THE FUTURE OF THE FOUND STERLING
By NICHOLAS DAVENPORT
HAVING imbibed the , outmoded
quantity theory of money Mr. Peter :EL (Samson) Thorneycroft now appears
to have swallowed—judging from his free-trade remarks in Canada—the whole liti.NAer-faire doctrine of unrestricted multilateral trade with a rigid gold exchange Standard. I was. glad to see Sir Robert Boothby declaring in a letter to the Financial Times that if that was seri- ously intended by the Government he could not get out of the Tory Party quickly enough. What is really going on in this Chancellor's mind? Is he still thinking in terms of full convertibility for . the E now that.it is looking the $ full in the face —at parity? I would agree with him. that the present half-cock system of fixed exchanges with- out full convertibilities is nearing its ,final show- down. Let us see how far it has travelled. We honoured the Bretton Woods and American loan agreement by trying convertibility in 1947, but had to suspend it after a week or two and go back to full exchange and import controls with dis- crimination against dollar goods. The 'confidence' crisis of 1949 then compelled us to devalue sterling by 30 per, cent. Cripps, over-did the de- valuation of sterling, but most, other European currencies followed our lead and the strain in the exchange system was eased. It was a great pity that when sterling gathered strength in 1950 we did not then allow the £ to float in the ex- changes. Unfortunately we kept alive the Bretton Wood S system of fixed exchange parities based on the gold dollar. Our next crisis was in 1951 --with inflation at home and balance of payments deficit abroad—and we met it not by borrowing from the international Monetary Fund (although our reserves fell to £602 million or $1,685 million), but by dear money (4 per cent. only) and import restrictions. Encouraged by the subsequent recovery in our gold and dollar reserves the Tory Government relaxed the remaining controls, liberalised' European trade, allowed the City markets in metals and select commodities to open up (With' dollar dealings), reduced the categories of sterling, widened the market in transferable sterling and gave the world to understand that it was mOving towards full convertibility for the £.
In the spring of 19,53 Mr. Butler, then Chancellor, and Mr. Eden, then Foreign Secre- tary, went to Washington to discuss convertibility and a stabilisation loan. Their reception. was lukewarm. I have always understood that Prime Minister Churchill was also' lukewarm; having been soundly advised against convertibility by Sir Donald Macdougall, the Oxford economist, and by Lord Cherwell. Anyway, there was no helpful lowering of American tariffs. The Randall Commission did not favour 'any dash to con- vertibility but thought that the UK reserves needed strengthening and recommended that better use might be made of the $3,000 million of resources of the IMF which had not been tapped except for some $150 million a year. In due course this happened—with a vengeance. When the exchange crisis of 1957 developed we borrowed $561 million from the IMF and ear- marked another $739 million. Other countries in difficulties also borrowed, and in the year to April, 1957, the IMF extended loans and' Credits of no less than $2,300 'million, reducing is supply of gold and convertible currencies to about $2,000 million. Thus, in the first year in which it was called upon to help countries caught in a crisis of liquidity, the IMF has come virtually to the end °fits gold tether. If Mr. Thorn9ycroft
will take my advice he would call in the remain- ing credit of $739 million .immediately. It only holds good until the end of the year and if he does not call it other countries will no doubt get it and the IMF will then be nearly cleaned out. The $500 million he borrowed from the Export- Import Bank has already been swallowed up (and more) by the gold losses of the past two months. Our reserves are down to $1,850 million.
The meeting of the IMF, from which the Chancellor has just returned, was profoundly disappointing. The Americans took the oppor- tunity to preach the orthodox Republican doctrine that world trade is threatened not by the shortage of world reserves but by the failure to control inflation. Mr. Thorneycroft was in such a hurry to agree with his masters that he repudiated, Keynes and the whole English monetary tradition of the past twenty-five years. World trade may certainly be threatened by in- flationary booms and slumps, but it is also threatened by the obstinate refusal of the Amen-
cans to agree to write up the price of gold, and by the failure of the creditor countries, the US and Germany, to expand their imports adequately. A writing-up of the price of gold, long overdue, is , the simplest way of increasing reserves and improving liquidity. It need have no inflationary consequences in the US if the Treasury carried the surplus arising out of the transaction to a special 'frozen' account. That Washington should deny this relief to the trading world is an act of quite extraordinary selfishness'. As for import policies of the creditor countries, a dollar gap reappeared in the last quarter of 1956 and in the first half of 1957 ($450 million). An annual out- flow of dollars at the rate of $1,000 million a year has been turned into an inflow of much the same proportion. The World Bank has done its best by lending $388 million last year to fifteen countries, and it has since borrowed $150 million from Germany for relending. But this is not nearly enough. If the pressures on international liquidity continue, if the world fall in commodity prices is accelerated by Mr. (Samson) Thorneycroft's savage deflation, another sterling exchange crisis will surely develop later on. A wise Chancellor would consider abandoning the Bretton Woods system for a floating exchange when the £
regained a position of strength.
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