THE ECONOMY
The pound in trouble but losing track of the deutschmark
JOCK BRUCE-GA RDYNE
In order to maximise the tax advantage of their investment income under the new system, our spouses — to put it crudely — are likely to start another run on the pound just when the poor old currency is taking a battering anyway. This is quite simply because they cannot obtain access to their investments clear of UK tax under the new dispensation unless they first move them into offshore funds and that, we must assume, is what they will do.
What the resulting outflow of funds from sterling will amount to is a matter of speculation. But the potential is obviously very substantial. I have a feeling that Mr John Major may have cause to regard this particular legacy from his predecessor as the harshest of the lot; worse than the inflation 'blip% worse than the continuing credit boom: worse even than the inflation and political consequences of the introduc- tion of the poll tax, coming at the worst possible moment when sterling is already under acute pressure anyway. Fortunately Mr Major has at least aban- doned his predecessor's attempt to track the deutschmark. Nonetheless, he cannot afford to stand aside and watch the pound slither deeper and deeper into the quag- mire, because of the effect this would have on his domestic anti-inflation strategy. Which leaves one tentatively and reluctant- ly to speculate on the possibility that at long last Mrs Thatcher's phenomenal good fortune has begun to run out. . We may be moving into an environment
In which challenges to her leadership --with all the additional strains that these are
bound to put on the exchange rate — are going to be positively encouraged. Consid- er this: in 1975 Mrs Thatcher herself demonstrated conclusively the unwisdorn of hesitation for the ambitious candidate to succeed to party leadership. I think few of us doubt that had Willy Whitelaw stood in the first round of the contest to replace Ted Heath, he would have emerged comfort- ably as the leader of the Tory Party. Now it looks increasingly likely that Mr Michael Heseltine is preparing to jump into the ring with both feet. Can Sir Geoffrey Howe risk the possibility of missing the bus? And if not Geoffrey Howe, then what about the others: Douglas Hurd, John Major, Chris Patten etc?
Until the past two or three weeks all this seemed to me to be fairly idle speculation. But I'm not so sure it can be dismissed as such in today's altered circumstances. Amongst all these contenders, Mr Michael Heseltine can claim now to have offered his party an alternative manifesto involving the establishment of an independent cen- tral bank and a broad corporatist industrial strategy. He can even, if you wish, point to evidence of the consequences of this strategy: he would, I am sure, regard the announcement by Ford of another big investment in the UK automobile industry on Merseyside as the direct consequence of the way in which the Department of Trade and Industry smoothed the path of Ford's participation in Jaguar by removing or releasing the golden share.
Some of us might be inclined to wonder whether this latest announcement, adding as it does still more to the surplus capacity confronting the European motor car indus- try as we pass into the single market, is necessarily an ideal development. Mr Heseltine would, I have no doubt, respond to such lily-livered hesitations by replying that if we do not steal the opportunity to create extra jobs on Merseyside the Ger- mans or the French will grab the jobs for themselves. There is no place for faint hearts in Mr Heseltine's world.
It is not entirely clear to me why Mr Heseltine's strategy should embrace the concept of an independent central bank, 'I'm looking forward to the Budget, at least it'll take my mind off the poll tax.' although clearly this will win him the votes of the Governor of the Bank of England, Mr Robin Leigh-Pemberton and his col- leagues in Threadneedle Street. Mr Leigh- Pemberton would be inclined to argue that if the Tory Party is minded to switch to such a radical alternative as the Heseltine strategy it would be better off with a fully independent central bank to back it up. Unfortunately it seems to me that there is a fallacy buried somewhere in this approach. The Governor of the Bank of England argues that the independence of the Ger- man Bundesbank holds the key to the strength of the deutschmark: in the Federal Republic the politicians are beyond the reach of temptation to muck around with monetary policy. There is surely another possible explanation for the low inflation record of the Germans. This is that they experienced hyper-inflation under the Weimar Republic and they are terrified of experiencing a repetition. Our folk memories, by contrast, point in precisely the opposite direction. In the 1920s under its Governor, Montagu Norman, the Bank of England did get its hands on monetary policy and unfortunately it allowed Chur- chill the Chancellor to join it back to the Gold Standard at too high a level, thus intensifying the severity of the depression.
It is also somewhat paradoxical, when you come to think of it, that a politician who believes as passionately as Mr Hesel- tine does in the concept of Great Britain Ltd, should at the same time advocate depriving his political colleagues of access to one of the more fundamental levers of economic policy. At the moment it is all somewhat academic since there is not the remotest possibility of Mrs Thatcher hand- ing over the key of monetary policy to Mr Leigh-Pemberton. Of course if Mrs Thatcher is now to be replaced by Mr Heseltine or indeed one of the other aspirants to her throne, all sorts of things become possible, although those aspirants need to bear in mind that there is a Catch 22 to this situation. A serious challenge to the Prime Minister could remove what stuffing there is left in the poor old pound and the implications of that possibility for our counter-inflation strategy are almost too horrendous to contemplate. But ambi- tious politicians who see the possibility of the highest prize of all passing into new hands are unlikely to be deterred by thoughts such as these.
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