DEVALUATION REVIEWED

Te Awamutu Courier, Volume 79, Issue 7147, 19 December 1949, Page 7

DEVALUATION REVIEWED

HISTORY, REASON AND POSSIBLE RESULTS ADDRESS TO ROTARY CLUB BY MR J. HAMMOND (Continued from last issue) Pressure for Devaluation Nine times since January, 1948 Sir Stafford Cripps denned most emphatically that the pound would be devalued, and even in the face of dwindling dollar reserves he appeared still dead set against it. Such p.n attitude may have been intended to bolster the world’s waning confidence in sterling, but it failed in its purpose. Foreign buyers were holding up orders in the hope of buying British goods cheaply after devaluation.. Undoubtedly there was American pressure for this step to be taken, but British opinion itself was pressing for devaluation, as it was realised that with or without American assistance they would be compelled to devalue, to cut costs, to increase output, and to tackle the problem of productivity. And the greatest pressure of all was probably coming from the International Money Fund. The choice was not, therefore, between “ accepting American dictation and the continuance of an independent British state.” It was between taking the steps necessary to make British economy solvent immediately with America’s active co-operation, or taking them in six months time in the middle of economic disaster and with America contributing no more than a melancholy “ I told you so.’” Tn a London theatre a quartet of actors dressed as Prime Minister C’ement Attlee, with his Ministers, Sir Stafford Cripps, Ernest Bevin, and Herbert Morrison, sang a doleful ditty: “ Oh what a terrible morning I “ Oh, what a terrible day ! We gotta horrible feeling Dollars a’int coming our way ! ”

At the beginning of September last, en route to Washington for a conference on the dollar crises, Ministers Bevin and Cripps tried not to look as doleful as they no doubt felt. Their own personal health was not good and they were going to have to wrestle with the bigger problem of Britain’s tejconjomic health. It w|as glenera&ly expected that the conference would produce no definite, radical or inspiring solution, but that a iseries of short range adjustments like a shovelful of gravel under a skidding wheel, might help pull Britain out of the immediate financial mudhole in which she was floundering. Such short range adjustments might include increasing stockpiling by the United States of istrategetic raw materials from the sterling area; simplification of United States customs procedure; reduction in tariffs and more United States investment in the sterling area. It was thought most improbable that a further loan would be asked or offered or that there would be devaluation of the pound. Breathtaking Cut

However, a fortnight later Sir Stafford Cripps returned to England and over the 8.8. C., after a preamble explaining Britain’s economic plight, he came to the sensational core of his message; Britain was devaluing the pound from §4.03 to §2.80. Even those experts who were dead sure that devaluation was coming, the size of the cut, 31%, was breathtaking. Cripps explained how th 4 move would help exports. For example a British car that formerly sold in the United States for 1500 dollars could now sell for 900 dollars. Therefore, more Americans might buy The “internal value” of the pound would be untouched—it would buy just as much as before of products made at home, or of imports from sterling areas. Imports from dollar areas would cost more —most importantly, wheat from North America. Since the British Government could not afford further food subsidies, consumers would pay the difference. Within a fortnight the price of bread would go up from 45d to 6d. Experts predicted that the British cost of living would rise 5% or even 10% in a few months.

Cripps said that the sacrifices involved in devaluation would be wasted if production costs were allowed to rise. By this he meant that appeals for wage increases must be rejected. The alternative would be “unemployment, bankruptcy, fear and misery.” Nevertheless, wage-freezing in the face of rising living costs was the bitterest part of his message for home consumption. The British move touched off convulsive reflex actions around the fiscal . world. All the Dominions devalued their currencies in proportion; Canada, a dollar country, devalued its dollar 10%. In the colonies the readjustment was automatic. Ireland, Egypt and Israel brought their pounds into parity with Britain’s. Norway, Denmark, Finland, Iceland, the Netherlands and Sweden made devaluation moves. Despite Cripps’ inveiglings against “profiteering,” Brifons who had bought South African gold shares, in anticipation of devaluation, made whopping profits. f Phony Exchange Rates

All this dislocation and hullaballoo will be amply balanced if devaluation accomplishes its immediate purpose; a breathing spell for Britain. Beyond that lies an even more important goal: freeing trade- from phony exchange rates. The §4.03 pound was phony because a pound would not buy in Britain as much as §4.03 would buy in the United States.

"The $2.80 pound may work no miracles; but at least it is honest. If honesty is still the best policy, Cripps has moved Ms country toward recovery —even though it may have to travel through more austerity to get there. Supposing that devaluation, combined with continued export drives, does result in an increase in the hard currency earnings of the sterling area, does this mean that we shall have a chance of obtaining more goods and services from the hard currency areas? The answer is that any extra earnings of those currencies must be used in the first place to rebuild the gold and dollar reserves of the United Kingdom from the present dangerously low level (£351 million) to at

least the figure of £5OO million which Sir Stafford Cripps has stated to be the minimum safety level. Secondly, allowance must be made for the fact that .considerable quantities of ?.r~?ntial imports are now being obtained free under Marshall Aid. That aid will be progressively reduced over the next three years, and is due to cease altogether in 1952. If the supply of these imports is to be continued they must thereafter be paid for in cash. Thirdly, in 1952, Britain is due to begin the repaying of the American and Canadian Hollar loans of 194(|. ft is therefore most unlikely that there will be more hard currencies available to us for spending on additional imports in the immediate future. Possible Results In the long run three possible results of the devaluation stand' out from all others. The present minor recession in the United States may deepen and British goods selling there at competing prices might cause tariffs to be increased thus cancelling out the advantages of devaluation. The low prices of imports may lead to a further recession in the United States and bring a real slump into which the rest of the world would be dragged. Finally the higher prices of dollar goods in Britain with resulting increases in living cadts may Imiake. demands for higher wages irresistible. This would give another turn to the inflation wheel, increase export prices, and again reduce or nullifying the benefits of devaluation.

Whether the final results of devaluation are good or bad it can never be a cure-a.ll. The real solution for Britain’s difficulties is for her people to live within their income. They must buy from dollar and other sources only what can be paid for from the proceeds of current exports, which means acceptance of a cut in living standards until they learn to produce and sell more goods. The British Empire has vast resources and wide open spaces. Lands hunger for civilisation. Over-popula-ted England now lies under the threat of the atomic bomb. Would it be possible for her to spread about half her splendid people among her worldwide possessions and establish and equip them in these new lands? Perhaps not until she makes some radical readjustments will Britain finally get away from her fundamental economic problems of which the present dollar crisis is but an outward manifestation.