The Pound and the Dollar
By NICHOLAS DAVENPORT
I HAVE the feeling that in the business and financial world international co-operation has received a big setback. Certainly, economic nationalism seems to be once again on the march. It was revealed in its true colours when West Germany suddenly up-valued the D-mark by 5 per cent. You may take it that this was not done to help the $ or the £, they did it.. for internal reasons— to damp down their- domestic boom. There was no reference to the International Monetary Fund, %Filch is supposed to be the guardian of those sacred cows--the gold-fixed national exchange rates. There was, I believe, some inquiry of fellow members of the community of Six as to What their attitude would be to a revaluation of the D-mark, but none of them was told that it was imminent or even contemplated. The ?atell were plainly taken by surprise and as. their economy is closely. linked with that of West Germany they were. forced to follow suit. Immed- iately there was heavy selling of both dollars and sterling and buying of Swiss francs, which vvete expected to'follow the mark and the guilder
rds. The attack on sterling was especially Ileakiy—'fredzied; according to some reports.
could any *foreign speculator imagine that the British would be foolish enough to Jet slip this wonderful opportunity of devaluing sterling? But the Bank of England. having no Stall ord Cripps to give it courage, played the honourable game. The day was saved—at a heavy cost, I fear, to our gold reserves, but the real victory went not to the forces of monetary law and order, but to the guerrilla forces of the 'hot money' merchant and the currency speculator.
Of course, Mr. Selwyn Lloyd has declared in the House of Commons with the utmost gravity that the British Government has no intention of devaluing sterling and that the £ is by no means overvalued in terms of other currencies. Of course, everyone has believed him—for the present. But there was a curious sequel to this skirmish in the exchanges. The central bankers at their monthly meeting in Basle of the Bank for International Settlements, expressing them- selves satisfied that the rumours of further cur- rency adjustments were unfounded, wished it to be known that 'the central banks concerned are co-operating closely in the exchange markets.' The co-operation is to take the form of stock- piling each other's currencies instead of convert- ing excess holdings into gold. The" inference is twofold. First,, international co-operation having failed on the political front, the central bankers feel obliged to stand in the breach. Secondly, the threat to some currencies (sterling in particu- lar) is so serious and the thinness of the reserves so palpable .(British in particular) that a partial suspension of currency convertibility at central bank level is considered desirable for a period— until such time as the IMF can reconstruct itself or improve world liquidity or give adequate backing to weak international currencies.
The Americans do not appear to be pressing very hard for the reconstruction of the IMF, although they must know that time is not on the side of the £ and that the seasonal strain this August may bring another exchange crisis. They are naturally giving first priority to the disposal of their own recession and the defence of their own currency. While an American trade recovery is much to be desired, the various measures taken to help the dollar must tend to weaken sterling. For example, the tying of American foreign aid to American goods (which the Kennedy admin- istration is pushing extremely hard) and the restrictions laid upon American tourists' imports cannot fail to reduce the demand for sterling. It is difficult not to resist the conclusion that the American monetary authorities are much more concerned with establishing one strong inter- national currency—the dollar—than with estab- lishing two. Of course, they are interested in revitalising the IMF, but the plan they first favoured of Professor Triffin (the professor being the new consultant to the Council of Economic Advisers) would require another international conference like Bretton Woods.and would take years to negotiate. The less radical plan they now prefer of Mr. Edward Bernstein (one of the American negotiators at Bretton Woods and now an independent consultant in Washington) requires stand-by credits to be given to the IMF by countries with large reserves. This suggests that what they have in mind is a very simple operation: when gold flows out of Fort Knox to Germany the IMF borrows it back and loans it to the United States. Apparently some variant of the Bernstein plan is to be submitted to the IMF meeting in Vienna this September. By that time it will probably be clear whether sterling can hold at its present fixed rate of $2.80.
I here is really no reason why it should nut hold if exports continue their recovery and imports are restrained, but it may be necessary for a time to control the volume of private over- seas investment, so much of which contributes little to the current export trade or to the lone- term strength of sterling. Sir Roy Harrod would go further and restrict imports, discriminating possibly against dollar imports, but this is not to be recommended when we seem to be on the verge of serious merger negotiations with the European Six. A control of private overseas investment is the only tenable line of defence.
It must not be forgotten that the withdrawal of South Africa from the Commonwealth is not a withdrawal from the sterling area. London is happily the market for the bulk of the African ouput of gold. At one time the Reserve Bank of South Africa offered substantial discounts to buyers of gold who would take delivery at the Cape, but this discount has fallen away and about 90 per cent. of the • output (say £290. million) now comes to the London bullion mar- ket. In fact, this is' the only market capable of disposing of it and when sterling is struggling to maintain its position as an international currency. South African gold can be helpful. This may seem to some of us. radicals like supping with w the devil, but when were beggars choosers?
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