THE ECONOMY & THE CITY
The Devaluation Bore
By NICHOLAS DAVENPORT
ALL this talk of devaluation has become a bore. tiDoes anyone in his senses think that de- valuation of sterling would be a good thing, that is, if he is a trader resident in the sterling area? Yet some learned economists, it is said, have seriously advised the Government to commit this folly.
They must be out of their minds. De- valuation might have a ,case if the adverse balance of payments were due to the fact that British goods had priced themselves out of the world's markets through excessive labour costs, but this is simply not true as a general state- ment. In some manufactures we can undercut the Continent and America. I heard recently of a British manufacturer of metal windows who tried to storm into the French building trades because his product was 50 per cent cheaper than French metal windows. But he had no suc- cess at all because the French were not interested in buying outside their own market. We may have lost a lot of orders because our delivery dates have been unsatisfactory, but that has been due to an overstretched demand at home, and the right way to stop that evil is by easing up at home. I am not advocating a general deflation of The whole economy, but the application of controls and licensing to the few affected indus- tries, as the Government is now doing—at long last--in the building and contracting industry.
We may also have lost some foreign orders be- cause our design has been unsatisfactory or our after-sales service negligent, but that trouble cannot be cured by devaluation, which would give only a short-term relief to the inefficient firms guilty of such shortcomings. For the UK as a great world trader, and for the overseas sterling area as a great supplier of industrial raw materials, it would be the height of folly to turn the terms of trade against ourselves by lowering the value of sterling in terms of foreign cur- rencies. We have just borrowed £900 million ($2,500 million) from the IMF and others in de- fence of the present sterling rate. Are we mad enough to contemplate having to earn £1,200 million in order to pay back the same amount of dollars; that is, if we suffer sterling to fall from $2.80 to $2.10? It was criminal of sterling- area traders to court the risk of devaluation by resorting to the techniques of `leads' and 'lags' and it is good that the Government has at last prohibited importers paying for goods in foreign currencies before actual shipment. We are all in the sterling boat and it is time we all stopped rocking it.
Any idea that devaluation gives traders any lasting advantage can be seen to be nonsense if a study is made of the effects of the excessive and unreasonable devaluation of sterling made by Stafford Cripps in 1949. The volume of ex- ports in 1950 did not even rise sufficiently to produce the same dollar value as in 1949. And the sharp rise in 1951 was due to the Korean war—which also swelled imports. It is interesting to find that although the devaluation of 1949 necessarily brought about a fall in the index of UK export prices in 1950, this index was back in 1952 to very near its pre-devaluation level. This does not suggest that exporters always make good use of devaluation by improving their efficiency. Many of them simply increase their profit margins.
What caused the flurry in the sterling exchange last week was the escalhtion of false alarms-- `neurotic rumours,' as Mr. Wilson called them —prompted by the conversion into gold of about £30 million of sterling held by the Chinese (who naturally eschew holding their reserves in dollars). Altogether we must have lost in July well over £120 million of gold and convertible currencies. Our reserves are officially quoted at £947 million, but what is left of the $750 million swap arrangement with the Federal Reserve is probably only half. There is the $250 million credit with the US Import-Export Bank (backed by the collateral of the `second line' reserves— the $1,250 million portfolio) and I understand the Americans have promised to enlarge these credits if there is any further trouble. So we have still enough resources to finance the continuing (though falling) deficit on the balance of pay- ments.
The latest favourable trade returns sug- gest that the deficit this year may be less than the estimated £300 to £350 million (or much less than half that of last year). The only serious worry for the 'sterling bank' is, therefore, the attitude of the holders of £5,000 million of sterling deposits. We cannot answer for the Chinese, but the IMF and other international odganisations hold about £1,000 million and other central monetary institutions nearly £2,500 million (of which the overseas sterling area accounts for £1,850 million). The private holders are therefore about £1,500 million, of which £1,000 million are in the sterling area. If these do not get panicky, the `sterling bank' should hold and good trade returns certainly should make for greater confidence.
Another confidence factor is the report of the study group of the Group of Ten, under the chairmanship of M. Ossola, which was published this week. This was set up to examine the various types of proposals which had been made for the creation of reserve assets, and a very dull, if balanced, report it has made. But the reassuring news is that the continental group Is prepared to discuss this report and give particu- larly favourable consideration to the CRU scheme adapted by the French from the Bernstein proposal. In brief, these Collective Re- serve Units are non-interest-bearing assets created outside the IMF by a limited group of industrial countries in agreed amounts and distributed and used in a uniform ratio with gold held in the participating countries' monetary reserves. As long as the scheme is not too rigidly tied to gold. it could be a useful development and might solve some of the problems of the sterling reserve liabilities. It excludes raising the price of gold and would channel a larger part of the new out- put of gold into official reserves.
On the whole, our monetary position is much less distressing than the pessimists make out. If the Bank of England manages to put a tem- porary stop to our investment overseas, our balance of payments should right itself more quickly than people anticipate.
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