21 AUGUST 1971, Page 24

MONEY

The currency shemozzle

NICHOLAS DAVENPORT

We return to a continuation of the old, old crisis — the breakdown of the international monetary system devised at Bretton Woods twenty-five years ago — and Mr Nixon is dealing with the dollar aspect of it in much the same patchy way as Mr Wilson dealt with the sterling aspect of it in 1964. He has imposed a 10 per cent surcharge on imports, declared a ninety-day freeze on wages, prices and dividends denied the convertibility of the dollar into gold and refused a formal devaluation. But unlike Mr Wilson, he has gone all out for expansion. Wall Street has soared.

There is a big difference between a weak dollar and a weak £. The dollar is the only currency with a fixed gold content, so that you cannot resort to devaluation of the dollar without writing up the monetary price of gold. This was fixed at $35 in 1934. The Americans have refused to consider writing up the price of gold ever since the great gold crisis of 1968. They were ready then to demonetise gold and have since been willing, if not keen, to see gold gradually disappear from use as a monetary reserve. They have not gone so far as to denounce gold as 'a barbarous relic,' as Keynes once did, but they have supported the issue of 'paper gold' by the IMF (the SDRs or Special Drawing Rights) as the more civilized way of adding to the world's trading or banking reserves.

Mr Nixon was, of course, clever enough to avoid raising the prickly question of the gold price. He has no legal power to do so, for that power has resided with Congress since 1945 when it ratified the Bretton Woods Agreement. The lengthy procedures for investigation, proposals and counter proposals which the American Congress would have to adopt before the question of raising the gold price could be considered has enabled Mr Nixon to play his trump card, namely, to leave it to the Europeans and the Japanese to write up their currencies against the dollar, as the Germans and Dutch have already done by agreeing to 'float.' As I write the German mark has floated to a premium of 8 per cent and the Dutch guilder to a premium of 5 per cent against the dollar. The Japanese yen must be the next.

Incidentally, I have always said that when the American gold stock had fallen to $10,000 million the authorities would put up a notice at Fort Knox to say, "No more sales of gold." The stock is now down to $10,246 million and it is regarded as the minimum for a world power to hold against the chance of a world war. The formal embargo on gold sales is, in effect, confirming what has been the practice since the gold crisis of 1968 when a free market in non-monetary gold was established. The monetary powers then agreed not to convert their unwanted dollars into gold to any large extent. The clever French did manage to convert $190 million into gold this month to comply with IMF rules about the repayment of loans but we British have cheerfully used the surplus dollars we had to buy to pay off $614 million in advance of our outstanding drawings from the IMF. These are now down to $1,000 million.

The reserves of the monetary powers are now divided as to $36,870 million in gold and $48,705 million in dollars, reichmarks and other convertible currencies. The dollars held outside the central banks in the so-called Euro-dollar market are $40,000 million. The fact that the powers regard a gold stock as an essential war reserve suggests that gold is still regarded not as an irrelevance, as some foolish fanatics declare, but as something which the less civilized part of the world regard as relevant and valuable.

The dollar was not the first currency to show up the fatal weakness of the IMF system. The system has always depended on the deficit countries correcting their disequilibrium by deflation and the surplus countries theirs by inflation. But there was nothing to compel them to do, so if it did not suit their politics. In the case of the United States President Nixon rightly decided that recession had gone far enough and that the economy must be reflated, regardless of the payments deficit, so that the 1972 elections could be fought in a favourable business climate. Who would be bold enough to say today that the monetary rules of the IMF must come before the happiness and well-being of the working populations of its members?

Of course, the payments deficit of the United States had grown to such huge proportions that it could fairly be said that Washington was imposing on the world a dollar standard instead of the gold exchange standard set up at Bretton Woods. In the old days the Americans had a sufficient surplus on their visible trade to finance their overseas aid and their investment abroad, but this is no longer true. They are actually running a deficit on their visible trade and in the first quarter of 1971 their payments deficit amounted on one reckoning to $2,800 million and on another reckoning to $5,700 million. The American deficit has, of course, been extremely useful for the finance of European trade — and we must never forget the great generosity of Marshall Aid which restored. Europe after the war — but clearly the world could not tolerate American deficits of over $10,000 million a year much longer even if the Vietnam war were to end next year.

It is Japan who is now behaving selfishly and not the Americans. The Japanese government has been creating non-tariff barriers against the world's goods while stimulating her own exports by veiled subsidies which take the form of tax concessions. Japan has the highest rate of output growth of all the industrial nations — 11.3 per cent a year in the last decade and 10 per cent forecast for the present decade. This year Japanese exports are exceeding those of every member of the OECD except the United States and Germany. Its trade surplus last year was $4,000 million and her gold and foreign exchange reserves rose to $3,720 million at the end of 1970 and to over $10,000 million today. Yet she has still refused to up-value her currency.

As soon as the yen has been revalued upwards — I hope at 10 per cent — the Germans and the Dutch can bring their floating to an end and up-value their own currencies by 7 per cent and 5 per cent respectively. The system of fixed exchange rates might then enjoy another period of stability provided each currency is given more flexibility and is allowed to fluctuate by at least 3 per cent either side of its parity. It would be far too upsetting fOr world trade if all currencies were to float against the dollar. The only obstacle in the way of a settlement on the lines I suggest is the French insistence on a rigid gold exchange standard for the Common Market Six. Mr Heath should see to it that sterling is not tied to the French view or forced to up-value or floated upwards. We must retain our monetary independence.