Farewell to reserve sterling
MONEY
NICHOLAS DAVENPORT
At long last the great Basle agreement for the support of sterling—described here on 12 July—has been sewn up by the central bankers. Credit has rightly been given to the Governor of the Bank, Sir Leslie O'Brien, and his executive director, Mr Jeremy Morse, who carried out this arduous and complicated negotiation for the Government with brilliant expertise. Under the agreement eleven countries—the us, Germany, Italy, Holland, Belgium, Switzerland, Austria, Sweden, Japan, Canada and France—have put up a stand-by credit of $2,000 million (£834 mil- lion) to enable official (i.e. non-private) sterling area holders of the so-called sterling balances to exchange into hard currencies over a period and at an agreed rate. After much talk they have all promised to act with restraint—as they should, having received an exchange guarantee up to 100 per cent of their holdings—but it is generally expected that the agreed withdrawals will use up about half the credit almost imme- diately. The private holders, are still grumbling that they have been unfairly left out of the deal, but it is up to their own banks to arrange exit terms with the official banks.
Here is the latest record—as at 30 June— of the size of the sterling balances we have guaranteed—£2,172 million! What we have not guaranteed are (i) the sterling balances held by the non-sterling area countries which amount to £1,323 million (these have mostly covered themselves forward) and (h) the sterling balances of international organisations like the IMF which amount to 12,135 million. The total of all our net liabilities in sterling is a for- midable 45,630 million against which we have gold and dollar reserves of just over £1,100 million. In other words, on a short-term basis we are insolvent. On a long-term basis our investments- overseas make us the richest country in the world after the us.
The man in the street may think it is daft to give a dollar guarantee to over £2,000 million of sterling debts. We are only obliged to convert these sterling debts into foreign currencies at the prevailing rate of exchange. In other words, if we get into trouble again, we can devalue the debts by devaluing the £ once again. But this is not regarded as 'cricket' according to the rules of the IMF club. We are under an obligation to put our balance of pay- ments right and make the £ worth its present (devalued) rate of $2.40. But it is taking longer to do so than Mr Jenkins had estimated. Our visible trade deficit for the first seven months of the year was nearly £500 million and after allowing for the 'invisibles' the net trading deficit for the year is likely to be £430 million. For 1969 the National Institute estimate a surplus of only £90 million in the first half and £260 million in the second. This is very different from the £500 million surplus Mr Jenkins had imagined. If even this more sober estimate came under suspicion the holders of the sterling balances might have become more restive and have upset the whole IMF system by throwing sterling overboard. The Basle agreement was designed primarily to re- move this real threat not only to interna- tional monetary stability but to world trade.
But there is more to it than that. It marks —in Dr Emminger's words—`the controlled withdrawal of sterling from its reserve role.' Even the Governor of the Bank has admitted as much. Hitherto it has been regarded by the "Establishment as an act of treason to suggest that the role of sterling as a reserve currency was not divinely inspired and endowed. The late Per Jacobsson, a director-general of the IMF, once said that the Crown and the f sterling were the twin pillars of Britain's greatness. Certainly the two were part and parcel of the whole British mystery. Yet the reserve currency role was always a nonsense. It was not God- inspired but man-made. The war left us with a huge pile of sterling debts owing to common- wealth and allied countries which, the Ameri- cans said, should be written down. But the 1945 Labour government never tried very hard to get them written dawn. The Treasury really believed at that time that these sterling debts would be an inducement to the creditors to buy British goods. It was a fallacy. The creditors found it a convenience to hold the sterling, not only because London was a great financial centre but because the British as a rule paid a higher rate of interest on balances than other financial centres. (It is hoped that the Basle agreement will enable us to save a little on the interest bill.) But they never re- garded sterling as a safe reserve. It could not be, for sterling was not—like the dollar—fully and freely convertible into gold or hard cur- rencies.
So these wretched sterling liabilities have been hanging all these years like a millstone round our neck. Whenever our balance of pay- ments plunged into the red the sterling holders would become nervous and restive and start moving into safer currencies. What is more, their nervousness spread to Westminster. The government of the day would begin cutting things down at home to restore the balance of payments and so make the overseas sterling holders feel safer. The people who felt far less safe were, of course, the men at home who were thrown out of work.
The reserve currency masquerade has be- devilled British politics since the war. As I have said, the constant worry over these sterl- ing balances was responsible for the Tory stop- go policy and for the subsequent deflations under Labour. Now that a settlement has been reached and the important members of the IMF have been proved willing to finance 'a con- trolled withdrawal of sterling from its reserve role rather than face a collapse of the' whole IL■te ',national monetary system, could not this let together' have been organised before? Was it necessary for the normal economic growth of Britain to have been so stifled in 1966 and 1967? '
We do not, of course, know what strings, if any, have been attached to the Basle agreement. There is talk that Sir -Leslie O'Brien has been put under an obligation to tell the Chancellor that the central bankers are all convinced that public expenditures should be cut down still further and that the money supply should also be subjected to a further squeeze. The money supply caveat could well be interpreted as an advice to cut the credit of importers and to insist on prior deposits of cash before import orders are given. The next trade returns will be watched with the eagle eyes common to bankers. But let us give thanks that the truth about sterling is beginning to -emerge. It will be a currency still used in at least 25 per cent of international trade but not held as a currency reserve. The £ was momentarily justified in jumping 13/32 cents to nearly $2.381 on Mon- day morning.
Previous page
