In the City
Mugging the Old Lady
Mugging the Old Lady of Threadneedle Street, who usually carries some £4 billion Pounds in her 'reserve' pouch, is a dastardly Crime and I am glad that it was not a British journalist who was guilty of it. I am proposing to set up a vigilante corps of financial Journalists who will pounce on any scribe sPreading false rumours about the Old Lady !nd her money. As I remarked last week, the official' reserve holdings of sterling amounted to £4.6 billion in June 1975 and sales bY Arab and Iranian holders have now reduced the total to £3.1 billion. Apart from these 'official' reserves there are probably another £2 billion in other nervous hands aId according to another mugger writing in the International Currency Review there are Z4 billion whose owners intend to withdraw then 1 over the next two to three years. Of Co.urse, if they all stampede and rush to sell ithons in a week the exchange value of the zcan drop to anything, but they are fools to d,t) so. These reserve holdings must be ex,cnanged, as I have so often argued, for some Icirni of IMF paper guaranteed by the richest Members. 4. In my view it was a mistake to ask the IMF a loan of $3.9 billion at this stage. We should have paid off our drawings on the sLtand-by credit by dipping into our reserves, 0. Y recalling the $500m loan to Italy and DY Pledging our overseas portfolios. I must k my young colleague Booker (not a mug r), who wrote last week of Britain's 'imtPiending bankruptcy', to turn to page 206 of in9e Bank of England's Bulletin for June co,76. He will find that the net external assets he private sector at the end of 1975 were :/.6 billion and even after debiting the net s.k.1ernai liabilities of the public sector we bt.1,11 had a favourable balance of £1.76 thillion. So we are not yet a bankrupt nation, °Iigh we could become one if we went on th'efinitely spending more on public welfare all we earned by selling our goods and
services. Fortunately we can look forward to selling oil abroad which we have never done before. By 1980 the North Sea will meet our oil consumption and give us a cash surplus of about £1 billion.
In the Panorama debate the Prime Minister stuck firmly to his government's policy which was one of gradual cuts in expenditure ('slices each year') and 'sustainable growth' by restoring manufacturing industry to profitability and strength. The critics who want a drastic change are those on the left and those on the right. The left want a siege economy (as advocated by Norman Atkinson, the new Treasurer of the Parliamentary Labour Party). The right want the other extreme of a severe deflation through massive cuts in public spending (as advocated by Christopher Booker and other journalists).
I need not waste time in dealing with the loonies of the left who advocate cocking a snook at the IMF and other creditors and setting up a siege economy with general import controls. As soon as we do that and default on our international loan charges and obligations the sterling exchange rate will fall much more than it did this week and the cost of our imported food and raw materials'will soar. As factories close down and food shops are beseiged by angry housewives I would have thought that the loonies of the left would be thrown out of office or packed off to Moscow to learn the elementary lesson that if your foreign creditors won't accept your paper currency and if you can't pay for your food imports with enough exports of goods or gold (which the Russians have but we haven't) you starve.
As regards the other extreme policy of sudden and severe deflation through massive cuts in public spending—the size of the cuts suggested being £5 billion in the next financial year—Mr Callaghan warned us that it would be socially divisive. Mr Healey at the Mansion House last week, when he strangely avoided being rude to anyone, stated that a £5 billion cut would mean reducing our standard of living by 10 per cent or more, lowering our national output by some 5 per cent and adding perhaps a million to the ranks of the unemployed. I would not like to accept Mr Healey's figures, which are arguable, but one would certainly agree with him that an abrupt, massive cut in public spending would cause 'widespread industrial disruption and a wage explosion' which would upset 'the social contract'. He has spoken on another occasion of 'fighting in the streets'. If there is to be any fighting it would almost certainly occur in the factories and not in the streets, for the moderate trade unionists who are above all concerned about their jobs and take-home pay would probably be fighting the revolutionaries who want to close everything down and smash the mixed economy system.
Incidentally I would not be surprised if Mr Healey did not choose his words about 'fighting in the streets' in order to make a political impression on the IMF (whose bailiff men are now in London sitting on the doorstep of poor Sir Derek Mitchell, the first Secretary of the Treasury in charge of overseas finance) just as Mr Callaghan did in his dignified and impressive Panorama debate. What they are telling the IMF is not to make the clauses they require in our 'letter of good intent', soliciting the loan of 83.9 billion, so severe as to cause 'industrial disruption' and a breakdown in the social contract. Clearly no international monetary body today wants to cause a political or social flare-up in the countries of their borrowers which might spread round the western capitalist world and destroy NATO.
In the meantime we have to balance our books at home by borrowing in the giltedged market from the non-bank public. Lately this operation has been badly handled through panicky rises in Bank rate, but it is obvious to all those who know the City that the necessary money will be available from the institutions who collect the national savings. So far in the current financial year the Treasury has been able to sell about £2,000 million and by March, when the market has recovered from its sulks over the recent bungling by the Bank, it should be able to sell another £2,500 million. It is fortunate that we are blessed with an extremely efficient financial system, a lawabiding public which pays its taxes and a middle class which has never given up its habit of saving. I would not give a prize to any economist, especially the monetarist Milton Friedman, who says that Britain is close to collapse. A nation which has a capital market machine as well oiled as that in the City cannot be compared with Chile or New York City. The professor should have his head examined.
While this attack on sterling goes on, the share market collapses and billions of pounds are knocked off the value of our leading equity shares. Next week I will endeavour to bring what comfort I can to the depressed holders.