MONEY Second thoughts on the settlement
Nicholas Davenport
It would be a lovely New Year's treat if this boring currency crisis were to be removed from the financial writer's column for twelve months. But I doubt whether we can escape so long. Professor Schiller, the Economics Minister of West Germany, has described the new settlement as "a fragile work of art." " Fragile " is hardly the appropriate word to use. In my view that tough Texan, Mr Connally, the US Secretary of the Treasury, has got away with most of what he wanted, as I thought he would. He pretends that M. Pompidou dragged out of him an increase in the price of gold — from $35 to $38 an ounce — but as he still refuses to sell gold at any price it is a Pyrrhic victory for M. Pompidou. And meaningless for the South African producers who sell their gold on the free market at $42. When President Nixon hails the settlement as "the most significant monetary agreement in the history of the world" it is clear that he is trying to fool us. But as he made a fool of himself over the Indian war I suppose that he was looking round for something to crow about. And this monetary agreement is certainly a feather in his cap. He has secured effectively a 10 per cent devaluation of the dollar overall.
In return for lifting the 10 per cent import surcharge and the protectionist provisions of the job development tax credits the dollar has secured the following revaluations of the currencies of her important competitors:
Parity New Revaluation May I Parity v Dollar
£ sterling 2.40 2.60 +8.6% French franc 5.55 5.11 +8.6%, Dutch guilder 3.62 3.24 +11.6% German mark 3.66 3.22 +13.6% Swiss franc 4.37 3.84 +6.4% Japanese yen 360 308 +16.9% British goods exported to the US will now go up in price by 8.6 per cent while goods imported from the US will now go down in price by 7.9 per cent.
It is true the percentage of our exports to the United States has fallen to 12 per cent (against 27/ per cent for the sterling area) but this blow to our US export trade will be felt keenly when the American boom gets going. Japan has been the worst hit — her abject surrender was due to her businessmen's dislike for floating rates and exchange controls and the slowing down of her economy will react upon Australia who has now been forced to follow the dollar down. The devaluation of the Australian dollar against sterling will now be 2.25 per cent.
This again will have an adverse effect upon our exports to that continent as well as upon the sterling prices of Australian shares. Mr Barber has claimed that Britain will not lose its competitiveness with the rest of the world, as compared with our position on May I, meaning, I suppose, that what we lose from upvaluation of sterling against the dollar we shall gain from the depreciation of sterling against the German mark and the Swiss franc (4.4 per cent), the Dutch guilder and the Belgian franc (2.7 per cent) and the Japanese yen (7.1 per cent). (We remain unchanged against the French franc.) But all this remains to be seen. The percentage of our export trade going to countries where we have a currency disadvantage slightly exceeds the percentage of our trade going to countries where we have a currency advantage. The South African rand has been devalued against sterling by as much as 12.28 per cent. As no member of the Group of Ten was willing to speak up for South Africa that country will suffer economically more than most and when she loses her Commonwealth preferences in Great Britain when we enter the EEC she will be faced with serious recession. The effect of this monetary settlement on world trade is certainly at the outset to be deflationary. It is significant that Canada insists on keeping her free floating exchange. She has been tougher than the Europeans.
Apart from Japan, Australia and South Africa, which are certain to feel the pinch, there are a number of the poorer developing countries which are bound to suffer. They have already been hit by the collapse in many commodity and base metal prices and now they are going to feel the adverse effects of the depreciation of the dollar. Their small reserves are generally in the form of dollars and they sell their raw materials in dollar termsSo their buying power will be diminished. They have already lost in turnover from the re cession in world trade. Diminished exports higher prices for imports, lower prices fO exports, and reserves cut by dollar depre ciation — here are the makings of a sluoli for the poor developing countries of tbi world. It is absurd for President Nixe to talk of the great expansion of worli trade which will follow this monetals settlement; it will have to wait upof the boom which he has promised for tb United States in his election year. FO the moment the poorer southern half of tb world will face recession. They were rle represented at the monetary talks of tb, rich Group of Ten and the least the rid nations should do is to organise throui the IMF a long-term interest-free credit 4 at least $1,000 million — a Connally ple, on the lines of the Marshall plan whits saved Europe.
This may be exactly what will come of he trade negotiations which have be going on behind the scenes and betwee the heads of state. The Americans ar asking the EEC to agree to the stockpiliel of grain surpluses for a period of yeal (which could lead to the revision of till detestable common agricultural pad and to concessions over citrus fruits al , tobacco. Monetary agreements withos! trade agreements are a waste of time. !, is absurd to fix new exchange parities the parties to the agreement are not goief to change their trading habits. Countrie like Japan must stop piling up huge pal ments surpluses at the expense of debt° countries who do not subsidise their el porters or impose quotas on their imports,' Groups like the EEC must stop being 0'1 fish and protecting their inefficient Wale" against the world's food exporters. Thi temporary monetary agreement does II' begin to solve the world's trading pro' lems. Can sterling hold its new exchange rated Fortunately the Group of Ten decided ' allow 24 per cent margins for excharl rate fluctuations above and below the ne,' fixed parities. For sterling the dealiv1,1 range will be $2.547 to $2.664 and the Beg I of England is making full use of its greats! 1 freedom by allowing sterling to sit on 1:1 floor. That will be the most comfortalP I position for our traders.
Previous page
