28 JULY 1967, Page 20

The sterling debate MONEY

NICHOLAS DAVENPORT

There is no doubt that the Tribune dissidents have got something; in fact, they have got their long-term priorities right. I have argued over the years that it is wrong for an advanced in- dustrial nation like Britain to give the main- tenance of a fixed rate of exchange the first priority in its long-term economic policy. If you insist on that, with its periodic defla- tions, you will sacrifice not only too much employment and too much economic growth, but you will kill the profitability and élan of the private industrial sector, the urge to develop new industrial processes and techniques through sophisticated investment; in short, the dynamism which ensures the competitiveness of our export trade and the viability of our economy. For the short term, of course, you may have to defend sterling to avoid being pushed into an inordinate and untimely de- valuation. It seems to me that the current economic debate feeds upon a confusion be- tween long-term and short-term economic policies.

Of course we had to defend sterling in 1964 when there was a huge deficit on the balance of payments, a universal lack of understana- ing of the expansionist Maudling policy which had generated it and a widespread panic about the intentions of the new Labour government. The exchange crisis at that time was certainly made much worse that it need have been be- cause some of the new ministers went moaning about Europe, saying that we were `bust' and that it was all the fault of the wicked Tories. This is not the moment to regurgitate that miserable crisis or to pass judgment on the subsequent crises in 1965 and 1966. But short-term policies, if prolonged from year to year, are apt to become bad long-term policies. If the current economic debate serves to point this danger it will have been worth while.

Space allows me to deal only with the present sterling crisis. It is not as serious as the earlier ones. The volume of selling has been nothing -like so heavy. On Thursday of last week it became bad enough to bring the Bank -of England into the market in support of both'spot and forward positions and it is thought that its support operations cost about £80 million. But by the weekend the selling had subsidstd and after Mr Callaghan's statement in the House of Commons debate on Monday sterling rallied at one time to $2.781. At the moment of writing it has eased to $2.781.

There is no suggestion that the selling came from abroad. It seems that the upsetting lack of confidence started to mount at home. The trade returns had been disappointing and the official explanations were not calculated to re- assure anybody—namely, that exports had come back from their peak and that imports had moved to a higher level than had been anticipated. Then came the Middle East war and the threat of the withdrawal of the Arab sterling balances which were in excess of £500 million. That in itself was no threat to sterling because the Basle credits ($1,350 million) had been renewed just to meet the contingency of a withdrawal of sterling balances. But the extra cost of our oil imports meant that Mr Callaghan's slender balance of payments sur- plus this year had probably been wiped out. The merchant banks who advise their com- mercial customers at home on `leads and lags' were bound to take a gloomy view of sterling in the coming seasonal strain this autumn. With our huge import and export volume—over £10,000 million a year combined —these `leads and lags' can quickly build up into a strain on sterling of around £1,000 million. And the only central bank support im- mediately available is the American `swap' facilities of $1,000 million.

Both Government and Opposition parties have officially rejected all ideas of devaluation. From the Government point of view this is understandable. As Mr Callaghan stated in the Commons debate, we would need another in- comes freeze 'if the benefits of devaluation were to be secured' and the Government does not feel that it is politically strong enough to im- pose another wage freeze on the trade unions. But the official rejection of devaluation as an economic policy does not mean that sterling cannot be forced off its present exchange rate by a volume of persistent selling in excess of the means of support buying. This would be a terribly costly 'final solution' for a country loaded with dollar debt. We have got to pay the IMF a balance of about $350 million in December next and in 1970 we have to repay the final tranche of its loan of $1,500 million.

At $2.80 this would cost £536 million but at $2.20 the sterling cost goes up to £682 million and at $2.00 to £750 million. The Tribune dissidents want to resume 'planned economic expansion' by selling part of our overseas port- folio investments to repay the IMP loans. But if the Government were to sequestrate our dollar portfolios, which exceed $5,000 million, it would shatter confidence at home and abroad. Nor is it necessary for them to take such dramatic and violent action. All that the Chan- cellor needs to do to secure, say, $1,000 million from our dollar portfolios is to tell the managers that if they voluntarily bring home $1,000 million he will abolish the 25 per cent grab of the investment dollar premium (now 28 per cent) and restore the investment dollar pool to its rightful status by denying access to it for the 'direct' industrial investor. The investment dollar pool is no burden on the sterling exchange and the portfolio managers would, I am sure, be quick to borrow dollars in New York to replace in due course any of their investments which they had voluntarily sold to oblige Mr Callaghan and meet the national need.

Sterling will no doubt remain in danger until the seasonal strain in imports is past—made more serious by the refusal to impose select import quotas—but the Treasury could do a lot to quieten nprves both at home and abroad by publishing As balance of payments figures every six months instead of quarterly and its - trade returns every three months instead of monthly. The drama of the monthly return, which can be upset by strikes, wars and weather, produces a sort of national hysteria and en- courages wild speculation in the exchange markets. Nor does the Stock Exchange help by 'bear' raids on the gilt-edged market before or after the trade returns are published. Nor does Wall Street help by giving a decidedly `inflation' flavour to its recent sharp equity movements. Even the harmless demonetisa- ton of silver, with advertised sales of silver at rising prices from the Treasury stock- pile, has made the nervous and the uninformed feel that all currencies linked to a fixed-price metal are in danger. I suppose it is all part of the seasonal madness which attacks everyone at midsummer. If only we could send the dealers in the sterling exchange on holiday with the boys from Westminster!