In the City
More control?
Tony Rudd
Some Conservative MPs were reported as having said that the reimposition of exchange control would not constitute a U-turn in policy. An observation that such and such an action does not fall into that category automatically leads others to assume that that is exactly the U-turn contemplated. Or so it is generally believed in the City, where many observers are willing to offer heavy odds in favour of it being back by Christmas.
The removal of exchange control last Year was one of the most pleasant surprises of the Thatcher regime. No hanky-panky about gradual reductions; the whole thing Went overnight and 650 controllers, recently of New Change, just by St Paul's were off to other occupations, many of them outside the Bank. At a stroke Mrs Thatcher had removed what had become one of the most Permanent of the temporary restrictions Placed upon British life in 1939 as part of the necessary steps in the defence of the realm. But by the same token the reimposition of exchange control, particularly by this administration, would be seen within the square mile as being just about as U a turn as could be made. It would signify not Just going back to the bad old days of restrictions but also a fundamental retreat from the free market mechanism.
And, anyhow, would it do any good? Presumably the only reason for reimposing controls would be as a further step in the Protection of the value of the pound. Miraculously during the last week or so the Pound has made a strong recovery against Practically all currencies and particularly against the dollar. It looks capable of getting back to almost $2. However there are still many who think that it could slip again and who have convinced themselves that if that happens the controls will come back. They think this because they feel that the flight of capital, which has already been fairly considerable, could assume overwhelming proportions, unless physically Prevented.
However it must be observed that this country managed to suffer a whole number of exchange crises during the years that it actually had exchange control. The fact that residents could not move their capital out of the country in large quantities didn't Prevent the pound coming under enormous Pressure from time to time. The fact is that people speculate against their own currency in all sorts of ways which are quite impossible to check by any form of exchange control. The most popular comes under the heading of 'leads and lags'. When traders expect the currency to depreciate they rush to pay their overseas bills in foreign currency and do everything they can to delay the receipt of the payments due to them from abroad in sterling. It used to be estimated that a build-up against the pound in 'leads and lags' could amount to several billions sterling. We would guess that in today's inflationary numbers the total swing from one side (where people are expecting an appreciation) to the other (where they are expecting the pound to go down) could amount to something like £10 billion. This is the speculation which British traders could indulge in, without any help from anybody else.
Then there is the speculation which the overseas holder of sterling could indulge in. During the long postwar period when there was still enormous sterling debts floating about, either because of what we had had to pay out in the war for forage and supplies to our better-endowed allies, or, subsequently, because of the amazing amount of credit which we managed to take off our trading partners by getting them to leave money with the City of London, these balances always represented a threat. They could always be cashed in just when it was most inconvenient. Once the UK had accepted convertibility after the war it laid itself open to runs on its currency generated in this way. This particular problem was diminished during the Seventies by these pools of sterling having been in large part mopped up and by a deliberate policy, worked out largely with the Bank for International Settlements in Basle, whereby the remaining balances were turned into other currencies (when their holders wanted it so) in an orderly manner. By the time exchange control was removed the potential threat from what might be called 'overhang' of international sterling had largely been dealt with.
During the last year or so, though, sterling has again become more widely traded, mainly as a result of the much increased volatility in all the leading foreign exchange markets. This in turn can be traced back to the growth in the balances owned by the OPEC countries, which although they are not as enormous now as it was once feared they would be, are still larger than any other source of unspent accumulated wealth in existence in liquid form today. Even if we had exchange control these balances charging through London on their way from the dollar to the D-mark or wherever would still go on doing precisely that. Returning to the one type of wealth that would be directly affected by exchange control, namely resident-held capital balances, putting the restrictions back might be a case of closing the stable door after the horse has bolted. Those who want to take their money abroad have now had ample time in which to make their dispositions. Most of the nervous holders of sterling have done so, having taken the view right from the beginning that this was a temporary opportunity of which they must hurry to take advantage. This is not to say that if shortly before the next election the opinion polls begin to show that Mr Tony Benn is a lap or so ahead of all his political opponents, there won't be more money to chase after that which has already gone. But even those final instalments would be small compared with the bulk which has departed. So bringing back exchange control would really have no useful effect in shoring up the value of the pound. Admittedly it would give those 650 controllers their jobs back but the cost to the rest of the community would not be worth the candle. Industry hated have to fill up all those forms. So did everybody else. The existence of the dollar premium, which anybody who wanted to invest in foreign securities had to pay, was a wretched advertisement for the pound. The system wasn't watertight and indeed made it possible for some operators, who really specialised in the matter, to make inordinately large sums by circumvention of the whole thing.
So for all these reasons, there is very little merit in the idea of bringing back exchange control and, that being so, a hint that this government had no intention of doing so might not come amiss, particularly now that sterling seems to be reasonably buoyant again.
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