Sterling Convertibility
Stit,—We cannot tell exactly what the Commonwealth Finance Ministers meant by their references to sterling convertibility, but I think your leader, Sterling Fights Back, exaggerates the difficulties of introducing it, and the size of the reserves we should need to maintain it. It is important to see what it implies, which I suggest is briefly as follows.
First unfavourable balances in our trade with other countries would have to be settled in gold. But this in practice already happens to a great extent:
(i) The other sterling-area countries may, and do, use their balances with us to buy the hard currencies they need to pay for a restricted level of imports.
(ii) Balances with the E.P.U. countries require increasingly to be settled in gold.
(iii) Our present agreement with Argentina provides for converti- bility when their balances exceed a stated level. Secondly, there is a danger that other countries would restrict their imports from us in order to accumulate balances which they might con- vert into dollars. But it should be possible to ensure in our trade
agreements with these countries that this does not happen, and to provide penalties if it does.
Third, there would be efforts to convert existing sterling balances into dollars, and I agree that we should need enormous reserves if we were to allow this to happen freely. In the case of the other sterling- area countries, however, we could avoid it if they would agree: (i) Still to retain most of their foreign exchange reserves in the form of sterling.
(ii) To maintain an overall balance of payments.
In the case of other countries we should need a similar agreement, or else be obliged formally to block their balances; this would have little effect on their real ability to spend them.
There are, then, two things that we must do; first, secure a balance of payments for ourselves and the sterling area, which is apparently expected_ by the end of this year. Then we must make our economy more flexible and responsive to world conditions, that we may avoid the sudden and violent changes in our position which have been such a disturbing feature since the war.
If the pound were convertible, many countries would hold balances with us voluntarily, and we should certainly avoid our present losses from deals involving the use of cheap transferable sterling. Thus the case for convertibility is perhaps more immediate than your article
(The. case for convertibility is immediate in any event. What our article suggested was that it might not be possible to achieve full convertibility in a short time. But we agree that a qualified converti- bility, on the lines suggested by our correspondent, might well be reached more quickly. Ed. Spectator.)
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