MONEY AND THE CITY
Money talks at Nairobi
Nicholas Davenport
The remorseless way in which interest rates are pushed up by the monetary authorities regardless of the damage they do to innocent borrowers is nothing short of a scandal. We all know that the Governor of the Bank of England feels that he must raise 'Bank rate' to protect sterling against foreign sellers but he has no right to ignore the injury he causes to house rnortgagers who find themselves in " the red" when their building societies raise their mortgage rates to, say, 14 per cent, as one chairman has threatened to do. Even 12 per cent on a £5,000 mortgage (tax allowances and all) would be fatal for most family men's budgets. Mr Anthony Crosland is right to insist that the availability of mortgages and the price of mortgages should not depend on the amount that the building societies can borrow (which will, of course, be lessened by the Governor's higher Bank rates). "The Government," he said, "must decide annually how much is going into mortgage lending." And the price. 1 have spent a life-time arguing that there should be a two-tier system of interest rates, which Keynes first proposed in 1931 at the Macmillan Committee, and that there should be some Government direction of the flow of savings collected by the financial institutions in the City. There should always be one (low) rate of interest for home borrowers and another (higher) one for speculators.
This domestic money row is a microcosm of the international money row which will confront the finance ministers of the world at this month's Nairobi meeting of the International Monetary Fund. Each has been raising interest rates to suit his own selfish purposes. The Federal Reserve has put its discount rate up to 74 per cent to slow down the American boom. The Germans have raised their bank rate to 7 per cent to curb their own inflation and the French theirs to 94 per cent, being now top of the inflation league. The whole monetary gang have been making money much dearer and harder to use in order to punish the speculators in the world commodity markets who have been raising the cost of our imports and the cost of our living. The exceptional, indeed the preposterous, rise of 40 per cent in international commodity prices over the past twelve months calls for international co-operation for the control of the speculative use of money, particularly in the Euro-dollar market whose funds are the relic of the break-down of the Bretton Woods system.
The only sign of hope that something will come out of the Nairobi meeting of the IMF is that the chief parties concerned, who have been discussing the problems at the Committee of Twenty under Mr Jeremy Morse, seem to be at last agreed upon why the Bretton Woods system broke down. It was because its old rules never compelled the surplus countries to keep their payments in balance although they induced most of the debtor countries to deflate in order to try to restore equilibrium. The only debtor country which refused to obey the rules — and finally refused dollar convertibility to its creditors — was the US, which allowed its deficit to pile up in the Eurodollar market to everyone's satisfaction because, gold being in short supply, Europe wanted paper dollars to finance its expansion.
Believe it or not, the French and the Americans are now agreed that sanctions should be taken against surplus countries either in the form of negative interest rate on their reserves or the withholding of fresh SDR allocations and convertibility from the excess currencies they have accumulated. Keynes preferred special import surcharges on the export goods of surplus countries which I believe would be a far more effective plan. But if they want it their way, by all means let them have it.
I doubt, however, whether it is worthwhile trying to recreate a new international monetary system until the capitalist-finance powers have learned how to behave in a more rational and decent manner. One country's surplus is another country's deficit. The drive of some countries like Japan, whose superior competitiveness gave it a lead over all others, to pile up export surpluses, so that they could go on expanding their economies on the basis of a perpetual export-led growth, was, of course, incompatible with the IMF ideal of an international payments equilibrium. The capitalist world has got to give up its nationalistic philosophy of growth at anyone else's expense. The trade of the developing and poorer half of the world has to be taken more into account. The reserves which the surplus countries have built up must be made available for the finance of that trade.
This should be the key question to be debated at Nairobi but I fear the ministers will be bogged down in the technical debate on how to improve the present system of 'dirty' floating in the exchange markets. Both the French and the Americans seem to be agreed upon the need to get away from the indefinite floating of today. It has already led to a second and unnecessary devaluation of the dollar in February last which has given an unnecessarily extra commercial advantage to American exporters. As this has enabled the Americans to eliminate their trading deficit, which the French had so much complained about, M. Giscard d'Estaing has not made a great fuss about it but in an exclusive interview with a Times correspondent on July 27 he described floating as" a step-back to anarchy and irresponsibility." Mr Paul Volcker, the US Treasury Under-Secretary, also confessed at a press conference that floating was no longer "an acceptable substitute for reform." So it looks as if the Nairobi meeting will be concerned with the technique of how to make currencies convertible on a new alignment of exchange rates.
It seems to be agreed that the IMF will have to have a new numeraire and that the SDR will be groomed for that role. But there is no agreement as to how its future value is to be expressed. Some countries — America in particular — seem to think that it should be defined in terms of selected convertible currencies and not in gold but the French insist that gold should continue to play the important part. M. Giscard d'Estaing gave the following reasons. First, gold is a major component of the reserves of central banks. Second, gold is the means of settlement currently used for payments by the Soviet bloc and certain other socialist countries outside the IMF. Third, in the present state of universal inflation, gold constitutes for countries which hold it "the best means of preserving their assets . . . and maintaining the value of their national savings." If the French succeed in getting the Nairobi meeting to agree that the new SDR numeraire should be defined in terms of gold mainly and currencies secondarily it seems obvious that gold will have to be written up threefold from its present official price of $42, namely, to $126.
The suggestion has been made that the new numeraire should have a less cumbersome name than SDR, for example" Schweitzers," in memory of the outgoing managing director of the IMF, M. Pierre-Paul Schweitzer. Heaven forbid' The least admirable side of M. Schweitzer was his name. His successor has a better one, Dr Johannes Witteveen. But why not return to Keynes' original suggestion of " bancor," provided it is not pronounced as" bun kor."
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