d and and the Payments Crisis
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By NICHOLAS DAVENPORT
IF was not so many years ago that we all used to speak of France as the sick man of Europe. Today the tables have been turned. The French may have their economic difficulties but under their new Napoleon they have become more affluent, more self-confident and perhaps the least neurotic nation in Europe. The traveller from England, having been questioned cour- teously enough about the very long hair of our young men, is made to feel that the French are now greatly concerned about the sick man across the Channel. When, they ask, are we going to follow their example and pull ourselves together? Did not M. Pompidou, when he paid his official visit to London, tell our Prime Minister exactly how the French economy was brought back to health—by the unilateral devaluations of the franc in the 1950s (the last in 1958) coupled with a shock-treatment deflation and the restoration of industrial discipline? We may not have a Napoleon at No. 10 Downing Street--this they graciously concede—but we have an economist who should know that Britain cannot be admitted to the European Economic Community until it has brought its international payments into balance, abandoned its impossible role of a world reserve currency and accepted the discipline of the European monetary system.
To assist the transfer they would be prepared, I gather, to help arrange the conversion of the old sterling liabilities into a new multiple reserve currency--under the control of the Group of Ten--and even to allow a unilateral devaluation of sterling in terms of the European currencies, but the condition for this aid is that sterling would in future have to give up its link with the dollar and its reserve currency status. I do not suppose that the Americans would object if we ourselves decided that this Was the right course for Britain.
Now it is very important for us in Britain to understand the French argument because the in- ternational payments system devised at the Bret- ton Woods conference in 1945, which we call the gold-exchange standard, is heading for a total breakdown and we may soon have to make a choice between rival European and American policies. The system is breaking down at the moment not, as Lord BoothbY imagined in his excellent letter to The Times of August 15. be- cause 'there are not enough liquid reserves to sustain the volume of world production and trade' but because the 'adjustment mechanism' designed to correct and eliminate imbalances in international accounts is simply not up to the job. The International Monetary Fund was created to provide (conditional) credits to mem- ber countries who ran into deficit on their pay- ments accounts but the burden of adjustment was virtually placed on the deficit countries who had to deflate or devalue in order to stop the loss of their gold and convertible currency re- serves. There was nothing to force the surplus countries to adjust their domestic economies by inflating or by revaluing their currencies or by tindert4ing greater foreign aid: they could go on accumulating reserves to their hearts' content.
The IMF rules allowed for alteration in the par values of currencies which had been fixed
on the gold dollar, only in the event of a 'funda- mental disequilibritinf but they did not define 'fundamental disequilibrium.' Except in very un- settled periods the resort to devaluation or re- valuation has rarely been made. Yet the memoranda of Keynes and White submitted to the Bretton Woods conference clearly showed that they did not expect the payments system to work without exchange rate variations.
The deficiencies of the IMF payments system, which have brought on the present monetary crisis, have been analysed and the counter- measures of reform discussed in a clearly written book by an American economist, Mr Sidney Rolfe, with the unfortunate title of Gold and World Power. This is shortly to be published in this country and is well worth studying by those who want to understand this complicated prob- lem. Being an American - and I suspect a Populist—Mr Rolfe is naturally disposed to adopt an anti-gold and anti-European line. The American government has been gradually releasing the pile of gold it accumulated in the last war—about $28,000 million—and is now down to a stock of $13.300 million (still huge compared with our $3,200 million). Last year otter $1,600 million of dollars were converted into gold by the European central banks, of which France accounted for $1,200 million. No one should blame the French for converting these surplus dollars into gold—least of all ourselves who have a much higher proportion of gold to convertible currencies in our reserves than France. The American government is running a huge deficit on her international account--this year reaching perhaps $2.300 million against our own (say) $700 million—and it must seem pru- dent to the French to convert these deficit dollars (and deficit sterling) into gold while gold remains at its current price of $35 an ounce. For, in the French view, the time may come when the price of gold has to be raised. At the moment not enough of the metal comes into the world re- serves of the Central Banks to work a gold- exchange standard. Last year, for example. the world produced $1,460 millions' worth of gold but in spite of that record output, and the sales of gold by Russia ($350 million), the total cen- tral bank reserves of gold and convertible cur- rencies were virtually unchanged at $65,000 million. The missing gold went into private hoards in the Middle East. the Far East and else- where and into official (government) hoards in South Africa and China. Of course, hoarding makes a nonsense of the gold-exchange standard but as long as gold is forcibly 'devalued' and as long as the reserve currency countries (the US and UK) pile up huge deficits on their inter- national payments accounts cautious and con- servative people like the French will prefer to hold gold than paper currencies.
The utterly opposed views of the French and American governments over the reform of the IMF payments system brings a breakdown dangerously near. The radical Americans, like Mr Sidney Rolfe. would like to see their govern- ment sell gold freely at $35 an ounce but buy it only at, say, $25 an ounce. He would like to see the readjustment mechanism of the IMF work on the basis of the (limited) flexible exchange rates pro- posed by Professor Meade—the so-called 'moving peg.' I agree that a sane capitalist world would strive to make its monetary paper sound and re- exchangeable and make much less use of gold. But we are still in a period of 'no confidence' in 'deficit' paper and it behoves the Group of Ten to call an immediate monetary conference to devise a working compromise between the American and European points of view before the IMF system breaks down. It is hopeless to expect the IMF annual jamboree to produce anything but hotter air.
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