THE ECONOMY & THE CITY
The Helmsman and the Financial Storm
By NICHOLAS DAVENPORT
Ir is small wonder that the Prime Minister re- cently appealed for the Dunkirk spirit. The economic and financial situation might appear to some nervous people as• impossible as the military situation, appeared to the faint-hearted in 1940. In July of that year, Hitler began his War Direc- tive No 16 with the words: 'Since England in spite of her hopeless military situation shows no signs of being ready to come to an understanding I have decided to prepare a landing operation against England.' (He wisely left out the Scots and the Welsh!) A similarly worded directive might have been issued by those undertaking the great 'bear' operation against the I. But, like Hitler, they failed to take into account a stout- hearted Prime Minister who refused to consider that he could be beaten. By the end of the year our gold reserves were down to f827 million and short-term debts had been incurred to the IMF, the BIS and a dozen central banks which would mop up the greater part of them. In addition, there were net sterling liabilities at the end of September of £3,914 million against which the government could raise a further loan of only about $1,500 million from the IMF—on terms! —and perhaps $700 million from the pledging of its $1,000 worth of American securities. But the undaunted Mr Wilson had what Sir Winston Churchill did not have in 1940—the active partici- pation of the American authorities. President Johnson was as determined to defend the dollar as Mr. Wilson wag to defend the pound.
At the end of last week the American Treasury intervened with a strongly-worded statement in defence of the dollar and in defiance of the gold- hoarders—not to mention the French Treasury seeking to convert its dollars into gold. 'Those expecting a boost in the basic price of gold,' it said, 'will inevitably end on the losing side. . . . The dollar price of gold ($35 per ounce) is im- mutable.' Congress is to be asked, as I anticipated last week, to cut down the 25 per cent gold ratio requirement which is at present sterilising $12,000 million of gold at Fort Knox—three-quarters of the total reserve. The gold-hoarders, who pushed up the price in London to nearly $35.20 last week, will have plenty of gold bars to satisfy their greed or quieten their nerves when the 'free' American reserves are replenished. Of course, if France and other big holdets of dollar deposits were to decide to convert all their dollars into gold they could quickly force the American Treasury to put up a notice at Fort Knox that gold sales were suspended. France has over $1,000 million, Germany $3,000 million, Italy $800 million and other European countries about $1,000 million. In fact, the total dollar deposits of central banks and monetary authorities amount to about $12,000 million dollars. But it is not in the interests of France or any other member of the IMF to destroy an international financial system, however inadequate it may be, before they are ready with something better to take its place. All of us have different plans for its re- form. The Americans and British favour the creation of an international currency, managed by a new world central bank (or subsidiary of the IMF), which would be only partly backed by gold. The French desire a larger gold back- ing and rigid restrictions upon credit creation by such a body. There is bound to be great argu- ment between the two monetary camps before the inevitable compromise is worked out. But the lesson to be learned by the gold-hoarders and by the panicky 'bears' of sterling is that every one of the monetary powers has an interest in preserving the status quo of the gold dollar and its fellow reserve currency until a new Bretton Woods conference can be held. Meanwhile, one must admire the Prime Minister for his Chur- chillian strength of nerve in not flinching when confronted with the biggest run on the 'sterling' bank since the war.
Mr. Wilson has another powerful support which Sir Winston did not have—a deputy as stout-hearted as himself. Mr. George Brown goes forth like David to battle against the Goliath of high prices and wages armed not even with a sling and a stone unless you can call his appeal to public opinion a sort of boomerang weapon. He has no legal power to control wages or prices. He has no commission set up to re- view either. He is well aware that wage earnings have risen by about 8 per cent last year and prices by under 4 per cent. Looking ahead, he knows that six million workers are going to get higher pay this year under new agreements in engineering, electricity and gas, building, agri- culture, iron and steel, textiles, the post office, the docks, etc. (the railwaymen have just secured 9 per cent), that a further fractional rise in the cost-of-living index will bring a few more million workers on to higher wage rates under the 'sliding- scale' agreements, and that the employers are bound to seize the opportunity of a cost-inflation- ary budget to adjust their prices upwards (some with more justice than others). Yet, undaunted, he has managed to bring the opposing interests in our split society to the conference table and make them sign a declaration of intent `to keep the in- creases in wages, salaries and other forms of income in line with the increase in the real national output, to keep the general level of prices stable, to lead a sustained attack on the obstacles to efficiency, whether on the part of management or workers, and to co-operate with the government in giving shape to the machipery ' to be established for this pur- pose.' Call it cheek or call it courage, it was a remarkable achievement, Whether the machinery can effectively work when produc- tivity is so difficult to measure, when wage drift- ing is so difficult to control, when the national
growth rate may drop (as it must this year) from 4 per cent to perhaps 1 per cent or 2 per cent, is anybody's guess. The trade union idea is a 'planned' growth of wages each year, not a miss one year and a jump another year, and without stability of prices it is difficult to see how the workers can accept restraint. It needs a stout heart to go battling on and set up the review commission on the assumption that the two sides will behave in a reasonable and civilised manner when confronted with a government demand for restraint. Mr. Brown is fortunate to have as his No. 2 Mr. Anthony Crosland, who is as tough as he is erudite.
Assuming that the economy survives its Dun- kirk retreat and its dear-money deflation, Mr. Brown and Mr. Crosland's work on the National Economic Development Council could save our industrial future. The little 'Neddies' they are setting up to examine the productivity record of each industry, find out why it is im- porting so many machine tools or exporting so few manufactures, and then suggest the right investment it should make to ensure its efficiency, are very much on the lines of the French Com- missariat du Plan which was so successful in modernising French industry. All this is good long-term industrial planning. But it needs courage to undertake it while, short-term, the economy seems hopelessly out of balance.
The City which may have been shaken by some other ministers' shortcomings, but never lost its balance in the recent crisis—as the market in- dices show—is now very ready to take off its hat to the Prime Minister and his deputy for standing their ground and not losing their nerve in one of the worst financial storms of our trading history.
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