18 AUGUST 1961, Page 23

A New Banker's 'Ramp'?

By NICHOLAS DAVENPORT

DOES history really repeat it- self? Only when our rulers are stupid enough not to learn from their predecessors' mistakes. Go back thirty years to another thundery August. In 1931 there had been another flight from the £. There had been another out- cry against over-spending—but this time against government over-spending, for the Budget was unbalanced. To save the £ it was considered vital to have a foreign loan and J. P. Morgan and Company were consulted. Naturally these foreign bankers expressed the prevailing finan- cial opinion—that not only must the Budget be balanced but the economies recommended by the May Committee be carried out. These in- cluded savage cuts in the unemployment bene- fits. All this was virtually admitted by Ramsay MacDonald in the House of Commons later on when he sought to justify his sabotage of the then Labour Government. Thus the legend grew that there had been a 'bankers' ramp.' The sequel did not support that plausible theory. The National Government in September suspended the gold standard and the £ was lost—falling from $4.86 to $3.23 before settling down at $3.40 by the end of the year. But the economy was saved and we gained a useful experience in running a floating exchange to everyone's satis- faction, except the foreign bankers'.

Happily today we are not saddled with such a feeble, split Government as that of poor Ramsay MacDonald. The £ has been saved—for the time. It is not yet September. but I see no chance of the present Scot at No. 10 calling in Mr. Gaitskell to help and sending Mr. Harold Wil- son with Mr. Lloyd to the September meeting of the IMF to announce suspension of the gold exchange standard. Yet the flight from the £ has been far worse than it was thirty years ago. It has amounted to about £650 million since the beginning of the year (equivalent to $1,820 mil- lion or more than half the total gold and dollar reserves held at the end of 1960—£1,154 million). In 1931 at the height of the crisis the Bank was losing gold at the rate of £2.1. million a day but it did not last long. And today the support bor- rowed for the £ has been much more massive. In August, 1931, the credits obtained were only £130 million. Today we have drawn from the IMF the equivalent of $1,500 million in nine currencies and secured in addition a 'stand-by' credit for $500 million to cover the next twelve months. This far exceeds the credit we obtained in the Suez crisis—$561f million plus a 'stand-by' of $7384 million which was never drawn. It has only just dawned upon the press that these enormous loans have been obtained at a price.--7 compliance with the banker's wishes. To this ex- tent has history repeated itself.

We are usually very sensitive to the taunt that foreigners have been dictating our domestic policies, but the reason why nothing has been heard of a 'bankers' ramp' on this occasion is partly because the credits were only announced

after Parliament had finished debating the economic crisis, partly because the money came not from private or national banks but from an international organisation—the IMF. The terms of the IMF announcement were very carefully worded: The UK has adopted a series of fiscal and monetary measures and certain other policies which together are designed to restore a strong balance of payments position at the existing exchange rate and without imposing restrictions on trade and current payments. The drawing on the Fund will place at the disposal of the UK substantial amounts of foreign exchange while the new policies are taking effect. The stand-by arrangement will give a specific guarantee of further support for the UK efforts to maintain the strength of sterling . . .

it is clear from this statement that the condi- tion of the loans was that the British Chancellor should carry through a deflationary programme as stiff as the IMF considered necessary. What was not divulged was that Dr. Per Jacobsson, the director-general of the Fund, had demanded a 7 per cent. Bank rate which Mr. Lloyd was loath

to grant. The advice of the J. P. Morgan partners thirty years ago was mild compared with this dictation—and they only got 6 per cent.

Like other faceless international bureaucrats Dr. Per Jacobsson is quite unknown to the British public. He came into the news in Septem- ber, 1959, when he declared that 'in all likelihood world inflation is over.' This was when he was urging the UK and others to adopt the full ob- ligations of Article 8 which meant removing all exchange and trade restrictions and requiring IMF approval before fresh restrictions were im- posed. It cannot be said that his nostrums for our economic health have proved at all helpful. We would not be in such grievous balance of payments trouble if we had not removed dollar and other trade restrictions so quickly. And his present monetary cure-all--the 7 per cent. Bank rate—is likely to prove equally disastrous. Ex- cessively dear money has been found to be. a deadly medicine time and time again. It hits directly at investment; it raises rents and induces new wage claims; it slows down all trading and raises the costs of manufactures, it takes the heart out of business enterprise, not to mention farming; it hits directly at the export trade, which we are trying so hard to stimulate (On heavy capital goods the extra 2 pal- cent. ot, a five-year export credit can add 5 pea- cent. to the cost of the contract, and according to press reports it has already lost some valuable business to our com- petitors.) Apart from all this damage a 7 per cent. Bank rate increases the costs of servicing the floating debt by £100 million a year. and of the overseas sterling balances by £60 million a year. So the Treasury whips itself as well as the economy! It is, in fact, behaving like an old- fashioned doctor who tries to cure lunacy by whipping the unruly patients in an asylum—and not only the patients, but the warders as well! Mr. Lloyd should see a psychiatrist himself before he listens to old-fashioned quackery. I cannot believe that the right way out of our trouble is to slash national output and make war on the workers. I cannot believe that the British trade union movement is to stupid to co-operate in a sensible wages policy if it is appealed to reasonably.

The Economist has described Dr. Jacobsson as 'a tremendous one-man band, and although it regards the success of the IMF as largely his personal achievement it suggests that an inner directorate—`a compact; creative and decision- making group keeping in touch with the in- formed public'—might be better for the IMF than the present dictatorship I hope this sug- gestion will be put forward at tin forthcoming meeting of the IMF in Vienna. As soon as we join the European Common Market and co- operate with M. Monnet in setting up a Euro- pean monetary fund—more in tune with modern economics than the IMF—the better.

CUSTOS is on holiday.