THE ECONOMY & THE CITY
The Threat to World Liquidity
BY NICHOLAS DAVENPORT l'Nis is the most irascible Christmas I can J remember. The whole world seems to be of bad temper and selfishness. I am not re- ferring to Rhodesia or to black Africa or to the hideous war in the Far East, but to the bad temper and selfishness among the trading and Peaceful' nations of the West. They all seem
to be trying to ruin each other. If we folly is allowed to continue much longer we shall repeat the tragedy of the 1920s and end up in a world trade recession.
It all comes about because we still do not know how to manage our monetary affairs on a world scale. We are all trying to acquire sur- pluses on our international trading accounts, i.e. to sell abroad as much as possible of our own Produce and manufactures and buy as little as possible of other countries' produce and manufactures. Selfishness, in other words, is still the mainspring of international trade. (Added to pride and politics it was also the mainspring of the European Common Market.) As it is im- Possible under these conditions for every country's exports to be exactly balanced by every r7nntry's imports we need, of course, a flexible System of international payments and credits. Since the war we have been struggling to Make do with an imperfect gold exchange standard operated through the International Monetary Fund ;nd the World Bank and its associates. There has never been enough gold to work even an imperfect gold exchange System, and the practice naturally developed of using the so-called 'reserve currencies,' sterling and the dollar, to supplement gold in national reserves. This brought useful additions to inter- national liquidity whenever the US or the UK ran into deficit on their international accounts, for masses of dollar and sterling deposits then. Passed into foreign hands. But this is just the Point which has angered the choleric French. It makes it too easy, they say, for the US and the UK to run up these 'deficits without tears.' So they are objecting strongly to the use of dollars and sterling as reserve currencies. They started the 'smear' campaign against the dollar accentuated the rush to convert dollars and sterling into gold. The result was a fall of nearly $2,000 million in the amount of 'reserve' cur- rencies held in national reserves in the first half of this year. The net result was a contraction of $550 million in total international liquidity in the six months ending June. This may seem tiny— being just under 1 per cent—but it is dangerous for world reserves to drop when world trade exPanded last year by over 10 per cent. Between 1960 and 1964—before all this bad temper flared PP---the normal accretion tq the national reserves Was of the order of $2,000 million a year. But Private hoarders, encouraged by the French gold rush, have been running off with a large part of the new supply of gold from the mines.
We shall never forget in this country that the French were mainly responsible for the explosion of our monetary crisis in 1929-31. Of course; we had inflicted economic misery on our- selves by returning to the gold exchange stan- dard in 1925 at an overvalued rate of exchange for stetting. But our financial crisis was brought on when France—to quote from i League d
Nations report—'decided in 1928 to take nothing but gold in settlement of the enormous surplus accruing to her from the repatriation of capital and from the current balance of payments. In London the pressure became unbearable and the gold parity of the $ was abandoned.'
The same sort of thing could happen in 1966 if private• gold hoarding is allowed to go on uninterruptedly, if the French and others con- tinue to turn their dollars into gold and if the efforts to increase international liquidity by a reform of the IMF or the creation of new 'col- lective reserve units' is once again postponed. The Americans have now been thoroughly angered by the French attacks and are deter- mined to see that their dollar will not lose its position as a world trading and reserve currency. To prove to the world that the dollar is a fun- damentally strong currency (which it is because American exports far exceed imports) the late President imposed a tax on foreign issues while the new President secured a voluntary curb on American investments overseas. (Neither was mean enough to propose cutting foreign aid, but the Senate did make a cut under Johnson.) The first result was a squeeze in the Euro- dollar market, which is equivalent to a squeeze in international liquidity. And lately the squeeze has been tightened up. The US Treasury has requested American companies operating over- seas to borrow overseas in foreign countries as far as they can to avoid pressure on the dollar, and the hint has been taken in no small way. In fact, American companies have borrowed so heavily—long before they need the money— that they have stripped the loan market on the Continent. This will inevitably slow down the expansion of inter-European trade and the world export market. In other words, one monetary act of selfishness on the part of the French has prompted another monetary act of selfishness on the part of the Americans. And President Johnson has made it worse by a 'Buy American' campaign, so that American orders have been switched from British and continental manufacturers to their domestic market. The final result will be a slowing-down of world trade and more balance of payments trouble for countries, like Great Britain, whose livelihood depends on foreign trade.
The prospect of another payments deficit of around $1,500 million for the year has caused the American authorities to take a much tougher line with their businessmen over investment abroad. This will mean a cut in capital spending in the UK by at least £100 million next year. At the same time Mr. McNamara is shutting down more American defence bases overseas while Mr. Fowler is bringing in legislation to encourage foreign investment in the United States. The higher bank rate (4) per cent) imposed by the Federal Reserve is intended to keep American money at home and encourage foreign money to come to the US. All these measures are expected to cut the American deficit by over $1,000 million. So dollars abroad are going to get scarcer and the finance for international trade made much more difficult. This spells trouble for great international traders like ourselves who are at the receiving end of other people's folly and anger.
Previous page
