Patchwork devaluation MONEY
NICHOLAS DAVENPORT
Peter denied his Christ three times before the cock crowed in the morning but devaluation was denied twenty times in thirty-seven months by Mr Wilson and Mr Callaghan before the rude Gallic cock crowed its head off. This is not said in rebuke of these ministers, who would still be happily denying devaluation today if the $800 million hurriedly lent to them by the central bankers at Basle a fortnight ago (when the two billion dollar credits had run out), had not been dissipated in the last hectic bear attack on sterling, but I do wish they had not used so often the old clichds about `the £ riding high,' and 'putting the economy right.' The £ has been a distressed reserve currency ever since the First World War and the only time it could claim to be `riding high' was in the 1930s after it had been divorced from gold and was being cleverly managed by the Bank of England in a free floating market. The world had confidence in British monetary management at that time under a National government, but no one, I regret, appears to have confidence today in British monetary management under a Labour government. The devaluation of 1949, in circumstances not so very unlike those of 1967, is too vividly remembered. Two years after that 1949 devaluation there was another serious balance of payments crisis—with a trading deficit of £419 million, which was slightly higher than the trading deficit in 1964—and the Labour government finally disintegrated in 1951. The confidence today that a devaluation of 14.3 per cent will be more successful is still a very tender plant.
The central banks abroad have cut their sterling deposits by a matter of £500 million in the past twelve months but still hold over £2,200 million in London, costing us around £150 million a year in interest charges at the present fantastic bill rates. The total of the sterling balances, accumulated as the result of two world wars, has been over £5,000 million until the recent drop to £4,700 million. Until these sterling balances are funded at much lower rates of interest sterling can never 'ride high.' And they will have to be funded if we are to join the European Common Market. This is the first great problem of UK monetary manage- ment. The next is the immense size of the trad- ing transactions in sterling. Add our import and export trade together and the sufn of our in- visible transactions and you reach a total of around £15,000 million. Disturb the confidence of 10 per cent and you get a sterling crisis. Mr Callaghan personally secured the confidence of America, as I found when I called on the Federal Reserve Bank of New York not many months ago, but he failed to win the confidence of Europe, or of the Middle East or of the Far East and, more important, of the business world in the City. Yet he was personally liked and trusted by every banker he met except the French whom he lambasted on more than one public occasion.
Every banker has the same problem as the tmc monetacer managersthe problem of a run on the bank when confidence is lost. But this does not mean that the bank is 'bust.' We are an immensely wealthy creditor nation with private long term assets of £9,600 million, of which £3,200 million is in the shape of marketable portfolio securities. I regret that Mr Callaghan did not see his way to mobilise some part of these securities to meet the IMF debts. He went on grabbing 25 per cent of the dollar premium on sales or switching but never gave us any incentive to disinvest. Clearly, in a financial crisis this country has to restrict direct invest- ment abroad to the amount which can be financed by the retention of profits or by foreign loans but Mr Callaghan allowed the businessman seeking a direct investment to barge into the security dollar pool and drive up the premium to 35 per cent. It would have been far wiser in my opinion to confine the portfolio pool to its proper function and give the port- folio managers an incentive to bring home $1,400 million to repay the ititr debt due in 1970. This debt will now cost us £80 million more to repay—a total of £580 million. Mr Callaghan wisely liquefied the bulk of the official dollar portfolio to help repay the $1,000 million due to the IMF this year—of which the final balance of $225 million will be paid next month, costing us now an extra £15 million, but why he did not ask the City to help in the same way is beyond my comprehension. Incidentally, the investment dollar premium opened on Tuesday at 16 per cent and rose rapidly to 25 per cent, indicating that the investment trusts had little confidence in the present devaluation and were scrambling to add to their dollar securities.
Having had personal experience of the two previous Labour Prime Ministers' devaluations I was amazed this week by the extreme anger which this one has aroused in the business world —so faithfully mirrored on the face of Mr Heath on the television screen. I attribute this to the in- dignation felt by all businessmen at being pushed around, slapped and tortured by so many changes in taxation and controls by the present Government. The culmination was the 10- per cent surcharge imposed for one black year on the already confiscatory surtax on high incomes and the farcically devised SET to round off the revo- lution in company taxation. Now the manu- facturers are to lose the SET subsidy (except in the development areas)—and the exporters their 24 per cent rebate of indirect taxation—and cor- poration tax is to be raised from 40 per cent to 424 per cent. No businessman feels safe under these constant chops and changes from White- hall. He feels he is being trifled with and threatened by more and more government inter- ference and control. This will explain his lack of confidence in Whitehall management. To make matters worse he is now confronted with a moneylender's Bank rate of 8 per cent. What businessman can borrow from his bankers at 10 per cent and feel confident that he can make any profit from new investment at this extor- tionate borrowing charge? To hold Bank rate at 8 per cent for more than a few weeks will be subjecting the business world tb an intolerable handicap and finally destroying its already shattered morale.
The City shares the anger and distrust of the business world. It is not, of course, slow to take advantage of the financial difficulties of the Government, as it showed by its scramble into devaluation-hedges in equity shares last week —oil, metal shares and gold. Now it will be moving into government stocks at the record low levels offered this week with yields of around 74 per cent on five-year `shorts' The question is whether the international monetary system as at present constituted can survive. Certainly the weak link in the IMF chain was sterling and certainly sterling is stronger than it was but the French who object so fiercely to the reserve currency role of the dollar and the £ will go on attacking the weak parts of the front whenever they emerge. The next, of course, could be an overvalued franc which could lead to a writing-up of the price of gold by the gold bloc. Ultimately, I still believe we shall see a dollar-sterling joint currency float- ing against the gold bloc of Europe but a 14.3 per cent devaluation of sterling, mathematically worked out by the economists whose sums never prove right in practice, seems to me a patch-up of a crumbling international monetary front.
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