City reflections on the crisis MONEY
NICHOLAS DAVENPORT
The high drama of the monetary crisis last week had all the makings of a Greek tragedy. The innocent protagonists, mouthing fine words and sentiments, appeared tragically ignorant of the terrible calamities which the gods had prepared
for them. At the DAF meeting two months ago
the Director-General was congratulating himself and everybody on the fact that there was no monetary crisis in sight. On 15 November Sir Leslie O'Brien, Governor of the Bank of Eng- land, interviewed on his way to Basle, cheer- fully said: 'I have a good hope of enjoying the quietest weekend, in Basle - since I became Governor.' Dr Schiller, West German Econo- mics Minister, remarked : 'As always I am hopeful. The time is ripe for making decisions.'
The only men who proved capable of making decisions were not these clever financial experts but the politicians. Dr Kissinger said firmly: 'As long as I stand as Chancellor at the head of this government there will be no upward re- valuation of the mark.' And the President of France equally firmly declared that there would be no devaluation of the franc: 'it would be the worst possible absurdity.'
To add a final touch of irony the financial elders who- voted to extend to France credits amounting to $2,000 million assumed that the franc was to be devalued by around 10 per cent. The Times quoted with great authority the actual figure agreed—namely 11.1 per cent. Of course, the credits were not made legally con- ditional on devaluation. The financiers would not have dared to make the French President grovel in-mortal dust. But it never occurred to anyone at the Bonn conference that the gods might be on his side and not theirs. If they had only realised that the General had already been humiliated enough by his own rioting students and strikers they would have known that he would not choose the easy way out for France. All this goes to prove not that the interna- tional monetary system is necessarily unwork- able but that governments today do not always want to adhere to its rules. One of its important rules is that when a country is in 'funda- mental disequilibrium,' either by way of deficit or surplus on its balance of payments, it will be expected in the first case to devalue and deflate and in the second case to upvalue and inflate. But the decision to do so remains a political one —and never an easy one to take when it means a serious deflation or inflation of the economy.
And what exactly is a 'fundamental disequili- brium'? Clearly, it is not always a question of price. British goods might be fairly priced but uncompetitive because of inefficient after-sales service and bad design. The sensible remedy might then be not to devalue and deflate but to clap on import quotas (allowed by the IMF) while the government forces or encourages in- dustry to become more efficient. Similarly, if a surplus country does not want to upvalue its currency the sensible remedy (also allowed by the n4F) might be to impose discriminatory re- strictions against imports from that country rather than ask it to inflate.
Of course, the international monetary system has its serious weaknesses. Its operation is not automatic, as it was under, the wicked old gold standard. Nor is it flexible enough. And it is trying to operate with grossly insufficient re-
serves, which the new sues (Special Drawing Rights of the DAF) are intended to remedy. But reform has not come quickly enough. The trad-
ing world, dealing in realities and contemptu- ous of political make-believe, moves its capital around as and when it can hedge against the follies of governments. And short of closing down the exchange markets permanently, which
would kill trade in the free world, I don't see how it can be stopped. The French, having lost $1,100 million from their reserves in the week before last Saturday, are doing their best to restrain the capital flight by imposing rigid ex- change controls. The Germans have also taken steps to discourage capital inflows by various restrictions. But while freedom of capital to move about remains unchecked there will no doubt be more currency crises to come until a better and more flexible system is devised.
. Naturally the Stock Exchange was thrown off course by these confusing and extraordinary events. It sees the refusal of France to devalue as a 'bull' point for our export trade and Mr Jenkins's deflationary package of £250 million as another blow to our home trade. Its first reac- tion, then, was to mark down beer, stores and other retail trade shares and mark up British American Tobacco and other overseas shares. But there was surprisingly moderate selling and the net effect upon the industrial index, although downward, was under 5 per cent. The gilt-edged market improved but failed to show any great confidence in spite of the fact that Mr Jenkins had apparently vetoed the idea of controlling money supply by the Treasury sale of govern- ment bonds. I am glad that he did what I advo- cated here a week ago, namely impose PDIS (prior deposits on imports) and instruct the banks to bring down their advances below the old ceiling (which the banks say is impossible). But I regret that he used the regulator.
I would ask the econometricians at the Treasury to get into their calculating heads that they cannot treat the British public as mere figures to put into a computer. They ignore pub- lic psychology at their peril. The idea that because they failed to secure this half-year a 2 per cent drop in the £25,000 million annual consumer expenditure after a £500 million de- flationary budget they will secure a 1 per cent drop next year as a result of a £250 million deflationary package now is the height of mathe- matical folly. The average British family is so fed up. with these constant attacks on its living standards that it would beg, borrow and steal rather than drink, eat or smoke less. They still believe prices will go up and their instinct is to spend more quickly and to get their next pay claim through as soon as possible. Until the public begins to-have more confidence in the economic strategy of the Government and is therefore prepared to save more and spend less we shall never reach stability.
On 8 November I anticipated this new mone- tary squeeze and expressed the view that it might squeeze the 'bull' market on the Stock Exchange to death. It still looks like that
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