MONEY The unreality of currency crises
NICHOLAS DAVENPORT
While we have been bickering over the Budget strange things have been going on in the exchange markets. Dollar money has been pouring into Germany, Switzerland, Holland and the UK. There is increasing talk of another world currency crisis which always brings up the hoary idea of writing up the monetary price of gold. As usual the villain of the monetary drama is the American deficit. On the black markets the dollar is being quoted at a bigger discount than sterling.
Last year the us had a visible trade surplus of $2,700 million but a payments deficit of no less than $9,800 million. The Vietnam war contributed to this enormous American deficit but there is no restriction upon private investment overseas apart from the 'equal- isation' tax on foreign issues. There has, however, been talk of exchange restrictions being placed on the outflow of private capital and it may be that we have seen something of a genuine flight of American capital abroad prompted by the new Federal Act re- quiring disclosure of privately-held assets abroad.
The surplus countries receiving this unwanted flood of American money have the option—in theory—of converting the dollars into gold or of upvaluing their currencies in terms of the American dollar. But the option is not in fact very real. First, the Americans would object to a wholesale conversion of dollars into gold, their gold reserves having fallen below $12,000 million, and would pro- vide no facilities for the operation. Secondly, the upvaluation of the surplus currencies in terms of the dollar is not as simple as it sounds because of the varying price inflation in the different countries. For example, German export prices, which used to be over 10 per cent more favourable than American, are now only 5 per cent more favourable, are on a par with Continental prices and 5 per cent above the Japanese. The dollar may cer- tainly be overvalued but having regard to their own rising wage-cost inflations the surplus Continental countries see no reason why they should upvalue their currencies. The last time West Germany upvalued—by 8 per cent in the autumn of 1969—she met with a violent upswing in wages. Nevertheless, with the highest reserves in the world—nearly $16,000 million in dollars and gold—she has the strongest currency in Europe.
If the unwanted dollars cannot be con- verted into gold they can be, and have been, converted into SDRS to a limited extent. Last year's allocation of $3,500 million of SDRS went mainly to finance increasing world trade and the similar allocation of $3,500 million in January 1972 will go the same way, but the surpluS countries now suspect that the creation of SDRS was mainly a scheme for financing the dollar deficit. And they don't like it. They are unlikely to agree to any further extension of the 'paper gold' device. The recognition of gold as the im- portant reserve asset is back in favour.
As a result of the agreement between South Africa and the IMF in December 1969 newly-mined gold once again entered the world's monetary reserves in 1970. When the gold row with South Africa blew up in 1968 the monetary authorities declared that they would refrain from making further purchases of gold because the existing monetary stocks were adequate. 'This,' said Samuel Montagu in their annual bullion review, 'was an attempt to demonetise gold but any chance of this succeeding has now receded.' As the world becomes more unset- tled and dangerous the bullion merchants may—for the time being—be right. There is certainly no apparent readiness to give up a gold exchange standard for a dollar stan- dard. The world's monetary stocks increased last year by about $400 million to a total of $41,200 million. 'Both in the us and, among the principal financial powers', said the First National City Bank of New York, 'these gold stocks appear increasingly to have assumed the character of heavily defended last ditch reserves'. Convertible currencies and SDRS bring the total reserves to over $80,000 million. There is no longer any sug- gestion that they are inadequate to finance increase in world trade. There is no longer any pressure to write up the monetary price of gold. And even if there were any agree- ment to do so it would not change the ex- isting parities with the gold dollar, in other words, it would not help to solve the beset- ting problem of the international monetary system. This problem is the lack of any ad- justing mechanism to correct the imbalances between the major currencies.
Recent events suggest that the EEC powers are anxious to work towards a common European currency and leave the maverick dollar to make its own adjustment by floating against a solid Euiopean gold bloc. They are making a start this year by 'narrowing the bands' of permitted fluctuation between the five European currencies. They have even suggested that a common European currency will become a reserve currency. How this could come about unless they are prepared to trade, with the world outside on a deficit basis for some years is not clear but perhaps they are assuming that when Britain joins they will take over the sterling area reserve position. The official part of the sterling area reserves has already been 'taken over' under the Basle agreement but are we prepared to hand over the right to decide what parity is necessary for sterling to maintain a growth economy? No doubt the EEC is ready to allow a further devaluation for sterling on entry into the Common Market but the sur- render of our exchange freedom is another argument against joining.
The Europeans are also anxious to control the huge Euro-dollar market. The quantity of money in the Euro-dollar system —$45.000 million—is now larger than the entire stock of monetary gold and over half as large as the total stock of gold and convertible currency reserves. Euro-dollars are dollars deposited with commercial banks outside the us and their supply is continually fed by the deficit on the American balance of payments. Their volume and their rates of interest offered are upsetting to the national control of the volume and price of money on both sides of the Atlantic. Only last week the Federal Reserve had to issue $1,500 million of three-month certificates to the foreign branches of American banks at a higher rate of intereq than at home in order to stem the flow of dollars abroad. Euro-dollar money is hot money and an infernal nuisance to governments in Europe.
The solution of these international money problems takes an inordinate time. It may even have to wait until the commercial demand for gold exceeds the new supply, which may be less than ten years, and forces up the free market force to $50or more. But I get the feeling that the solution will never be found until a major currency or bloc of cur- rencies decides to float against those who
prefer fixed exchanges. And I also get the feeling that currency crises have become a
bore. Governments are beginning to perceive their unreality. The reality of economic life is the present clash between workers and employers, both in the public and the private sectors.
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