DEVALUATION IS NOT ENOUGH
FOR countries which have run into difficulty in the conduct of their international trade and finance, as for businesses which find themselves in a similar case, there comes a point at which past mistakes and misfortunes have to be acknowledged, a line drawn, and a new start made. The devaluation of the pound from $4.03 to $2.80, announced by the Chancellor of the Exchequer on Sunday, September 18th, represents the line drawn between a past phase of inflation at home and increasing selling difficulty abroad and a future phase of renewed effort to hold inflation in check and increase sales in the dollar market. It is that and nothing more. The remarkable exhilaration shown by the Chancellor might just possibly have been justified by last week's achievement of an agreement with the United States and Canada on future economic co-operation, but it cannot possibly be justified by a mere reduction in the exchange value of the pound. Sir Stafford Cripps knows no more than anyone else whether sufficient new orders from the dollar countries will be forthcoming, whether they will be matched by a sufficient new effort by British industry, or whether the two between them will carry the country to solvency. The time for rejoicing lies in the rather distant future, if it lies anywhere. There is no automatic consequence of the devaluation of the pound sterling, except the rise in the price of gold which filled up a small cup of happiness in Throgmorton Street and has already been drained to the dregs. It is not even a stimulant. It is enough to purge away past failures, but it is not enough to ensure even a temporary future success.
There is no doubt, of course, that the evils and pretences which devaluation wiped away were becoming big ones. The ptetence that the pound was worth four dollars had gone on long enough. It had onfy been maintained by the purely artificial device of officially fixed exchange rates. That device had been disregarded for months in the so-called black bourses of the world. But when, in recent weeks, foreign holders of sterling showed such willing- ness to unload it that the " black " rate dropped to the neighbour- hood of three dollars to the pound, the Chancellor had to make up his mind to change the official rate to bring it into line with the unofficial. There may have been something of undue anxiety and of unjustifiable gambling in the unofficial fall, but it is one of the undesirable consequences of a refusal to have free or " white " exchange markets that there is no effective and continuous counter to the vagaries of the black. The actual reply of the British Government—a single violent reduction in the value of the pound—was the only reply possible in the circumstances. But it is not in itself a method to be commended.
Of the various passages of political special pleading in the Chancellor's broadcast of last Sunday night, that which attempted to defend the device of fixed exchange rates, was quite the most astonishing. A rate which has been held at a purely artificial level for months is suddenly reduced by 3o per cent. overnight, by a decision so secret that Parliament could not even be informed of it in advance, much less consulted. The dangers of the operation are so great that it is necessary to close the banks and the Stock Exchange to absorb the first impact. And this is referred to, by a Minister who has built up a reputation for frankness, as " a very useful arrangement," which enables traders to " know where they are in their business." But if the exchanges had been free—and it is the Bretton Woods agreements, as well a, British policy, which keeps them unfreethe dollar value of the pound would have fallen, but it would have fallen relatively slowly and in a calculable manner, and it would almost certainly have stopped before reaching the low level of $2.80 at which it is now officially fixed. This process, to put it mildly, hat certain advantages over the Treasury's method of watching the black market quotations and then suddenly undercutting the most pessimistic seller of sterling, while making a promise that if the downward jolt to $2.80 proves to be too drastic there will be an upward jolt to come later. The financial community no doubt recognised that the old official rate of $4.03 had become quite unrealistic. It even accepted so clumsy a device as devalu- ation for putting it right. But to suggest that it liked the process is surely to go a little too far.
The open recognition of past inflation was the other big piece of tidying up accomplished by devaluation. But here again the effect of the admission was marred by the regrettable intrusion of bias into the Chancellor's presentation of the facts—an intrusion which turned his announcement into something more like a party political broadcast than an official statement. The account which he gave of the deflationary process as it occurred between the wars was imperfect as history, since it implied that the hardships then suffered were deliberately inflicted by business and the Governments of the day ; but the subtle suggestion that this is how non-Socialists might be expected to behave now it was downright dishonest. It was not a statement of probabilities, but a mischievous reflection, by a Minister of the Crown, on the character and intentions of his fellow countrymen. It was doubly to be condemned for its implication that the Government's own followers are pursuing a course which could in no circumstances lead to unemployment, misery and bankruptcy. It may be argued that in putting forward wage claims at this time, in showing no signs of making a new effort in production, and in counten- ancing the argument that any rise in the cost of living brought about by devaluation must be met by a rise in wages, the trade unionists are acting in ignorance. But such behaviour could very quickly kill all the hopes of a fresh start which de- valuation was meant to inspire. And it cannot be said that the Chancellor attacked this major menace with the necessary determination. In his broadcast, as in his announcement after the Chequers conference in July, he allowed reassurance to creep in where it was not appropriate. He repeated that the social services must not be touched, and so ruled out the main possibility of Gov- ernment retrenchment. Last July the excuse could be made that he was a very tired man. Today it cannot.
That doubts about the Government's own determination and singleness of purpose should be allowed to arise is particularly dangerous. The effort required of the industries producing for the dollar market is formidable. They will require the utmost confidence and boldness to face the risks that lie ahead. In the single case of the Lancashire cotton industry success will depend first on the arrival of new orders from the dollar countries, attracted by the new exchange rate, secondly on the willingness of the labour force to work hard to meet those orders (without wage increases), and thirdly on the orders being large enough to justify the purchase of raw cotton for dollars which have now become dearer. The calculation of the elasticities of demand and supply which all this implies might appal an economic theorist—much more an ordinary business man. And yet the second factor—the willingness and capacity of the labour force—is itself so elastic that it is possible to hope that the job can be done. In fact the main hope for Britain lies in the assumption that there is a vast reserve of labour capacity which has only to be tapped to set going the genuine process of recovery. And it is hardly possible for anyone who has seen the figures of machinery now installed in mines, who has noticed the public performance of bricklayers, or who has observed the pace of railwaymen even when they arc not going slow, to doubt that the reserve is there to be tapped. What is more, the heartening achievement of the steelworkers shows what can happen when it is tapped. But it will not be possible to assume that the effort will be made unless the Prime Minister speaks more plainly to the trade unions than he did at Bridlington, unless the Chancellor drops his new air of reassurance and goes back to that stark truthfulness on which his reputation was built, and unless the Economic Secretary to the Treasury, even in preaching to the faithful in the pages of the Daily Herald ceases to use a peculiar type of economics which makes no allowance for the limitation of real resources. It was the Chancellor himself who said that we cannot have our cake and eat it. It is the simple truth that we cannot both export goods and services for dollars and at the same time consume them at home, whether in the form of welfare services or otherwise. What is more we cannot even hope to stop inflation, which could wipe out the effect of devaluation in a very short time, unless the Government takes other measures to reduce its expenditure in addition to cuts in administrative costs. The effort which will be required of the workers and business is formidable. It must be matched by further official retrenchment. If it is not then devaluation alone will not save the country. It will not even save the Government.
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