Flexibility with laxity
Christopher Fildes
rr he Mansion House was a sea of white .I. ties. On the further coast, like the mut- ter of distant surf, Sir Geoffrey Howe was speaking. Then all at once a breeze stirred the waters. The Chancellor, it seemed, was working up to his point, he had a message for us, a new slogan: 'Flexibility without laxity', he proclaimed. At my table a Bank of England official abandoned his expres- sion of bankerly impassivity, sat up, and pulled a face. l thought at the time that his objection was to Sir Geoffrey's phrasing suited, perhaps, less to economic policy than to a breakfast cereal with plenty of roughage. But the man from the Bank could see trouble coming. That was the mo- ment when sterling became a one-way bet.
It happened three months ago. Sterling at the time was steady — preternaturally steady — and had been so for more than a year. It had been losing ground to the dollar, and gaining on the Continental cur- rencies. But against the average of our trading partners' currencies it had stayed put. That average is measured by an official index, in which different countries' curren- cies are weighted in proportion to our trade with them. Throughout 1982 that index had scarcely budged from a figure of 90 or a lit- tle above. Pure coincidence, the Treasury and the Bank of England would swear, car- rying no conviction.
In the theory with which this Govern- ment set out, there was no right or wrong level either for the exchange rate or for in- terest rates. What mattered was to steer by the money supply, interest rates were the steering wheel and the exchange rate was the wake. But it gradually became clear that the money-supply figures on which policy relied were giving false or erratic bearings. Other instruments had to be read, and it seemed — though it was never officially said — that the most reliable was sterling. If the exchange rate remained constant, then so did policy.
This last year, had the agreeable conse- quence that interest rates could come rattling down. Sterling was wanted — partly because the troubles of international bank- ing set off a flood of funk money, out of the more exposed banks, in America and Germany, and into the stolid and well- supervised giants of our High Streets. Every time sterling's index pushed up towards 92 or 93, the banks got a nudge to drop their base rates — and down they came, from 14'1 per cent on New Year's Day to 91/2 per cent at the Mansion House dinner. But as the year went on, and as the economic recovery forecast for the spring showed plainer signs of having aborted in the sum- mer, cheaper money became less of a steering-wheel for sterling and more of an end in itself.
Kites began to fly in the air of Whitehall. The Government, it was said, was deter- mined to get interest rates down. Ministers began to reiterate that they had no target rate of exchange for sterling. Down the air came deniable hints that the pound and in- terest rates might be welcome to slip down, in step with one another. Both would ease the pressures on industry, which were tightening. The CBI came close to making devaluation its formal policy.
Then to the bankers and merchants of the City of London, assembled in state 'under the Lord Mayor's roof, came the Chancellor with his message of 'flexibility'. Policy must bend, he implied, to accom- modate the needs of industry. For the pound, that could have only one meaning. If it began to strengthen, that would pro- vide the next eagerly-seized chance to make money cheaper and help industry. If it began to weaken — well, that would help industry too...
The Chancellor spoke late in October, and in mid-November the pound fell out of bed. Today it lies on the floor, bruised and miserable — as low against the dollar as it has ever been, and devalued against the average of our trading partners' currencies by some 10 per cent. And the banks' base rates, which had come down to 9 per cent, have climbed back up to 11 per cent, with the money market presently betting that their next move is likelier to be up than down.
The official response has been a display of ostentatious indifference, punctuated by displays of short temper. Of course (comes the assurance) there is no target for the ex- change rate, our only concern is to keep the exchanges open for two-way trading Then the Prime Minister comes back from Port Stanley, summons the Governor of the Bank of England to' her study, and invokes the name of God in telling the City to calm down.
The conventional response to a sterling crisis is to get the pound some help from abroad and to tighten policy at home. But this is not a conventional sterling crisis. The all-too-familiar symptoms are not to be seen. The balance of payments, this time, is strong, the inflation rate is below our com- petitors' average, wage settlements are low, the labour front (except perhaps at the waterworks) is calm, and the Government's borrowing is below its own plans, which no one had criticised for extravagance.
Instead, what we have been seeing is a flight of capital. Determined and quite suc- cessful attempts have been made to blame this on Peter Shore, the Shadow Chancellor, for conjuring up the spectre of a Labour government which would devalue the pound by 30 per cent and bring back ex- change controls. But he revealed his plans on 23 November, when the run on sterling was already under way. What Mr Shore underlined was that the alternative govern- ment would let the pound fall, while the present Government certainly would not let it rise. It does not take an expert on the ex- changes to bet in a one-horse race like that.
For Ministers, the morals are so obvious, and the postwar years have dinned them in so often, that it is strange that they should have to be learned again. First, a slide in sterling is easier to start than to stop. Se- cond, nothing speeds up that slide like the belief that the Government does not mind it. Third, a time comes when the Govern- ment must mind, to the point of doing unwelcome things. Fourth, the pound in our pocket has been devalued — and a Government whose declared first concern is to crack inflation must face that.
Lastly, it ill becomes any government least of all this one, which believes in markets — to rage at its own face reflected in the markets' glass.
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