BULLS, BEARS AND BUGABOO
No one would suppose, from the almost hysterical reaction to President Nixon's television broadcast on Sunday, that his economic measures are good news. Their possible repercussions are immensely hopeful. A lot of rickety old international financial machinery is likely to be cleared away, and we at least have the chance to introduce a more sensible system, For Britain, which still has a special position in the international currency field, the possibilities are particularly encouraging. But at the moment of going to press it looks as though the Heath administration is determined to fumble its chances.
A bullish or optimistic reaction to the new situation is justified by the ending of the monetary system which we have been trying to work with increasing difficulty since the end of the war. We have at last found our way out of the Bretton Woods. Bretton Woods rested on two principles — first, that the relationship between the value of all the world's currencies should be a fixed one, varying only between very small limits, i.e. less than 2 per cent. Second, the principle, which was always rather smudged, of convertibility into gold, via, as a practical matter, the dollar. But for the last three years at least the dollar has not been so convertible, even for central banks, at the nominal value of $35, set in 1934. President Nixon has done no more than acknowledge the reality of a situation which the previous administration preferred to obfuscate.
Bretton Woods failed to live up to the expectations of its creators and developed some unforeseen and very undesirable side effects. One which has affected us all is that the fixed exchange rate system, operated by governments whose expenditures never fail to rise year by year, has inevitably led to inflation. The President rightly described inflation as cruel, and admitted that eighty million wage earners in America have been on a treadmill. "Their pay cheques have been higher but they have not been any better off." The same comment can be applied to Great Britain and to many other Western countries.
At the moment Germany, Holland and Canada have floating exchange rates and have benefited from them. The German decision was taken advisedly as part of a policy against inflation. Mr Heath is looking desperately and unsuccessfully for some way to stop inflation here. This is his chance. All he has to do is to let the pound float, and return to his yacht. If a sailor does not know about floating, who should? Instead, the Cabinet has given the impression that it is terrified of taking any decision and wants to have its collective hand held for it at some international conference.
But what is the point of trying to arrange meetings of the group of ten or with the six members of the Common Market? Are they going to try to persuade President Nixon to eat his words? The desire to co-ordinate in some way our response with that of our partners (perhaps) to be in the Common Market is a further illustration of the damage politicians do when they arrogate to themselves the right to fix such an important price as the currency. The matter then becomes confused with other considerations. And who are we going to talk to in Europe — the Germans who are already floating, or the French who are determined not to? It is not a matter we can solve by compromise, coming down between the two, half floating, half not.
The events of Monday and Tuesday of this week undoubtedly demonstrate the disadvantages of politically managed currencies. Are the foreign exchange markets and the gold market to be closed indefinitely until these political meetings have taken place? If so, there will be a major interruption of business and the maximum amount of un certainty. This is always the way with political intervention in economic affairs. As with the Upper Clyde Shipbuilders or the aerospace industry, because the situation is politicalized and therefore has electoral implications, nothing effective can be done until the situation reaches a crisis. Then desperate action has to be taken in a hurry. In a market situation, the adjustments are all made steadily and gradually to keep in line with a changing situation; the word crisis ' which has appeared in most newspapers' headlines, would never be appropriate.
There are, of course, some grounds on which a bearish or pessimistic reaction would be justified—if, for instance, President Nixon's new policy were to mark a return to protectionism. But there is no sign of that yet. Indeed the measures are in part designed to break down the worst case of economic nationalism — the illiberal trading and commercial policies in Japan — and already the Japanese stock market has reacted sharply. It is true that the temporary surcharge of 10 per cent on imports into America will cut into some countries' dollar earnings — and some companies in Great Britain will have to accept a lower margin of profit on American sales or switch their exports elsewhere. But this is not a major problem and is only given such prominence because of the curious and persistent delusion that imports and exports of things you can touch make up the whole of a country's international accounts. They seldom make up much more than half, and the reduction in Britain's dollar exports is probably going to be less serious than the reduction in our dollar income from American tourists, who will to some extent be discouraged from taking their holidays abroad.
As for the bugaboo — as Mr Nixon described fears of devaluation — some of the President's address was so bad that it would have done credit to Mr Wilson. Naturally the American President must act as he chooses and his primary aim must be to further American interests. His internal problems of high inflation and heavy unemployment are well appreciated. It is also clear that though the chief cause of the deficit in the American balance of payments is the high rate of spending for military and political purposes throughout the world, the recent emergence of a deficit in American merchandise trade itself is certainly new and alarming.
The other unwelcome feature of Mr Nixon's speech is his decision to order a price, wage and dividend freeze. This will, of course, be welcomed by weaker brethren in this country as a volte-face which should immediately be emulated by Mr Heath. But what President Nixon says may well be different from what he does. As he emphasized, he is relying on the voluntary co-operation of workers and employers to make the freeze work, so it is all Lombard Street to a china orange that his wage-price freeze will be just as unsuccessful as all the British attempts have been in the last few years.
Of course, in spite of all that Mr Nixon does and Mr Heath doesn't do, life will go on, and in a few weeks' time, everyone may well be trying to remember what the fuss was all about. But if we are to make full use of the opportunities now open to us, and to make certain that this kind of ridiculous crisis does not again paralyse trade and business, we should get as far away as possible from politically managed currencies. The British Cabinet has demonstrated that even with the backing of an exceptionally strong balance of payments, it still doesn't know what to do about the £. The lesson to be learned is that the Cabinet should do nothing about the £, but leave the £ to look after itself.
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