Sterling on the brink
Nicholas Davenport It is now obvious why the Prime Minister could not go to the royal birthday party. He had just read the City page in the Spectator on the sterling crisis. He had come to the fifth paragraph which began: 'This is surely the occasion for our new Prime Minister to intervene. He can rightly say: We must stop this nonsense. This is exactly *here I came in before (1964)'. And here in the red box were the same old papers from the Treasury and the Bank of England about the exchange rates, the borrowings, the drawing rights from the IMF, the comparative inflation rates and interest rate structures, and the rest of the official gobbledygook (which Sir Harold would no doubt have flashed through in the car while putting on his garter). So what could Mr Callaghan do but wade through these boring papers in case the Queen had had a first sight of them? I only hope that he will throw them away, read this page and use his own common sense, of which he has plenty. He used it to good effect in the firm and courageous speech he made at the shopworkers' conference in Blackpool when he warned the nation that higher living standards must wait. He was quick to realise that if the external value of a currency collapses, its internal value will follow suit.
The Bank advice, which was to raise Bank rate (now called Minimum Lending Rate) by 1 per cent to l0 per cent last week has already proved useless. The pound went on being unwanted in the foreign exchange markets and fell to 81.81 which is equivalent to a depreciation of nearly 38 per cent since the Smithsonian settlement of 1971. Raising Bank rate is bad because dearer money puts up the cost of every business, deters industrial investment and adds to the inflation at home. Fortunately the banks and building societies did not have to put up their lending rates because they never brought their rates down proportionately to the MLR reduction from l2 per cent (last October) to 9 per cent. If there is any force in the Bank argument that they must maintain here a short-term interest rate 4 per cent to 6 per cent higher than in the US—the margin had lately dropped to 3 per cent—then the Prime Minister should tell the Bank to impose a two-tier system of interest rates, a much higher one for the nervous foreigner and a much lower one for the hard-pressed borrower at home. This could easily be enforced and monitored through .the acceptance houses, who are the authorised depositaries for foreign money.
What will induce foreigners to stop selling sterling is not, in fact, a higher rate of interest but a growing realisation that the rate of British inflation will really be brought down to a manageable level. What shook their faith was the immediate rejection by the comrades of the Chancellor's 3 per cent pay offer plus tax reliefs. But how are we to explain to foreigners that the TUC in Britain likes to wash its dirty linen in public, that it loves to bargain and haggle in order to impress its members, and that it will always compromise with a Labour government in order to keep the Tories out ?
A satisfactory agreement will no doubt be reached to enable the Chancellor to keep to his target. 'We have already cut our inflation rate by half since last August,' said Mr Healey, 'and we will eliminate it altogether by the middle of next year. I don't like the sort of thing being said about Britain in the last few years. I think we have got to make Britain a world leader and I think we can.' Fine words for a general to address to his troops, but how can he rely on his troops being loyalwhen Colonel Benn is telling them to expect a change in command ?
The Prime Minister has somehow to stop his comrades saying and doing things to upset the foreigners who hold the fate of sterling in their hands. He must tell the TUC that these foreigners are not fraternal trade union delegates, but hard-headed businessmen or officials who have the power to
destroy the value of our currency abroad. Foreign monetary authorities are holding over £4000 million in their official reserves and according to the Economist there is over £3000 million more in private hands. And if our own traders were to impose just one day's lag on export receipts and one day's lead on import payments it would cost our reserves some £250 million each time it is done.
Our reserves are pitifully low. The Bank gave a figure of $5,900 million at the end of March of which only about $4000 million would be readily' available. Of course we have private assets abroad. The Bank of England in its Bulletin last June gave a figureof £4885 million for the net external assets of the private sector, which would probably be worth today nearlY £8000 million, say $15,000 million. If the official reserves sink much lower the Bank, might have to borrow against these private assets abroad in order to mobilise a dollar 'massede manoeuvre', that is, when it wants to come decisively to the rescue of sterling in the exchange markets and catch out the bear speculators whom Mr HealeY has accused. Mr Harold Lever would be the best judge of when to mount the operation. At the end of 1974 the net external liabilities of the public sector were £2985 million. Since then the public sector has taken up over $8000 million worth of foreign currency loans. Quoting the Economist again the exchange rate loss on all the public-loans since the time they were originally drawn is now near to £1000 million. Of this the government has agreed to absorb £866 million through special exchange rate guarantees. All this will put up the cost of our electricity, our coal and our postal services. And these public boards borrowed quite a lot abroad without covering their exchange liabilities. When will the comrades realise that they cannot go on borrowing abroad to meet state deficits? If the Prime Minister feels that he cannot make the trade union leaders understand these complicated sums he must tell them in simple language what a collapse in sterling would mean to them and their wives. The fall in the exchange value of the pound since February will put up the cost of their shopping baskets by 2 per cent to 3 per cent before the end of the year. And the cost of this year's holidays abroad will have risen bY 50 per cent since 1975. Fish and chips on the Costa Brava could even double in price. They would be wise to accept Mr Healey 3 per cent if they wish to avoid such catastrophes. Of course, sterling will never be a safe currency until the huge sterling balances held by foreign central ibanks are funded through the machinery of the IMF and made repayable over a long period of years. That is a long-term prospect. Meanwhile the City is taking the view—expressed through its lack of panic in the market—that sterling will get over its present crisis. The TUC, if it came to its financial senses, could even make it look undervalued.
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