'The unexploded mine'
MONEY
NICHOLAS DAVENPORT
It is always a relief to forget our own troubles over the balance of payments by thinking of the like troubles of countries overseas. Some foolish and malicious. people are even gloating over the difficulties of France. The French trad- ing deficit has been running since November at the equivalent of about £80 million a month. Now the Bank of Fiance can count on as much support from other central banks as the Bank of England has enjoyed, but if there is a general run out of francs into privately hoarded gold the 'French currency flies out of reach of the central bank rescue operation. In that event the General 'would find himself crucified on the cross of gold with which a year ago he had been taunting and Provoking the paper dollar. The transmutations of the monetary world can be startling.
Ali well, you may say, one country's deficit helps to make up another country's surplus. It would be a very jolly world if the minuses and pluses in international trade were simply marked up in the accounts of an international clearing union, as Keynes suggested, and the surplus countries were to lend the debtor coun- Viet the money required to balance the books. But there is no international clearing union. There is only an International Monetary Fund or Club which treats these imbalances very seri- ously and expects its rules to be kept although it imposes no sanctions if they are broken, as in- variably they are. The club's rules are that a deficit country must deflate in order to bring down its prices and a surplus country must in- flate in order to raise its prices. As wages are the main cause of price disequilibrium and can- not be dictated, the rules are really unworkable. In the event of a so-called 'fundamental dis- equilibrium' the deficit country may devalue and' the surplus country up-value its currency, but it is a difficult decision to make seeing that other countries will not be called in for advice and will probably object to the new rate. We have seen that Germany, which ran up a surplus last year of the equivalent of £1,200 million, refused to up-value (except indirectly and inadequately), although other countries under the intF rules could have subjected her exports to a special import tax. It may seem amazing that the IMF system has worked at all and has allowed world trade to expand, but the truth is that expansion has generally been due to the blithe disregard of the itqF regulations.
Last year, according to the National Institute, the world recorded the second biggest rise in the volume and value of international trade since the Korean war. It was around 12 per cent. The OECD group of advanced industrial coun- tries claimed the same sort of rise. Necessity was, in fact, the driving force. The war in Viet- nam brought a considerable gain to countries in the Far East and to the primary producers whose commodity exports advanced sharply in market value in the second half of the year. Sig- nificantly, both National Institute and the OECD group are forecasting a slowing down of the advance in world trade to about 8 per cent in the first half of 1969 due to the coming check to domestic expansion in the us and France and, according to the mak in the UK also. Further, the MCD group =Erect that in the second half of 1969 the primary producers may react to their extremely large trade deficit with the OECD area by cutting their purchases from the advanced industrial nations. So it cannot be said that the ne monetary system, when it is taken seriously, does anything to help the orderly expansion of world trade.
In fact, the reverse. As the National Institute pointed out in its last bulletin : 'A system in which rates of exchange remain constant in relation to one another and to the price of gold is viable only if countries give the highest priority to maintaining external balance over a period of years. . . . If they fail to do so. and the expectation is thus aroused that events may force a change of one exchange rate against the others or of all of them against gold. then large movements of funds are bound to occur and the longer they last, the more likely they are to continue.' This is a gloomy pronouncement to make in the middle of a franc crisis. The feel- ing is that if the General cannot hold the labour front the franc may be devalued by as much as 20 per cent to 25 per cent. This could upset sterling, the Belgian franc and the Dutch guilder and perhaps lead to devaluation on an even wider front. But the General may be able to hold the situation until the autumn when, after the German elections, the mark may be up- valued and the franc devalued in an agreed orderly fashion.
The fundamental weakness in the IMF system of fixed exchange rates is that surplus countries
are generally unwilling to increase imports and make their own exports less competitive while
the deficit countries are generally unwilling to contract sufficiently to cause a substantial rise in unemployment. For example, there will be a strong resistance to Mr Jenkins's budget if he intends to deflate further for die purposes of IMF repayment. Why, it will be said, should we cause more unemployment to enable the IMF debts to be repaid on the due date when these repayment dates could be phased forward by, say, five years? Sane business people never in- sist on debtors breaking themselves in order to repay their debts: they like to see them quietly expanding and getting stronger.
A further caustic comment on the IMF system was made by Sir George Bolton, chairman of the Bank of London and South America, this week, when he told his shareholders in his an- nual review that the western world was sitting on 'an unexploded mine that might be triggered off by any small event that distracts markets. Sir George takes the view that the tight between central banks to maintain an orderly payments system may well prove unsuccessful, particu- larly as the battle between the adherents of gold and those who support an international ex- change standard still remains 'completely un- resolved.' So in the next few months we must get accustomed to sitting quietly on 'an unexploded mine' which, if it goes oil, will wreck the bond market temporarily and send some equity shares sky-high.
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