Devalue now
Sir: Your "call for what the French call a 'cold • devaluation" (June 17) is not the first attempt of its kind to square the economic circle.
Another devaluation may well be forced on us soon "if things go on as they are going at present" — and nothing is better calculated to force the pace than devaluation
talk itself. But let us not delude ourselves that even an unforced devaluation would do anything to improve our chances in the battle against inflation. On the contrary, it would make matters worse.
Directly, devaluation raises the cost of imports, and so aggravates, rather than relieves, the inflationary pressure at home. Indirectly, by making exports more competitive (which is another way of saying that the devaluing country sells its goods and services at an artificially low price), it will be followed, after a time lag, by an improvement in the balance of payments which, far from reducing, will once again increase the inflow of funds from abroad, thus further swelling the domestic money supply. This improvement will, of course, be at the expense of others, who will therefore be tempted, or forced, sooner or later to embark on the same experiment, rendering the whole exercise ultimately self-defeating.
What is true of imports is also true of the foreign exchange cost of other forms of overseas expenditure, such as the contributions we have contracted to make to the European Community budget (what you call the rise in costs on entry into Europe"). Whether this increase would be outweighed, and paid for, by a more favourable trade balance with Europe on less favourable terms of trade is something which nobody can foretell with certainty. Besides, are trade unions likely to moderate their wage claims if, on top of an inevitable rise in the cost of living due to dearer imports, they are encouraged •to expect that any adverse effect of inflationary pay settlements on exports will be offset, at a stroke, by another devaluation, "cold" or otherwise? If we cannot presume indefinitely to be bailed out by others, neither should unions — and employers — presume to be bailed out by their government.
Above all, if, in the final analysis, devaluation is "only the first step to economic success," and has to be made to work by other measures, is it not wiser, and infinitely less painful in the long run, to adopt and persevere with such measures in the first place?
W. Grey 12 Arden Road, Finchley, London N3
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