EXCHANGE CONTROL AND THE NEW TRADE WAR
B Y NICHOLAS DAVENPORT :1:„IIE Prompt action taken by the Treasury reply to Colonel Nasser's unwarrantable gernarche is a useful reminder that our exchange control is available for our 11A4ilional defence in the coming trade war. that was needed to block the Egyptian 4ggressor were two simple orders—Statu .- rY Instruments Nos. 1164 and 1163: price nd. and 3d.—subjecting to the full exchange 'ontrel system (a) the cash, securities or rid held by the Suez Canal Company in he UK and (b) all payments from or to C accounts of residents in Egypt. Having eeentralised its exchange control the 'reasury merely had to add : 'And inquiry rEeppt should be addressed to a banker in garding an individual payment to or from 1°,,e UK.' It was as simple as that. No army 1° c 1 bureau rats had to be called up. The 'arlks authorised to deal in foreign erxChange are the agents of the Government leklY to do the Treasury's bidding at a illornent's notice. If this simple machinery Iavailable for the control of Colonel slasser why cannot it be used more often 40
r the control of our balance of pay- ll
rfnanaties in the doubt it would offend the the OEEC who dream of the eIs? N cerIlninon European market and 100 per ersent• liberalisation of trade. But we are Untmitted to a full employment policy in ilain and we cannot sacrifice our work- °Ple to a textbook phrase such as 'the "lernational division of labour.' If the cold ‘var is really to become a trade war we are DOing to be forced to take some more rotective action by way of exchange control.
I a Consider what the alternative freedom
s Involved. The Treasury has explained all in its latest Bulletin. We all know at between 1953 and 1955 the rate of sn5elal investment (housing and the social in'rvices) declined while that of investment Manufacturing industry and other pro- wilelive sectors accelerated. This was just oliIat j the country needed, for it led to an 'round expansion of production. Fixed illvestment in manufacturing industry_ 1140-thirds of the total—rose last year by er? less than 27 per cent. (by value) as rrrlPared with 1954. Among individual wrldustries investment by the motor industry thas 95 per cent. higher than in 1954, by hie Paper and printing industry 50 per cent. 0,111er, and by the metal-using industries h'"er than motors 25 per cent. higher. A r,.,°arcl of Trade inquiry also revealed that e-anufacturing industry intended to in- zi,rease its capital expenditures in 1956 by Per cent, over the 1955 level. Now the "ernment, says the Treasury Bulletin, :11ust encourage a high rate of productive illkvestment in the long-term, since this is i',_key to the further growth of output. the maintenance of our competitive posi- f.°11 in world markets and hence to our uture living standards. But a sudden 4Psurge of productive investment, it says, edtnributes to our balance of payments mculties and must be moderated. That is '3Sv it defends the withdrawal of the
investment allowances and the stiffening of the control over capital issues. But surely the last thing which should be moderated in a not very dynamic society is productive investment. Consumer spending should be the first thing cut and that can be achieved by stiffening up the import licences and the exchange control. Defence expenditure should be the next and that no doubt is being planned. Social investment should follow and those cuts have, in fat, been given priority over cuts in defence. But we should never have attempted to cut produc- tive investment. We should have tried to right the balance of payments by tightening up the import licences and the rationing of foreign exchange for consumer goods.
The Treasury admits there is a contradic- lion between the long-term policy of stimulating productive investment and the short-term policy of reducing the over- load on the economy. It says that the contradiction will be resolved by an increase in the volume of production. But this is nonsense. The disinflationary measures it has had to impose because it refuses to apply exchange control are pulling down the national production. The index of industrial output has stopped rising and is now below the corresponding level of a year ago. The present labour unrest is bound to pull it down farther. It is this mistaken policy which is under- mining foreign confidence in the pound. Ever since Mr. Macmillan explained the economic position to the special, meeting of bankers—including foreign and Ameri- can bankers—at the Treasury on July 24 the sterling exchange has been slipping. Colonel Nasser dealt it another blow and as I write it is down to $2.78i. Whether the Treasury likes it or not the hour of stricter exchange control is drawing near.
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