hardly be reduced much. Therefore, devaluation could be successful only if Britain earned more dollars than before, and this in turn would be dependent on the United States increasing her purchases by

the requisite amount and by the sterling area being in a position to supply the additional goods and services.

“ Elasticity of Demand ” The answer to the first part of this problem depends on market conditions in the hard currency countries and on what is called the “ elasticity of demand.” In recent statistical calculations it has been estimated that the elasticity of demand for United Kingdom exports is greater than unity. In simple language that means that a reduction in the price of British goods will result in a more than proportionate increase in the volume of sales. If this is correct then there should be a good chance that the sterling area will increase its earnings of hard currencies. This view is supported by the fact that sterling area goods are only a marginal element in the United States market. 'They are, in effect, only a drop in an enormous bucket. It might be possible, for example, to double the sales of certain sterling area goods in the United States, which would be a substantial achievement, and yet make little impression on the market. One of the reasons for the lagging of sales of British goods in that market earlier this year was said to be the relatively high price of those goods. A fall in price could, therefore, make a very substantial difference. As to whether the sterling area could supply the additional goods, this would require consideration of each commodity individually. In some cases the necessary increase in exports might prove difficult, whilst in others there might have to be a substantial diversion of goods away from the home market and soft currency markets. Obviously, prodigious efforts in production and salesmanship would be required.

(To Be Continued)