28 AUGUST 1971, Page 8


Now we're afloat


Suddenly the perspective of all writing and speaking on exchanges, sterling, reserve currencies and all the rest has altered, and altered for good. After August 23, 1971, ' the day the £ floated,' all the old debates are obsolete, and it is the misfortune of two substantial books on the pound sterling and the British balance of payments that they appeared almost exactly at that juncture. Both of them reflecting, as of necessity they did, the era of fixed parities, their interest has ceased to be contemporary and has become historical. As historical documents they will retain their value, and this value will increase, because, as time goes on, it will be more and more difficult to understand how for a quarter of a century virtually everybody — outside the Communist countries, at least — managed to treat a manifest absurdity as a basic and unchallengeable assumption and to bestow an infinitude of blood, sweat and tears on the inevitable and predictable consequences of that absurdity.

The two book* themselves not merely document that period and that mentality; they will prove additionally valuable to future historians of mass political hallucination because they themselves were written under the spell of it. Mr Manser powerfully debunks the myths of British inadequacy, uncompetitiveness, decadence etc which were founded on the phenomenon of the balance of payments deficit and with which the British public allowed, nay, joyfully invited, their politicians to flagellate them these twenty-five y€ ars past. He triumphantly puts into historical perspective the permanent (and necessary) fact of the British deficit on visible ' current account, and he shows up the statistical tricks and fallacies which have made bogeys out of such harmless data as Britain's "declining share of world trade." He points to the role of government expenditure overseas amongst the items of British demand for foreign currencies. Yet he not merely resolutel,' ignores the effect — which wholly and adequately explains the phenomena of overall surplus and deficit — of the currency price-system having been jammed since Bretton Woods; he actually himself joins in the (until yesterday) fashionable jeers at the expense of 'floaters.' His punishment is to have written and published such sentences as that "the Community authorities have set their faces sternly against any departure from fixed parities," which, in a book published on July 19, 1971, makes us ' floaters' snigger very unkindly. How came such an intelligent author to miss the main point of the entire subject to which he has devoted his study — the British balance of payments?

The same question emerges equally insistently from Mr Cohen's book on ' sterling as an international currency.' Two quotations will more than suffice: "It seems clear that if the pound were allowed to float, undoubtedly it would soon lose whatever significance it still retains as an international currency. Most sterling holders would almost certainly begin to sell off their balances, in order to switch into dollars or other more stable assetreserve media. Use of the poung for international purposes would shrink to a minimum."

"There is no need to rehearse all of the objections to flexible exchange rates here; they have been elaborated enough elsewhere. Suffice it to say that they are serious —sufficiently serious, in my opinion, to rule out the idea altogether as a genuine policy option. The approach hardly receives any support at all in official or banking circles."

(I have been unable to refrain from the luxury of one or two italics.) One can hear Professor Friedman's laughter all the way from Chicago.

In fact, as the former of these two extracts illustrates, the whole business about sterling as a 'reserve currency ' is a nonsense, derived from Humpty-Dumpty's nonsensical assumption that when I say a parity is fixed it is fixed.' The very expression 'international currency' applied to sterling is a contradiction in terms: sterling, the dollar, the mark, the Swiss franc, and all the rest are national currencies, they are the creatures of governments and politicians, and if you doubt that, you need only try to buy something with them in a shop across the frontier or across the world. Now, if we were talking about Rubens....

No less devoid of content is the very term 'reserve currency.' We all of us, individuals and governments, like to have something in the kitty, and our tastes and conveniences vary about what to put there. Some foreigners, and some foreign governments, have taken a fancy to holding as part of their reserves some government debts denominated in sterling — so do I, as a matter of fact, but that's another story — and there is nothing to be surprised at in this. They have done so for reasons which seemed good to them, they. have done so voluntarily, and they have done so with their eyes open. They have not done so, however, because they believed the assertions of British politicians to the effect that one would always be able to exchange a pound for $4.20 — sorry, $2.80 — sorry, £2.40. Even 'lesser breeds without the law' are not so gullible as that. They have done it insofar as, all things considered, they regarded it as the best available option from their point of view.

What converted this harmless, and indeed rational, proceeding into an incubus and a mumbo-jumbo for Britain, something to be mentioned only in the hushed and sanctimonious tone adopted by the BBC for pronouncing the words "sterling's reserve role," was simply and solely the strenuous determination to guarantee what in the nature of things could not be guaranteed, namely, the value of a unit of a national currency in terms of others. The spectacle of John Bull tottering about with this Old Man of the Sea on his shoulders was so entertaining and profitable to other countries that in 1968 they gathered round at Basle and paid and encouraged him to go on doing so. It was the fixed parity which, though all the holders of sterling were already discounting it, brought into the calculations of British governments and politicians what in itself was none of their affair. When the business about "unwinding Britain's sterling reserve role " came up in connection with British entry into the EEC. I remember asking the Chancellor of the Exchequer how it was proposed to force foreign governments to sell their sterling assets, if they did not want to, or to prevent them buying sterling assets, if they wanted to. But answer came there none.

However, I return to the central and intrinsically important question: how came so many governments to conspire for so long in organising a manifest and inherent absurdity ,and why was it only the force of the events, not of reason, which eventually pushed them over the edge into common sense, still protesting that nothing at all had really happened?

Much of the answer is contained in that pregnant, and partially italicised, sentence of Mr Cohen: "The approach hardly receives any support at all in official or banking circles." Of course not. When a proposition has been embraced officially, and that by more than one party in the state, all the forces of authority are automatically aligned upon it. This is the more so when the proposition in question refers to external, not internal affairs, and when therefore international as well as national respectability is mobilised in its sirppOrt. As time passes, and more and more sacrifices have been offered up on the altar of the said proposition, its sanctity is proportionately enhanced. Only outsiders and bounders will then discuss or question it, the sort of people not to be found "in official or banking circles."

Not many weeks ago, a noble lord inadvertently misdescribed me in a letter to The Times as having learnt my advocacy of floating the pound from Lord Cromer. Stung as if he had been called a racialist, our ambassador designate in Washington hastened to repudiate any suggestion that he had ever favoured floating the pound.

It would be indelicate to inquire as to the present state of that distinguished banker's opinion. In any case, the lesson to be learnt is not that even the greatest among us may err. It is that in the governance of men authority normally, perhaps invariably, prevails over reason unless and until events come to the rescue of reason. Every one of the " objections to flexible exchange rates" was always refutable by rational argument and had been so refuted. Yet a floating pound remained impossible — until it happened. And then the headline to the column announcing it read as follows in one national newspaper: "Pound to find own level today for first time since 1939." Before we know where we are, it will have become impossible for the pound not to float; but that also will not have been the effect of reason.

*Britain in Balance W. A. P. Manser (Longman, £2.75).

The Future of Sterling as an International Currency Benjamin J. Cohen (Macmillan, E4.50),