MONEY Sterling and the 'Pink Paper'
NICHOLAS DAVENPORT
Curiously enough the silly season is usually a bad time for sterling and this year it has been made worse by the appalling strike fever rag- ing in the factories. In seven months more working days have been lost through strikes than in any twelve months before. The re- jection by the cicN-Sankey men of a generous offer agreed to by their union does suggest an under-cover subversive movement against the Establishment—and sterling. The ex- change began slipping in May when it was over $2.40 and is now just a margin over $2.38, with the discount on three-months sterling widening to nearly 11 per cent. The Bank of England had to intervene in the market last week and, of course, is compelled by the rules to do so if the rate drops to $2.38. But no extra heavy volume of selling was reported.
Curiously enough again, just when the IMF September meeting approaches and people begin to talk about changes in exchange rates, Professor - Kaldor addresses the economic section of the British Association and argues for a managed floating exchange rate—'free but controlled by active official intervention in the market'. And this follows on the publication of a book by Samuel Brit- tan also advocating a floating exchange. The harassed exchange managers at the Bank of England must be using four-letter words. I have no space to plunge into this discussion except to object to Mr Brittan calling the balance of payments a 'pseudo-problem'. I call this pseudo-English. A deficit on the balance of payments is always a financing problem but always a manageable one when capital and trading accounts are properly separated and the problem is understood.
Happily the Central Statistical Office has intervened at this timely point with a new and illuminating edition of its 'pink paper' on the uic balance of . payments. This presents the figures in a new form.leading up to 'the total currency flow' instead of the old 'basic balance'. In other words, it starts
with the familiar 'current balance', that is, the balance of current trading income over current expenditure including 'invisibles' and adds all external transactions in capital (not distinguishing, because you can't, between short-term and long-term) and the so-called 'balancing item'. The new tables show at a glance whether we are earning our living in current trade and how the Govern- ment is financing any final deficit.
At last the cso reveals the truth about the famous 1800 million deficit' of 1964—the Tory legacy on which Mr Wilson fed for party political nourishment for so many years. It turns out to be all a lie. The 1964 end result was a deficit of only £695 million made up as to £395 million on current trading and £300 million on net investment capital outflow. If Mr Maudling wished to excuse his £395 million trading deficit he could say that he was stocking up for the expansion of the economy at a time when the terms of trade were becoming adverse. He might add that Mr Wilson produced a far worse result in 1968 as the new tables reveal : In f million 1964 1968 Visible Trade -519 -643
+124 +324 Current Balance -395 -319 Investment and capital flows -289 - 1,010* Balancing Item -11 - 81
Total Currency Flow -695 -1,410 *Includes EEA loss on forward exchange of £251 million: Source: UK Balance of Payments 1970 Central Statistical Office 15s.
The dissemination of the '£800 million deficit' lie did a great deal of harm not only to sterling but to Mr Wilson. When it was first disclosed by Mr Gordon Walker and Mr Douglas Jay at the November 1964 meeting of EFTA, it undoubtedly encouraged 'bear'
ffolkes's investors' alphabet
Gis for Glamour stock raids on sterling. It also encouraged foreign bankers to believe that the Wilson govern- ment was not competent to handle such an enormous deficit. The truth was that it was a relatively small trading deficit which any competent government with an overseas trade of £10,000 million could arrange to finance. The wickedness of the Iwo million deficit' propaganda was that it lumped capital and trading accounts together and wildly exaggerated the total.
It is well to bear in mind that a net in- vestment capital outflow means that residents of this country have been acquiring net assets abroad to a greater extent than foreigners have been acquiring net assets in this country. The Bank of England is presumed to control the acquisition of assets abroad—and has strict tests of profitability before it allows the new purchase of foreign currency—but it can never control every transaction of the great international com- panies or every merger among overseas groups, so that one year may be favourable for us on capital outflows and one year adverse. Incidentally, this proves how awkward it could be to have a floating ex- change when the government is not in con- trol of short-term or long-term capital move- ments.
The new tables of the 'pink paper' bring out the increasing importance of the 'in- visibles' account of the private sector. Interest, profits and dividends (all net) have risen from £514 million in 1964 to £780 million in 1969. Last year our insurance companies netted £243 million, our banks £97 million and our merchants and brokers nearly £100 million. Yet this was a section of the economy 'making money out of money' which was not popalar with Mr Wilson. The truth is that last year 'private services and transfers' (£564 million) and private 'interest, profits and dividends' (£780 million) paid for all the government services and transfers of the public sector overseas (£787 million) and left a surplus of £557 'tuition which was enough to pay off the deficit on the visible trade accounts (£141 million) four times over.
The Central Statistical Office is to be con- gratulated on presenting tables which help to show how strong our underlying ex- change position is. Our private investments overseas—direct and portfolio—amount to £14,000 million and our liabilities against them f6,750 million. Fundamentally we are therefore a rich country and our currency a strong one. Certainly sterling was a strong currency in 1969 and this year, in spite of the current weakness, is likely to remain on 'pink paper' a sound currency. There was a massive inflow of funds in the first quarter of the year of about £915 million—due in part to the reversal of the unfavourable 'leads' and lags'---and the figures for the second quarter will be published this week or next. Before any trader or speculator is tempted to go short on sterling again, let him carefully study the tables in this fascinating new edi- tion of the 'pink paper'.
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