CITY AND SUBURBAN
Sterling sails out across the Channel with the gangways down
CHRIS I OPHER FILDES
Iwas in Marblehead, Massachusetts, when my bet came up, and I needed to hurry home before the pay-out windows shut. I had bet an ecu each way, as I wrote in 'City and Suburban' on 18 August, that we would hitch sterling to the European Monetary System in the first week of October — 'for three reasons: it is the week after the International Monetary Fund meeting,the week before the Con- servative Party Conference, and the week of the Labour Conference'.
So that was right, and all that we have to do now is to live with the consequences. They will be with us for many years to come, and I fear them. We have embarked on an attempt to rig the biggest market of all, the foreign exchanges. We must then try to make our economy fit our exchange rate. We are told that this is an essential discipline, or an alternative — as if there were one — to self-discipline. Some people even expect to enjoy it. Already the first and airiest expectations have dispersed. Markets live by anticipa- tion, and this marriage had, in the modern style, been thoroughly anticipated — hon- eymoon first, wedlock afterwards . . . . Only the naive could see it as a white wedding with a happy electoral event due nine months later. Of course it helps John Major to upstage his opposite numbers, in Westminster and in the finance ministries of Europe. He has given himself the credentials he will need in two months' time, for the Rome conference on monet- ary union — so that he can carry on his good work of derailing Jacques Delors' bandwagon. More urgent necessities, though, have forced his hand.
Until now Mr Major as Chancellor has flown on automatic pilot, as set by his predecessor. Leaving interest rates un- changed, leaving budgetary policy un- changed, he put a new face on the Lawson policies and gave them time to work. Now they have, in their way. The cash squeeze which Mr Lawson began two years ago has taken hold, and is crushing borrowers and lenders to death. British companies last year overspent their incomes by an unpre- cedented £25 billion. After six months of this year, they were set (so says David Owen at Kleinwort Benson) to overspend their incomes by another £37 billion. Polly Peck is only the latest and most spectacular instance of what happens when a company, however glamorous its façade, runs out of cash. Polypexia nervosa is infectious, can become epidemic, and is usually fatal. Cheaper money had to come soon. Mr Major, timing his change of policy, will have seen deepening risk and problematic- al reward in waiting any longer. At the same time, he did not want to add troubles with sterling to the troubles he had already — the sterling scare on the eve of the IMF meeting served to underline that. EMS membership is, at least, a well-timed diver- sion, and may for a while serve as a defence. This was enough to persuade Mr Major to rewrite his stated terms for entry — the clause which said that Britain's inflation rate must be converging on our European partners'. He simply inserted, in his IMF speech, the word 'prospective'. This turns out to mean that we can go into the EMS on a post-dated cheque and the hope of better luck next year.
Luck can take him, and us, only so far. Luck will not keep us out of trouble if we go on running 11-figure deficits on the current account of the balance of pay- ments. James Capel, I see, has raised its estimate of the 1991 deficit to £15 billion. I also see that William Rees-Mogg, the Sage of Hinton Blewitt, thinks Mr Major has made a fatal blunder by taking us in at too high an exchange rate — too high, that is, for British industry to compete and for our trade's performance to improve. Really, the sage might have told him that earlier. Week in, week out, the columnar word from Hinton Blewitt was that there is no salvation outside the EMS. Now Mr Major professes himself as a convert, and the sage tells him: You Blewitt.
Are we doomed to go into these arrange- ments at the wrong rate — too high in 1926, when Churchill put us back on the gold standard, too low in 1949, when Stafford Cripps devalued? Harold Wincott thought so, a quarter of a century ago, watching the Wilson government impaling itself on $2.80 parity for sterling — but Wincott wondered whether there was, or could long remain, such a thing as a right rate. An exchange rate, he thought, was a price — and prices change.
Keynes thought so too. The Bretton Woods system, his legacy to the post-war world, was meant to provide for that. Exchange rates would be fixed, within narrow limits, until it was time for a change — which the country concerned would agree with the IMF. Alas, it did not work like that. Exchange rates were locked into place, defended at high cost, and changed only in a series of violent jerks and successive crises which in the end brought down the system.
The EMS, like Bretton Woods, is sup- posed to be a system of fixed but adjust- able parities. Like Bretton Woods, it is locking into place. The Governor of the Bank of England has been congratulating the EMS on avoiding change, which must now (he says) be regarded as the very last resort. Central bankers love fixed ex- change rates, which do wonders for their self-importance. Fixed rates, though, are to economic management what Procrustes was to inn-keeping. They stretch or chop the customer to fit the framework.
We have heard much this week (and from assorted sages over many weeks) of what the EMS can do for us. Let me say once more that the EMS can do nothing for us that we could not, if we chose, do for ourselves. Our partners in the EMS will not keep sterling within its bounds. That is our responsibility. The EMS gives us no new weapons. In or out, we have only three of them: intervening in the markets, changing interest rates, or changing fiscal policy — crisis packages or mini-budgets, as they used to be called in their un- lamented day. Being in the EMS will not bring down our inflation by any means which were not available to us outside it. To rely on the EMS as an external disci- pline is to say that we either cannot or will not manage our affairs and would prefer that others acted for us. They will, of course, act for themselves.
Churchill came to bemoan his return to the gold standard (and to blame his advis- ers) but at the time he was a convert. `Nations on the gold standard', he said, `are like ships whose gangways are joined together.' No one cared to tell him that ships whose gangways are joined together are singularly ill equipped to sail the seas. What gangways are good for is boarding.
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