A sperm-bank for ideas on currencies
Lord Croham, better known perhaps as Douglas Allen, from the days when he ran the Treasury for Ted Heath and Tony Barber, has found a new vocation in retirement. He is into what I believe is known in the trade as in vitro fertilisation. Two years ago he presided over a presti- gious committee under the aegis of Dick Taverne's Public Policy Centre, which produced a report strongly recommending Bntish accession to the European currency club. Not long before Nigel Lawson's conversion to the currency club had be- come apparent. Now Lord Croham, and another prestigious committee — which included such luminaries as Andre de Lattre, his erstwhile opposite number in Paris, Count Otto Lamsdorff, the former FDP Finance Minister in Bonn, Robert Roosa, Under-Secretag for Monetary Affairs under Jack Kennedy, and Hideo Suzuki from Nomura — have gone global. They have come up with a plan for worldwide managed currencies which bears considerable resemblances to the plan which Nigel Lawson unveiled to the IMF last autumn. Copy cats? Not a bit of it. It was Lord Croham and his merry men, they tell us, who implanted each of these ideas in turn into our living Chancellor. Mr Lawson is not normally inclined to welcome claims to paternity for his brain- children, and he may have a thing or two to say. But don't let's squabble over attribu- tions. It is, surely, the follow-through that matters. And at least since early 1987 we have, to all intents and purposes, been behaving as if we were paid-up members of the currency club, whatever the Prime Minister may think. Is the 'Group of Seven' top Finance Ministers of the non- Communist world now going to dance to Lord Croham's tune?
But first, a word of caution about the European currency club. It was a little disconcerting to discover, at last week's public launch of the latest Croham report ('After the Louvre: Promoting Exchange Rate Stability': Public Policy Centre, 10-12 Cork Street, London W1) that one or two of those involved now seem to have some serious reservations about the club. There was a certain amount of grumbling about the behaviour of the German Mark. One heard the suggestion that it ought to be a good deal dearer than it is (a view which, it must be said, is increasingly shared by a number of the existing members of the club). Being of a mischievous disposition, I could not resist pointing out it was indeed to act as a dragging anchor on their currency that the Germans launched the scheme ten years ago: and it has worked precisely thus.
Only could it be that the Public Policy Centre has laid another egg in No. 11? When the pound on Monday poked its head shyly through the three-mark barrier, with the Bank of England nowhere to be seen, the Treasury told one and all that it was business as usual. Well they can pull the other one.
For the past twelve months and more whenever there has appeared to be a conflict between domestic monetary press- ures and the exchange rate, domestic monetary pressures have taken the back seat. If the pound got too close to three marks, interest rates were adjusted down- wards: and notwithstanding the Bank's concern about our credit spree, they were adjusted upwards only if the pound was well below the three mark ceiling. As recently as last Friday the Bank was busy dumping pounds on the foreign exchange markets as if they were infected.
Has the Prime Minister, whose hostility to currency management was reiterated in Parliament this week (in what the Treasury regarded as thoroughly bad taste) put her foot down? Possibly. But that artful sleuth at Shearson Lehmann, Tim Congdon, has noticed something. Last year Nigel Lawson announced that the technique known as 'over-funding' (by which, throughout the early 1980s, the Bank regularly sold more gilts than it needed to to cover the Budget deficit, as part of the battle to keep the monetary indicators on course) had been discontinued. In future the Bank would sell gilts to bridge the deficit, and that would be that. This was widely, and logically, perceived as the final burial of 'monetar- ism'. Only in recent months, as the deficit has shrunk to vanishing point and beyond, 'over-funding' has been quietly resumed. So we are entitled to pose the question: is Nigel Lawson a born-again monetarist?
These are deep waters, Watson. Let us swiftly return to safer ground: the wider horizons. It has to be said that when Nigel Lawson floated his scheme for a worldwide system of what we used to call 'crawling pegs' (in which currency parities would move little and often, instead of rarely and a lot, as they used to do under Bretton Woods) at the IMF, he didn't get much of a hearing. But the world has moved on. The Americans have — at any rate on one important occasion — joined the other leading central banks in assaulting dollar bears, and the three keys parities (dollar, yen and deutschmark) have been enjoying some months of relative stability. US Treasury Secretary James Baker has also been making helpful noises.
In fact the Croham Committee's latest offering is a good deal more gradualist, and a good deal less ambitious, than Mr Law- son's proposal to the IMF. Evidently under pressure from its German participants, it concludes that anything approaching a world currency grid will have to wait until the Americans have first got their house in order, by substantial shrinkage of their twin deficits (federal budget, and trade). Even then it is talking about ten per cent currency bands, involving no more than a presumption, other things being equal, that countries nearing the edge of the bank would feel motivated to do something about their taxes and/or their rates of interest. More of an 'open marriage', in fact, than a till-death-us-do-part job. But here's a consoling thought. Global luminaries have, like our own domestic mandarins, not infrequently displayed a tendency to come up with cures for mala- dies which nature has already taken in hand. Back in the late 1950s they were forever telling us about how to learn to love the 'dollar gap' — just as the 'dollar gap' was closing of its own accord. Now it is 'currency instability' which is supposed to have us in the grip of nightmares. Yet as these luminaries also remind us, at the root of trade imbalances is not the sheer size of the US budget deficit, so much as the inadequacy of US domestic savings. Well, following the Wall Street crash, the Amer- icans are indeed showing signs of saving rather more, and the US trade deficit does seem to be responding. If so, we must find something else to worry about: for what would become of out-of-office luminaries if all were for the best in the best of all possible worlds? Hence my sneaking suspicion that the European Monetary System, so long held up as the cynosure of neighbouring eyes, may be due for an agonising reappraisal. Perhaps we shall get an inkling of some answers to these interesting conundrums) on Tuesday.