2 OCTOBER 1971, Page 19

MONEY

Barber's money or trade war

Nicholas Davenport

This highly dramatised meeting of the International Monetary Fund in Washington, attended by all the Finance Ministers and their expensive entourage, might easily peter out in talk. They have gathered together to discuss money and its exchange — the old IMF system having brcken down — but it is not really a money crisis hut a trade crisis or even a trade war Which is threatened, The Americans have accused the world of trading unfairly and of pushing them , into a deficit on their balance of payments of such colossal dimensions — about $12,000 million in the first half of 1971 — that no ordinary IMF medicine like dear money and a banking squeeze could possibly put right. (They have tried dear money and a banking squeeze and their unemployment now exceeds 6 per cent.) So they have had to resort to a ban on gold convertibility, a 10 per cent surcharge on imports and a 'Buy American' clause in the new investment allowances — all in flagrant defiance of the rules of the. IMF and of GATT. Of course, the Americans have swelled their deficit by spending money like water on an cutrageous war in Vietnam — and making things worse by paying their troops in dollars which can be converted into other currencies — but their main accusation remains valid — that the Europeans and the Japanese have been trading unfairly With grossly undervalued currencies and trade quotas while the Japanese have even been subsidising their exports (through tax advantages) and imposing obstacles on imports. Happily, the British are not accused. The Americans regard the $2.40 rate for sterling as fair and reasonable. Before they left for Washington the

European and Japanese finance ministers (the Nine out of the Group of Ten) agreed upon a basic common policy which was to upvalu certain of their currencies provide1kl America agreed to remove, or put a datej on the removal of, the surcharge and rase the price of gold, that is, devalue the dq lar in terms of gold, to a limited extent! Before he left London Mr John Connallly, the Secretary of the US Treasury, rudely rejected any such deal but he is said to have modified his attitude since he arrived back in Washington. Mr Barker's new monetary plan may, however, provide a compromise.

One small point may be settled at this conference — a tiny little rise in the price of gold. The Common Market finance ministers have argued that unless some rise in the monetary price of gold takes place, their gold reserves will have less value in terms of their upvalued currencies. So it is suggested that the monetary price of gold should be raised by a percentage calculated from the few currency revaluations so as to leave the world gold reserves unchanged in terms of a weighted parcel of different currencies. As Mr Connally has said that he regards the price of gold as quite unimportant, this minor readjustment might well be made by the IMF Council raising the notional gold value of the SDRs. The American Congress, which passed an Act in 1934 raising the price of monetary gold from $20.67 to $35 per ounce, would not be called upon to do anything. It certainly would not dream of helping the two gold producers — Russia and South Africa — by raising the price to, say, $70. So if there is a minor adjust ment in the price of IMF SDRs, I would anticipate a slump in gold shares which have been carried far too high by American speculation.

Apart from Mr Barker's new plan the two sides are still nowhere near a compromise. Mr Connally has insisted that he wants an improvement of at least $13,000 million a year in the American balance of payments, beginning with $2,000 million less imports in the next twelve months. He did not set a time limit for this drastic change but he implied that it would require something like an upvaluation of 15 per cent to 20 per cent in the yen, 10 per cent in the D-mark, 4 per cent in sterling and varying amounts in about half a dozen others. None of these countries is likely to agree to such a sharp upvaluation, but as the D-mark and sterling have been floating near those percentages, there is a distinct threat that the Americans might insist on such a tough adjustment. I have heard a rumour that to speed our entry into the Common Market the British have been supporting the French on their insistence on new fixed parities and that we have agreed to a new rate of $2.50 for sterling. This in my opinion would be harmful for our export trade and for the reflation of our economy which, with near one million unemployed, relies more on a revival in exports today than on consumer spending.

The Americans are in a tough mood because Nixon knows that unless he can get the economy moving up he will lose his 1972 election. So why should he let the Japanese get away with a modest 8 per cent upvaluation and keep their trade restrictions? The Americans also want the western world to share their burdens of defence; they feel that they have been carrying Europe on their backs far too long. The pity of it all is that they have decided to cut aid for the poorer half of the world by 10 per cent. The latest report of the World Bank reveals how the balance of money payments is holding back the development of the poor nations. In 1970 the debt servicing obligations of the developing countries increased more than twice as fast as their export earnings! Once again the curse of dear money is restraining the reflation of our economies and swelling the army of the unemployed. The Republic of China is teaching us a lesson. When she advances capital for the construction of a railway in Central Africa the loan to Zambia is interest-free.

If you support Mr Barber's monetary reform, you will regard this IMF meeting as the beginning of a new era in world monetary co-operation. We are all ready to see the dollar (like gold) phased out as a world reserve currency, to welcome a return to fixed parities — but with more flexibility — after a suitable period of floating, and to rely on a further emission of SDRs, as Mr Barber proposes, for the replenishment of the world's trading reserves, while gold is gradually losing its importance. In the end no doubt we will all agree to create a new international monetary system along Mr Barber's lines, namely the SDRs ultimately supplanting the dollar and sterling as the main reserve asset in central bank reserves.