States and stages of 'financial crisis' MONEY
NICHOLAS DAVENPORT
Exactly what is a financial crisis? And What is a king-size financial crisis? Briefly defined a financial crisis is simply a critical shortage of cash. And a king-size financial crisis is a shortage of cash critical enough to call in a receiver. For example, if a publisher of news- papers and magazines were to be involved in a lengthy strike of all his workpeople, during which none of his papers could be published and all his cash resources would be used up, be would have to put himself in the hands of his bankers. He would never be able to make up for his lost output, for no one wants to read out-of-date papers. If hitherto he had been able to publish of a profit he would no doubt be able to secure new finance and start afresh. A financial crisis is not the same thing as an economic crisis.• But if the printing unions cling on too long -to their egregious restrictive practices the business of publishing could con- ceivably become uneconomic. A publisher would then bring on his own financial crisis by using up his cash resources to meet his losses. You see the difference.
Translating this definition from the individual to the national business it is difficult to see how the United Kingdom can be said to be threatened at this moment with its worst finan- cial crisis of all time. It has, of course, long been short of cash in its trading reserves and consequently gets caught up in a financial crisis whenever it loses the confidence of its creditors. But it has lately been refinanced by the IMF and the central bankers and these new credits have not yet been drawn upon. At the time of the November devaluation the bankers opened up credits of $2,400 million and these were extended to $4,000 million after Mr Jenkins had brought in an exceptionally severe budget, taking nearly £1,000 million out of the economy through new taxation. The gnomes of Zurich had never expected so much de- flationary backing for their loans.
When a financial crisis is not due to any serious economic crisis it only needs credits and confidence to see it overcome. Now it has never been suggested that the UK is economic- ally unsound or 'bust.' It has been exporting more goods per head of its working population than any of its rivals. It has never been proved that the uic has been exporting at a loss, although the export profit in some trades has been so low that it killed the incentive to ex- port. The fact that our imports have been in- creasing at a faster rate than our exports does not necessarily mean that our costs of manu- facture have been too high. It could mean (i) that our capital goods industries have not been making all the sophisticated goods required by our business people; (ii) that some of our export goods lack the design or after-sales service required by our customers overseas; and (iii) that consumers at home have had too much money in their pockets to spend and have been sucking up imports.
Devaluation of the pound came to the rescue by giving an extra profit to exporters whose incentives had previously been killed by lack of profit, but it is no permanent cure of the troubles I have listed. We need a recon-
struction of some industries to make them more export-capable or more import-saving and we need to stop incomes rising ahead of productivity to bring down the import bill. But we are not yet in any serious economic crisis as a world trader. We cannot be while the world demand for goods is so strong and while world trade is expanding. This is the great difference between 1968 and 1931. World demand had collapsed in 1931 because of massive unemployment, the slump in prices and the wiping-out of savings.
Here I must point out that a financial crisis for the UK can always be brought on by over- trading even when trading is economically sound. Mr Maudling was probably guilty of over-trading in his 1963-4 boom and the first sterling crisis arose because our overseas creditors did not have sufficient confidence in a Labour government's ability to handle our financial affairs. This 'credibility gap' turned out to be fully justified. The £402 million de- ficit on trading account in 1964 which Mr Maudling bequeathed was, in fact, exceeded in 1967 when the trading deficit rose to £514 million. It might well be argued that the subsequent sterling crises were all brought on by Labour mismanagement of our financial affairs although, apart from a wage-cost infla- tion, there was no serious economic crisis at home.
On the occasion of the 1965 financial crisis we had to borrow $2,400 million from the IMF as well as raise additional credits from the central banks. The first IMF tranche of $1,000 million fell due in November 1967, and this was met by the Treasury selling over two thirds of its own dollar portfolio (including good Amerada oil shares). The second tranche of $1,400 million has to be paid off by May 1970 and the Treasury has now agreed with the IMF to pay two instalments of $100 million in August and November this year and six quarterly instalments of $200 million begin- ning February 1969. Note that this has to be paid in dearer dollars. (I have never under- stood why the Treasury never borrowed dollars from the private portfolios while the 52.80 rate was valid.) It has been a considerable achieve- ment to repay the central bankers the credits raised to meet the earlier financial crises but it has taken its toll of our gold and dollar re- serves. These now stand at £1,155 million. Total sterling liabilities to overseas depositors (excluding the international monetary organisa- tions) amount to £3,800 million, of which the sterling area countries account for £2,440 mil-
lion. It will be seen how short we are, as a world banker, of cash reserves. If we lost the confidence of our overseas depositors and it they all wanted to convert their sterling into gold or dollars or European currencies• at the same time we would be sunk. But they are un- likely to do so. Apart from our sterling area partners we have good trading relations with most of the others except possibly some of the Arab states.
The monthly publication of the gold and dollar reserves is never an exact statement of our cash resources as a reserve currency banker. The Bank of England, which manages our exchange equalisation account, never divulges the extent of the credits outstanding with central banks or the 'swap' arrangements made with the us Treasury or any other nation. If the published reserve figures are lies they lie on the right side in that they under- state our immediate cash resources. Heaven knows that we are not a strong 'reserve' banker and can be caught up in any further dollar or international money crisis—which the SPECTATOR discussed last week—but if world trade remains buoyant, if our creditors remain confident that we can achieve a surplus on our balance of payments by 1970—although we may have no hope of reaching Mr Jenkins's £500 million surplus—we may avoid another sterling, that is, another financial crisis this year, in spite of the deficit (recently £80 million a month) which will still be showing up on our trading account. Fortunately our creditors seem to be more sophisticated and patient people than Mr Cecil King.
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