A load off sterling MONEY
NICHOLAS DAVENPORT
Imagine a team of brave mountaineers climbing the terrible north face of the Eiger. They are all roped together, a dozen of them, following a leader who is superbly equipped. One is mov- ing less freely than the others because he is carrying a much heavier load but the ascent is hazardous for all. None of them has a firm hold on the rock and all know that if one slips and falls he carries everyone with him. The sight is frightening.
Now imagine the Eiger to be the IMF (the in- ternational monetary system) and the brave mountaineers to be the principal currencies linked by the rope to the leader, the gold dollar. They know that if one slips they all slip. If sterl- ing, carrying the biggest load of debt, falls, it brings the rest down, even the gold-equipped
dollar. Now you know why no one in that team is going to let sterling down. Rescue teams are ready if it gets into trouble. Indeed, they are already at work.
Sterling has been in trouble for a long time,
but we must distinguish between the different sorts of trouble. First of all, there is the long- standing trouble of the sterling balances. The war left us with a pile of debt owing to Com- monwealth and Allied countries—£2,500 mil- lion and £1,200 million respectively. We were put under an obligation in the American loan agreement to try to get these debts reduced but they never were. (Dalton left the negotiation to Sir Wilfred Eady, who thought they were an asset.) Australia and New Zealand accepted some cuts but no one else. The result was that whenever sterling came under strain the holders of these vast sterling balances would become nervous, fearing devaluation, and some of them (but never Australia or New Zealand) would convert a part into stronger currencies. Even after the recent troubles had caused some sterl- ing holders to do some switching the total of the sterling balances at March 1968 was no less than £2,545 million for the sterling area coun- tries and £1,601 million for the non-sterling. The IMF and other international organisations held f 1,543 million.
The constant worry over these sterling bal-
ances was no doubt mainly responsible for the Tory stop-go policy and the subsequent defla- tions under Labour. When the international monetary system itself came under stress after the attack on the dollar and the flight into gold the central bankers at last realised that the sterl- ing balances would have to be funded or taken over, being a constant threat to sterling. The IMF system, in effect, could not afford a weak 'reserve currency' link in the international money chain. In other words they realised that they would have to underwrite the whole sterl- ing area system to keep the mw system going.
Serious discussions began at the annual meet- ing of the Bank for International Settlements in Basle at the beginning of June. It was sug- gested that some international body might take over responsibility for the sterling Treasury bills held by certain countries. Later Mr Harold Lever, the Financial Secretary of the Treasury, went to see the German finance minister and last week went on to approach the finance minis- ters of France and Italy. The Government are lucky to have in Mr Lever a man who not only understands the money system—perhaps the first financial secretary ever to do so—but is a first-rate business negotiator. Apparently he succeeded in coming home with a promise from the major financial powers to support sterling up to $2,000 million against any run-down in the balances of sterling area countries.
The agreement is for an initial period of five years after which repayments of any drawings will start and be spread over a further five years. The credits will cover over a third of the bal- ances held by sterling area countries. The bankers are in effect offering the sterling area governments a form of exchange guarantee similar to that offered recently to Hong Kong, Which is now insured against a drop in the value ' 01 its sterling Treasury bills. Probably some of the Arab countries and perhaps Malaysia and Singapore will take advantage of it and switch part of their holdings into gold or dollars. The scheme is a 'second-best' covering only a third of the sterling area balances and falling short of a take-over of the whole lot, but it is an advance and a real support for sterling.
There is another—and more serious—trouble which has been hurting sterling. This comes from our current trading account with the world which, having been adverse since 1964, leads to speculation, that is, short selling of sterling, in addition to genuine sales to meet the deficit. To offset these sales of sterling the Treasury has had to borrow dollars and other currencies from the IMF and the central banks. We borrowed $2,400 million from the IMF on account of the 1964-65 sterling crisis as well as over $2,000 million from the central banks, but by the middle of 1967 we had repaid $1,000 mil- lion to the IMF and reconstituted both the Euro- pean and American bank credits. When the next crisis broke, and devaluation followed in No- vember 1967, we had to raise a new standby credit of $1,400 million from the IMF and $2,600 million credits from the central banks, making $4,000 million in all. The IMF standby has re- cently been drawn, so that we now owe the IMF a total of $2,800 million, half falling due in 1970 and half in 1973. We have also drawn upon the central bank credits—perhaps tc the extent of over $1,000 million.
But these obligations are not fresh debts we have incurred; they are merely an exchange of dollar debts for sterling debts. The only fresh debts we have incurred are those arising out of the continuing deficit on our current trading account with the world. And these are bad enough. The balance of payments returns reveal the following trading deficits in the four years 1964 to 1967—£402 million, £110 million, £31 million and £514 million, a total of £1,057 mil- lion, to which must now be added £147 million for the first quarter of 1968. The Chancellor is confident that by this time next year these trading deficits will be turning into surpluses, but the closing of the deficit is obviously taking a longer time than most of our creditors expec- ted. Hence the need to reassure them by raising an additional credit of $2,000 million to 'under- write' the sterling area balances.
Does this mean the beginning of the end of the sterling area? I hope so. It has outworn its usefulness. The conditions which brought it into being—a world slump and breakdown of the world monetary system—no longer exist. The excrescences which burdened it—the sterling debts from the last world war—are in process of being stabilised. Sterling. freed from the sterl- ing area, could become for the first time in thirty-seven years a stable trading currency— and cease to be a reserve currency. It would be almost a financial miracle.
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