OUR ACHILLES HEEL
By NICHOLAS DAVENPORT You do not have to be a retired old colonel, or any other sort of \ crabbed, crusted Tory, to have a
feeling in your bones that Britain IS going down hill. (The economy, I mean; the Political system I leave to other commentators.) You have only to read and understand the gold and dollar reserve figures. When Sir Stafford Cripps had to devalue sterling in 1949 the gold and dollar reserves were worth £416 million: he wrote them up to £603 million by writing the down from $3.68 to $2.80. (He overdid it, but for many years after that this undervaluation of the £ proved to be a wonderful help to our export trade.) After last month's huge loss of gold (about £80 million) the reserves now stand at only £765 million, and if you deduct the £201 million worth of dollars borrowed from the IMF in December, Which will have to be repaid, you will see that our reserves are actually lower than they were after the Cripps devaluation. And they will be worse at the end of this month, partly because we have to pay in gold or dollars 75 per cent, of our August deficit of £631 million to the EPU, partly because the Exchange Equalisation Account is still having to support sterling against foreign 'bears' or the sharp withdrawal of sterling balances, partly because this is the season for heavy import buying of dollar raw materials. Now the Treasury cheerfully insist that the fall in our reserves to this dangerously low level implies no weakness or deterioration in our under- lYing trading position. We managed, they say, to score a surplus of about £50 million in the first half of the year and should end the year with about a £100 million credit on our current account. Nevertheless, I venture to tell the Treasury that our real position is much worse, not better, than they would have us believe.
* * There is, to begin with, the serious weakness of our position as an international banker, as the manager of a currency in which nearly half the World's trade is conducted. This waS brought home to everyone during the Suez crisis when we lost £100 million worth of gold and dollars in a single month (November). To strengthen our banking position—that is, to improve the ratio of our monetary assets to our monetary liabilities— We borrowed £201 million worth of dollars from the IMF, with the promise of another £265 mil- lion worth when needed, and arranged a loan of S500 million from the Import-Export Bank., But even if we draw on these loans our banking posi- tion is still grotesquely weak. At the end of last Year the sterling balances held in London by sterling and non-sterling countries and by inter- national bodies (like the World Bank and IMF) amounted to £4,000 million. Our gold and dollar reserves are under 20 per cent. of this total. (Before the war our reserves were approximately equal to our short-term liabilities in sterling.) No banker would feel safe if his liquid assets fell to anything near 20 per cent, of the amount which his depositors could withdraw on notice.
Of course, the depositors in our 'sterling bank' would never want to withdraw all their money at the same time, but many of them are now keen to take back all they can. For example, India and the new independents, Ghana and Malaya, need the money badly for their capital development Plans. And let no one suppose they they regard `currency reserve' deposits as inviolate. They will draw these out, too, if they need the capital for any home investment which will improve their
own balance of payments. Malaya is a great dol- lar earner, through her exports of tin and rubber, and it might even suit her economic book to with- draw from the sterling area altogether. It all depends on the amount of capital she can expect to receive from Great Britain for her develop- ment. If she finds it inadequate she will look to America and pledge her trading dollar surpluses as collateral for dollar loans. Australia is already finding it impossible to raise in London all the money she requires for her expansion and has to resort to the American capital market for the balance.
• • The idea that the UK can earn a sufficient sur- plus on its current international account to finance the capital development of the overseas Common- wealth is moonshine—that is, as long as there is no control of imports and domestic investment. In the last three years of a free economy we have averaged a surplus of £190 million a year. The overseas Commonwealth would need four times that amount. In India alone, under' its second five-year plan, the rate of investment is expected to average over £1,000 million a year up to 1961. And the idea that the UK .will have a sufficient international balance, after its overseas invest- ment, to build up its gold and dollar reserves to a safe level is adding moonbeams to moonshine. Last year was made abnormal by the Suez crisis, but it is a sobering thought that after a trading surplus of £233 million and an overseas invest- ment of £191 million, we were able to increase our gold and dollar reserves by exactly £5 million (after drawing on the IMF for £201 million to meet the withdrawals of our sterling depositors). We need to double our reserves at least (say another £750 million of gold and dollars) before they can be regarded as adequate for our banking and trading requirements. For that matter the total reserves of the non-Communist world out- side the US are absurdly low in relation to their total trade, being less than 18 per cent, of their imports and exports, but that is another story and concerus the price of gold.
The Treasury argue that all would be well if we earned a surplus on international account of £300 to £350 million a year and that this is not an impassible aim, being an improvement of only 1 per cent, on the total of our current earn- ings and outlays overseas. I hope to show next week that this is far too much to expect of our free economy.
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