Dollar devaluation cheers
Nicholas Davenport
Monetary history is a series of crises recorded in an agony column and the present crisis ends with a devaluation of the dollar by 10 per cent, the floating of the yen and the revaluation of the German mark by 5 per cent up. It will not, of course, be the last.
The Americans on the whole kept their cool. They felt sorry for the West Germans who had to bear the brunt of the frantic rush out of dollars and as the German balance of payments is only comfortably in surplus they did not press for the floating of the mark. The Swiss franc was floated only recently and is now up-valued by over 10 per cent. The lire has now joined it in floating. . What was worrying the Americans was not so much the frantic movements in the currency markets as the imbalances in world trade, which are not so easily cured by floating exchanges. The colossal Japanese surplus is their big trouble. It has been built up by restrictions upon imports and by the frenetic export drive of Japanese managers and workers. Japan is a country which imports its raw materials, processes them in sophisticated manufacture and exports a beautifully finished and cheap product. If the up-valued yen enables the managers to buy their raw materials at much cheaper prices the export position of some manufacturers eould be improved. It looks as if the Japanese surplus problem will not be solved until the US subjects its goods to a quota regulation or an import sur charge, which Congress is surely going to demand. Twothirds of the American trading deficit •is accounted for by Japanese imports.
Most people are naturally amazed by the huge amounts of money floating over the exchanges. Central banks in Europe — mostly the German — had to buy last week no less than $6000 million — and Tokyo another $1500 million — "to keep the dollar off the floor," which means that they had to absorb this amount of dollars to stop their own currencies being forced off their peg — for the moment. The German Federal Bank is now holding over $20,000 million.
Where do the dollars come from? From past and present deficits on the American balance of payments. At the moment — taking 1972 figures — the US has a deficit of $8,500 million on its current trade account. Last year the longterm capital outflow brought the total up to $10,000 million. This year the deficit is expected to be lower but seeing is believing. The accumulated deficits on earlier years have built up the Euro-dollar market and these dollars, own$ by foreign non-residents, amount to $60,000 million or more. The managers of these Euro-dollar accounts can move their money around at a stroke of the telex or a call on the telephone; and they trade in thousands of millions of dollars.
It is not all speculation. The money managers of the multinational companies have vast amounts of currency which they must protect against depreciation on the best advice. For example I have before me the February 7, 1973 issue of Green's Commodity bulletin published by the Economic News Agency which advises their clients on currency and metal movements. It says: "On January 26, 1972 we recommended the short sale of the Italian lire and repeated it in April, May, June, August and September . . . All short positions in the Italian lire should now be covered." This is typical of the advice being received by the managers of the great mult-national companies whose ' leads ' and ' lags ' can run into billions of dollars. If these corporation faceless men together with the managers of the Euro-dollar accounts owned by nimble/nervous foreigners, decide to move into marks or yen at the same time, nothing can save those currencies from being forced upwards, either by floating or revaluation.
The Green's Commodity Bulletin I have quoted had a significant comment on the dollar. "it appears," it says, "that a Berne gnome must have fallen off his cuckoo clock since there was really no justification for a Swiss float . . . This float, which in our opinion will be of short duration, offers an excellent opportunity to short the Swiss franc . .. There is nothing wrong with the dollar at the present time . . . We expect the dollar to strengthen considerably during this year . . . We expect new regulations that will oblige the US multi-national corporations to transfer more of their foreign earnings back to the United States." If this materialises it could vastly improve the American balance of payments, for these foreign earnings are enormous.
The capital side of a country's balance of payments has been the cause of most of the monetary trouble. There is a continuing huge investment abroad of the American and British multi-national companies and there is a continuing flight of capital abroad on the pant of those who fear penal taxation and Government interference. The latter applies especially to Italy Where, in spite of a favourable balance of current trade, capital flies out to Switzerland to avoid taxation. Several countries have adopted I —very properly in my opinion — a two-tier system of exchange control to help solve the capital problem. They have a ' financial ' rate of exchange for capital transactions which floats, and a commercial rate of exchange for current trade transactions which is fixed. The Germans have so far refused to apply this admirable system but the French, the Belgians, the Italians and (partially) the Dutch are working it. We British have long had the system of ' prem ium ' dolars for portfolio investment in dollar countries (with a wicked 25 per cent Treasury grab of the Premium on sales), and this now applies to investment in the former sterling area countries (but without the 25 per cent grab). Admittedly the two-tier exchange system has administrative problems but I am convinced that it should be made a permanent part of the exchange control apparatus and I believe that despite Dr Emminger's opposition sooner or later Germany will adopt it. To return to the trading side of the balance of payments the Americans have a just complaint against the Europeans as well as the Japanese for the restraints they put upon multilateral trade. The EEC agricultural policy shuts out surplus American foodstuffs and as long as this affront to multilateralism remains the imbalances of world trade are likely to get worse. The recent monetary crisis may therefore be a blessing in disguise. It throws into con-. fusion the monetary mechanism of the CAP (Common Agricultural Policy). It puts back the European monetary union which the French have been pressing. It probably kills the narrower currency band system which the Community was forcing on its members — Britain excepted while sterling floats — and it brings to the surface the deep difference of monetary opinion in the EEC.
So the realignment of the world exchange rates under the Smthsonian agreement of December 1971 has lasted a little over a year. The present realignment may not last so long. The Jeremy Morse Committee is still sitting brooclily on 'its monetary eggs and before any are hatched we may see another monetary crisis. Meanwhile we can expect Wall Street to respond briskly to the better export prospects of American companies. The expected Wall Street boom, which has been hanging fire, may now get going.
Previous page
