In the City
On the financial rocks
The City has certainly played ale game. It took the bait of that preposterous coupon-141 per cent—on the £600 million 'long' (1994) stock which the Treasury offered and over-subscribed the issue before it had time to be quoted in the market. Subscriptions of over £160,000 were only allotted about 60 per cent. It is reckoned that in this smart muster of the City institutions on the giltedged parade the Treasury has been able to sell over £1,000 million of stock to the non-bank public, which will bring the total sales for the first half of the financial year to Close on £2,000 million. To keep the rise in the money supply down to a 12 per cent annual rate (which, as I have said, is the Chancellor's target but not a fixity) sales of around £4,000 million will be necessary over the twelve financial months. And this should not be difficult. The old boys' brigade in the CuY traditionally is always ready to stand uPfor the pound sterling.
Why, then has the Bank of England Stopped supporting the pound in the exchange markets? As I write it has fallen to as lowest level ever—S1.68, which is an effective devaluation of 43.6 per cent since
he Smithsonian agreement of 1971. We 'save not yet used up the stand-by credit of 5,300 million. It is thought that we have not drawn much more than s1,200 million Of It• Etut it has to be repaid by the end of the Year, and as we have borrowed heavily
abroad for the public authorities—the public sector debt abroad is now over S17,000 million on which the annual interest charge is over 51,000 million—and as we have run down our gold and dollar reserves to 85,000 million it is possible that the Government feels that it has come to the end of its financial tether. And no wonder. The repayment of the stand-by credit by the end of the year may require anything up to 43,000 million or even more and the only facilities available to us at the IMF are about 53,800 million. It is the end of the financial road.
According to Mr Samuel Brittan of the Financial Times the Cabinet is deeply split on what measures it ought to or could take. He reveals that an import deposit measure is emerging as a strong candidate, Partly because it would be acceptable internationally, partly because it would please the trade unions (if not the revolutionary Left) and partly because it would curb the growth of the money supply and restrict the domestic credit expansion. Mr Roy Jenkins when Chancellor brought in a measure in 1968 requiring a 50 per cent deposit to be lodged for six months on imports of manufactured and some semi-manufactured goods. According to Mr Brittan if a scheme on these lines were introduced today it would cover more than £10,000 million worth of imports. I would imagine that this would so please Mr Jack Jones and his fellow (moderate) trade unionists that they would agree to the social contract with its wage restraint being continued for a third year or even indefinitely.
An import deposit scheme would, of course, be only a temporary measure. Something more permanent and more decisive would have to be introduced to stop the slide in sterling. No government can allow its currency to drop in value abroad by nearly a half unless it wants to go down in a welter of raging cost-inflation and social unrest. In my view Mr Callaghan should authorise Mr Healey to approach the IMF at its meeting this month for a sterling stabilisation five-year loan of not less than S10,000 million, while a scheme is being prepared for the conversion of the remaining 'official' holdings of sterling, which are some £4,000 million, into some form of IMF deposits. These official legatees of sterling as a reserve currency are entitled to this final protection. And the Americans, who caused all the chaos of madly floating currencies by renouncing Bretton Woods and the gold convertibility of the dollar, should back up the British demand for a stabilisation loan. The rest of the holding of sterling, oil and commercial, could be taken care of by an Exchange Equalisation Fund operation which, I hope, would be able to catch out the bears.
No doubt the left wing of the Labour Party would be horrified by the thought of applying to the IMF for a huge loan and writing a letter of good intent. I suppose the idea of paying your way and not living be yond your means, balancing your budget and not living on tick, would frighten the life out of anyone who is getting more out of the Welfare State than he is giving in productive work. But the game is up. The world does not owe us a living and does not like the look of our currency. So we had better write a letter of good intent before the world refuses to take any more of our paper, which would mean shutting down a lot of our factories and food shops.
Mr Healey's financial policy has been approved of by the central banks and a letter of good intent to the IMF would sim ply have to follow the lines of Mr Jenkins's letter of 22 May 1969 (but with different figures). (It is hard to believe that Mr Jenkins's borrowing requirement was then only £70 million—not £10,000 million—and his intention was to secure a Budget surplus of £1,000 million in twelve months.) Mr Healey might have to promise to cut the local authorities' spending by £1,000 million in addition to the cuts he has already announced, but what is wrong with trying to cut our way out of bankruptcy ? The Labour 'leftist' resolution to support those local authorities who refuse to make the cuts is not only irresponsible but evidence of a financial death-wish. The Lefties' vapourish objec tions to cutting out waste and extravagance must remind us all that the national executive caucus is as financially blind, stupid and ignorant as some trade unionists.