The crisis deepens
Nicholas Davenport
The buck stops here, as Harry Truman would have said if he were alive today to write this column. The figures on my desk, which would have conjured up this remark, are the worst ever monthly trade returns, the new low levels on 'the Stock Exchange for government bonds and equity shares, the new boost to inflation through anti-social-compact wage claims, and the fall of the £ sterling in the exchange market.
To take the last item first. The floating E has now dropped since the Smithsonian agreement of December 1971 to a near-22 per cent devaluation against the weighted average of the major currencies. Against a weak dollar it has fallen to $2.30. Even these depressed levels have only been held by continually borrowing abroad for the capital programmes of the public authorities — so that nearly two-thirds of our 'official reserves' are in fact borrowed money repayable over ten years — and by the grace and favour of the Arab oil producers who are prepared to take our IOUs.
The sharp drop in the sterling exchange last week was caused by the rumour that the Saudi Arabians were no longer prepared to accept any part of their oil revenues in sterling, which hitherto had been around 20 per cent, but Chancellor Healey returning from his Arabian visit claimed that he had been assured by the Saudis that they contemplated no change in their 'investment policy'. What matters, they said, was not whether any sterling would be used for the oil royalty payments — it is apparently being cut down — but the sterling orders we might receive in their rapid industrialisation programme. King Faisal graciously promised Mr Healey some industrial orders and went so far as to support his plan for a new IMF lending facility Which would be financed by the oil surplus countries. So the turbulent rocking of the floating £ may for a short time be assuaged.
But the trade figures suggest that more trouble will come in due course. November disclosed the largest monthly deficit ever recorded — no less than £534 million. In spite of a fall in the oil deficit payments, it was £100 million worse than in a bad October. Exports were down by nearly 00 million while imports were up by £50 million. True, the import bill Was swollen by the delivery of three
large aircraft to British Airways but if you analyse the trade figures in the last ,two quarters you will find that any improvement was caused by export prices increasing faster than import prices, which is not a 'good point if we are moving into more competitive and tighter conditions in world trade, It was significant that in the third quarter there was no increase in the volume of exports but a 37 per cent increase in the import of motor vehicles and of 14 per cent in chemicals. The only good point is that our invisibles' continue to increase — last month to £130 million — for which the City is partly to be thanked. It is not only City bankers but industrialists who now believe that it pays better to invest abroad. If we have another bad month in November the 1974 deficit on our balance of payments will be around £4,000 million of which two-thirds will be due to oil.
These depressing trade figures do not justify the alarmist talk that some papers indulge in — the Times, for example, suggests that what is at stake is not a further devaluation of the £ but an internal collapse of the currency as a viable medium of exchange _ but they may compel the Government to take defensive action, as the Italians have done, and impose for six months a surcharge on selective imports. As regards the internal crisis we have now got undated government bonds yielding nearlY 18 per cent, and industrial debentures 20 per cent, while industrial equity shares — taking the FT index at 150 — have fallen to their lowest levels for twenty years _ since June 1854. This means that it is impossible for any business to raise money for capital spending in the capital markets. It is no fault of the City. The City markets merely mirror the complete destruction of confidence in the business world which has been brought about by the ill-considered Marxist thrust of the Labour Party and by the aggressive tactics of militant trade unions whose Marxist leaders are interested not in increasing output and productivity but in grabbing more cash in wages at the expense of their weaker brothers.
Our internal crisis could be mitigated, if not mastered, if the Government were to take a few sensible practical business-like steps which I have continually advocated. First, unfreeze commercial and private rents and so restore the value of the property assets of the banks which otherwise will go bust. Second, speed up the FFI loan scheme which Mr. Lever proposed, so that UAW million of life and pension fund money can be taken off the 'Street' and put into medium term company loans — with a government guarantee. Third, introduce a twotier system of interest rates so that the dear money offered to Arabs and other foreigners is confined to foreign accounts while cheaper money can be offered to domestic housing. Finally, challenge the trade unions who make an inflationary joke of the so-called 'social contract'.
The Times is of course influenced by its editor Mr William Rees-Mogg who has just published his essay on the crisis of world inflation which he calls The Reigning Error. Nauseated by the debasement of paper money since the collapse of the Bretton Woods gold-dollar-exchange system -for which the Americans are primarily responsible — he wants the world to return to the gold standard. In a beautifully written first chapter he describes inflation as a disease of inordinacy. It is money without order. But inordinacy is rooted in the nature of man and so inflation is rooted in the nature both of man and of money. After two and a half thousand years we have produced. he says, the most divided, the least controlled, the most Untrustworthy and the most dangerous currency system the world has ever known.
I agree with Mr Rees-Mogg but I fear he has not the faintest chance of getting the world to return to the discipline of a gold standard. It is too hopelessly divided. The Americans would never have it as they are obsessed by a hatred of gold in the monetary system and a love of the almighty dollar. Mr Rees-Mogg might see Europe eventually having a monetary union based on gold but for the time being let the central banks.write up the value of their gold assets to the market price of gold and then insist on a much more rigid control of the paper money supply. This should be Mr Healey's first step towards the return to honest money in this island where we cannot go on much longer paying ourselves in money wages and salaries more than the real value of our output.
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