The Future of the Pound
By SIR ARTHUR SALTER FrHE pound is, and must remain, the basis of the economic life of Great Britain. Its future should, I suggest, be, during the present period, a main objective of all British economic and financial policy.
There can be no question of our immediately returning to gold. Before we do so (if we decide that we will) several things are necessary. We must decide at what parity to stabilize, and we are not in a position to do so until we know whether gold prices are going still to fall, and have learnt more than we know now of our real balance-of-trade position and the future of some of the main items in our balance of payments (such as our foreign investments). Secondly, we need to secure the liquid resources to support, beyond risk of a second failure, our new decision ; we should have chosen the worst of all possible alternatives if we stabilized again, and again lost our parity. Thirdly, we need to know whether, apart from the immediate incidents of the present crisis, there is a fair prospect of the gold standard being so worked in future as to secure a reasonable stability in world prices ; and that will certainly mean substantial delay.
In the meantime we must have an immediate policy while we are deciding and until we can apply our ultimate policy. This can only be, I think, the substantial main- tenance of the present internal purchasing power of the pound—i.e., the prevention of any substantial increase in our general price level. It is essential to bear in mind that, now we are off gold, this is the pound's only anchor of real value. Its exchange value from day to day, of course, depends upon the offers for purchase and sale for all purposes, movements of capital, payments for imports and exports, &c. But one factor in these daily trans- actions, potentially of great importance, is the view taken by those who deal or speculate in exchange as to the future value of the pound. So long as the pound con- tinues to buy about as much here as at present, exchange value may fall, but it is on an elaStic cord which is bound to bring it back (except, indeed, so far as gold prices continue to fall). If, however, cost of living so increased that there was a general upward movement in the wage and cost-of-production level, this forward estimate would always be based, on anticipation of a further fall in the pound's purchasing value. Exchange value would then fall, and very soon, instead of being brought back by the anchor of internal prices, it would itself drag that anchor ; speculative " bear " operations might become the driving force of the whole process, and there is no natural end to it. Exchange value falling would involve a further increase in the sterling cost of food and raw materials ; that, in turn, a further increase in the cost of living ; that, a further increase in wages and costs, and therefore again a reduction in the real value of the pound ; that, a further exchange fall, and so on, True, the movement can be stopped, but only by very drastic and difficult action. In France it was only when the franc had fallen to one-fifth that the fall was arrested. Having seen the " vicious spiral " in many European countries, I should be terrified if we were caught in it here.
The maintenance of the pound's internal purchasing value is not an impracticable objective for the present period. True, the fall in exchange value involves some increase in the cost of our imports, and some increase in the cost of living. But as gold prices have also fallen, the increase at a $3.50 pound is not great ; only a. fraction of it gets through to the cost of living, and the cost. of living might rise some points (as it has recently fallen) without causing an increase in the general wage and cost-of-production level. The danger will, however, obviously be enormously increased if, to the unintended increase in the cost of living which is caused by depre- ciation, we add a further increase by deliberate policy, through tariffs, especially on such articles as affect the cost-of-living index, If this is our objective, we must, of course, face frankly the fact that it gives us no relief from the burden of our internal debt. That would only be given by an actual increase of internal prices ; present exchange deprecia- tion does not give us an equivalent relief, for everything in regard to an internal debt turns on internal prices— it is these that affect the real value of the dividend to the consumer and the yield of revenue out of which they are paid. I do not say that internal prices should not rise at all, but only that they should mg rise to such an extent as to put up the wage and cost of production level ; to that limited extent, not more than, say, ten per cent., we get a little relief on our internal debt. For the rest, on this policy, it remains a problem of taxation and conversion.
Why do I say that we must not contemplate a further fall, say, to half the present real value—or even, like the French franc, to one-fifth—with a proportionate relief on our internal debt ? There are some who have advo- cated this, but have they considered the consequences ? Apart from the loss to the holders of Government Bonds, such a fall would involve labour working its way painfully back to the standards of real wages slowly acquired in the last century, through a series of disastrous wage disputes. It would mean an upward adjustment, with controversy at every point, of every scale of social insur- ance, unemployment, health, widows' and old age pensions, to maintain even a diminished real value. It would mean the loss of a half, or four-fifths, of the income secured for old age by fixed investments, by savings, and by every form of health insurance or annuity. But in addition there is one other consideration of the utmost importance. Almost half of our investments abroad are in the form of obligations by foreigners to pay us a fixed number of pounds sterling. These amount to over t100 millions a year. If the pound lost four-fifths of its value, we should have made the foreigner a present of over £80 millions a year. We cannot afford this. We used to have a surplus on our balance of payments of over £200 millions a year. This has disappeared, and the balance is now adverse. If we lost a further £80 millions a year of our Power to purchase abroad we should have the greatest difficulty in buying even our essential imports of food and raw material, and our standard of living might be substantially lowered.
But if this is our immediate objective, how should we envisage the future ? Should we aim at returning to gold—and, if so, on what conditions ? A managed cur- rency system involves both difficulties and dangers, and it is in particular a disturbance to international trade on %which we are more dependent than any other country. If and when, therefore, there is a reasonable prospect of the gold standard working well in future and maintaining the general level of prices fairly stable, I think we should aim at returning to gold, although not at the old parity • unless world gold prices have gone up a very great deal in the meantime. But before there can be such an assur- ance, there must, at best, be a long delay—and it in- volves many developments at present very doubtful. First, we need the stability of gold prices (preferably after an initial rise to counteract the abnormal fall of the last two years) to be accepted as the definite objective of the Government and Central Banks of the principal coun- tries. Then, to secure it, continuous and effective colla- boration by the Central Banks is required. It might, indeed, become necessary in case of gold scarcity to secure simultaneous legislation reducing the present statutory ratios for currency reserves. In addition, however, the " mat-distribution " of gold (which is the immediate trouble) needs correction, for if gold continues to flow to two countries and is not by them used as the basis of as big -a superstructure of money and credit as in the countries from which it was exported. a continuous deflationary influence on prices is inevitable. A change in the mone- tary policy of the U.S.A. and France would therefore be desirable. But the flow of gold to these countries cannot be stopped by their monetary action alone. The main cause of it is that the balance of payments is " positive " (that is, that more is owed to them in respect of past loans and their present balance of imports and exports than they owe), and that this gap is not bridged (as it was before) by corresponding new lending. If the American and French investor would lend again on a large scale the movement of gold could be stopped or reversed. But his confidence has been very badly shaken, and is likely to be further shaken before the winter is over ; and he is very unlikely to lend again on the scale required in any near future. Remissions of reparations and allied debt would, of course, help ; but any practicable concessions, though they may help, will not solve the problem. A deliberate policy of increasing the supply of money in America and France would again relieve the position— especially if it were allowed to have its effect in reducing their exports and increasing their imports—but it presents great difficulties, as would a reduction of their tariffs. In time a balance will be attained, so far as such action is not taken, partly by default in their payments by debtor countries, and partly by an inevitable reduction in the exports of gold-surplus countries. But this is a long and painful process, involving gold deflation all the time.
We cannot, of course, in any case hope that all the action and agreement desirable to give an assurance that the gold standard will work well in future will be possible. What we shall have to judge is whether, on balance, there is a reasonable prospect of its working fairly wet.
We need, therefore, if we can find it, an alternative objective of policy. This, I suggest, is that of a managed currency on a basis of maintaining a reasonable stability of prices in relation to a composite index figure of com- modity prices. And, if possible, this should be a concerted policy between ourselves and the other countries which have gone off gold. Half the world is now off gold ; most countries are fully aware of the dangers of inflation, and would like some external brake upon these dangers.
Agreements, tentative and elastic, between the non-gold countries for the conduct of their managed currencies on identical, or very similar, principles would help to give such a brake. At the same time, such a concerted policy would greatly add to our bargaining strength in negotia- tion with the gold countries, and if these negotiations failed and the course of events was disappointing, there would be an alternative to the return to gold.
I suggest, therefore, in summary, the following policy. For the moment we should take every possible step to prevent such in increase in the cost of living as would involve increases in the wage and cost of production level. We should, at the same time, prepare for a possible stabilization on a commodity price index basis, working out the policy for this purpose in concert with the other countries which have gone off gold. We should make these preparations, however, only in order to have an alterna- tive if a return to gold should prove impracticable or undesirable. In the meantime we should negotiate and co-operate with the gold countries so as to help, as far as we can, to secure every such change and agreement in policy as will increase the prospect of gold working well in future ; and if, say, in six months or a little later, the prospects of its working well are reasonably good, we should return to a parity decided upon in relation to conditions at that moment. But we should have an alternative ready—and do our best to diminish the dangers of that alternative.