20 AUGUST 1977, Page 14

The unpegged pound

.Sir: 'At long last' wrote Nicholas Davenport (6 August) in praise of the 'unpegged' pound, `the Bank.of England has done the right thing.' And most of us, including those who were most unhappy to see the pound floated (if that's the right word) in the first place, would probably agree. After all, what for so many years was sauce for the mounting gander!

Certainly, given the choice between a falling pound and a rising one, most of us now would have little hesitation in preferring the latter. But don't let us delude ourselves that a rising exchange rate is, any more than a falling one has proved to be, an automatic cure for a country's economic ills, whatever exciting vistas either appears to open up. Both are merely symptoms, albeit extremely sensitive symptoms, of a country's economic performance, and both can be bought at too high a price.

In the long run, indeed, governments intent on avoiding the excesses of inflation or unemployment, or both, could hardly do better, for themselves and others, than to run their affairs in such a way that their exchange rate is as far as possible kept stable. This idea that they should use the exchange rate as their compass, rather than treat it as an escape-hatch from difficulties of their own making, is not really new: it is what the maligned system of 'fixed' (or pegged) parities had always been intended to be.

Exchange rate stability would thus again become the hallmark of sound economic management and international economic respectability alike. Floating exchange rates have proved a great shock-absorber in their time, and the oil price explosion — itself a legacy of earlier excesses — could hardly have been weathered without them. But it is no use fitting our cars with the best shockabsorbers in the world — which also goes for floating bonds, indexed taxes and all other devices of the same ilk — if we persist in driving them to destruction.

W. Grey 12 Arden Roa d, Finchley, London N3