LETTERS TO THE EDITOR
A.B.C. OF THE CRISIS
SIR,—In your issue of September 5th Mr. Harrod accuses Britain of dishonourable conduct on the ground of her alleged violation of the Anglo- American Loan Agreement. It is a grave charge which should not be made by anyone, least of all by a British expert of international standing, without making sure of his facts. Yet Mr. Harrod's accusation is entirely devoid of any factual foundations. By suspending the convertibility of sterling Britain did not default on the Loan Agreement. She merely put into operation the " escape clause " which forms part of that Agree- ment, and which was devised to meet precisely the kinds of special circum- stances which prevail at present. The escape clause was applied after consultation with the United States Government, and with that Govern- ment's consent. Indeed the latter, so far from objecting, is now known to have been fully prepared to agree several months ago to a postponement of convertibility, in view of the obvious difficulties caused by the rise in American prices, the delay in the reconstruction of the Eastern Hemi- sphere, and the resulting unbalanced state of world trade, manifesting itself in a dollar famine. The bearing of these factors on convertibility appears to have been fully recognised by the United States Government, even if it has been ignored by Mr. Harrod.
Since the United States Government raised no objection to the suspen- sion, it is entirely incorrect to describe that act as a violation of the Agreement. So much for the legal aspects of Mr. Harrod's charge. But even if Britain had been guilty of default, it is doubtful whether Mr. Harrod would be entitled to denounce her in a tone of moral indignation, considering that in the same article he declares himself in favour of defaulting on her old sterling -balances by blocking them without their owners' consent. I fully agree with Mr. Harrod that the old sterling balances ought to have been blocked. Such a drastic step could only be justified, however, on the ground of our utter incapacity to pay these war debts without gravely compromising our reconstruction, and thereby endangering our future solvency. It would have been quite pointless to default on the old sterling balances merely in order to spare dollars for distribution to holders of new sterling balances. Indiscriminate conversion of sterling, whether for the benefit of old holders or new, sacrifices our reconstruction and our standard of living—largely for the sake of financing the purchase of Packards for Pashas and other war profiteers benefiting by convertibility at Britain's expense.
According to Mr. Harrod the main reason why Britain was unable to maintain convertibility was her excessive capital expenditure. But then the American Loan was granted for the declared purpose of financing capital expenditure. In fact, this country has been subj.tctect to much criticism in the United States for having devoted only a small fraction of the proceeds to capital expenditure. What Mr. Harrod and those who share his views refuse to see is that convertibility was in any case doomed to failure, owing to the world-wide famine for primary necessities and Britain's inability to supply them. In such a situation convertibility of sterling necessarily meant a large increase of our adverse balance. Holders of sterling naturally prefer American wheat and coal to British wireless sets, motor cars and textiles. The moment sterling was made convertible most of them lost interest in British goods. Owing to the brevity of the convertibility period this factor had no chance to produce anything like its full effect. Had convertibility been maintained for some months, however, the resulting increase of our import surplus would in itself have been sufficient to wipe out the balance of the American loan and also our own gold reserve.
The Government deserves to be censured, not because it suspended convertibility, but because it did not approach the United States Government in good time for the postponement of its initiation. And the Bank of England is open to criticism, not on the ground of Mr. Harrod's absurd allegation that it wanted deliberately to demonstrate the impossibility of maintaining convertibility, but on the ground of having misled the Chancellor of the Exchequer about its capacity for preventing the wholesale abuse of the arrangement. —I am, Sir, yours faithfully,
Suffolks, Ashurst Wood, East Grinstead, Sussex. PAUL EINZIG.
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