21 JUNE 1975, Page 29


The sterling crisis deepens

Nicholas Davenport

In all the rough and tumble and hysteria of the referendum debate the Stock Exchange set an example to the nation by behaving calmly, sensibly and cheerfully. It never lost its nerve. It never believed in anything but a 'Yes' vote. And the FT index went up steadily from around 312 at the beginning of May to 365 on June 5 — a rise of 17 per cent. Myself, I took a holiday in a Norman stronghold, mindful that an invasion from the Continent in 1066 had happily carried an eccentric, insular people into the mainstream of European development. Back to 1065 under another Harold had never appealed to me.

Since the referendum there has been a sharp fall in Stock Exchange prices. That lover of paradox, my editor, may be claiming that a 'Yes' Vote was bound to bring about a fall, but I fear that it has been caused by two very different events. First, the transfer of Mr Benn from the Department of Industry to that of Energy has disappointed the City fathers who wanted to see him removed from any such sensitive part of the economy as North Sea oil. Second, sterling, which was no doubt supported during the referendum debate, has become very weak and the foreign bankers — in particular the Bank of International Settlements — are taking a gloomy view of British economic prospects. How phoney that referendum cry about sovereignty became when it was obvious that we could not claim sovereignty even over our own pound!

As regards the first event, the City is, I think, misunderstanding the political position. Mr Benn has, in fact, been demoted. In the Lobby briefing it was made clear that although Mr Benn is now Energy Secretary Mr Harold Lever, Chancellor of the Duchy of Lancaster, and Mr Edmund Dell, Paymaster General, would remain responsible for the detailed negotiations on the 51 per cent state participation in the current North Sea oil licences. This fact probably prevented an immediate flight from the £. The Tribune group and Mrs Judith Hart are deeply conscious of the slap administered to Mr Benn but they should appreciate that an immediate majority take-over of North Sea oil companies would push the Treasury borrowing requirement — already rising to over £12,000

— up by at least £5,000 Million and lead to a wholesale Withdrawal of foreign holdings of sterling. One could not expect the IMF or the US or the EEC to come to the rescue of sterling simply to keep full Harted socialism alive in the UK.

Incidentally, the limits of insular socialism must now surely be getting into the heads of the less fanatical or less stupid members of the TUC. Of course, they can have a completely socialised economy if they want after a super-general strike to replace Mr Wilson with Mr Benn but it would mean immediate import controls, immediate stoppage of the movement of capital and labour, a siege economy, a totalitarian one-party state, a jump in imported food prices, a freeze on wages, and a reliance on Soviet Russia whose comradely advice would be to prohibit strikes, and insist on productivity norms. Of course, there is no majority vote for such a catastrophe. Most of you would prefer Mr Wilson and the brand of social democracy compatible with a stable foreign exchange rate for sterling which would enable us to buy our food and raw materials at a reasonable price.

Sterling has now fallen in its weighted depreciation against the leading currencies, which used to .be 211/2 per cent at the beginning of the year, to 25.9 per cent and in its dollar rate to $2.28—the lowest level for sixteen months. The B.I.S. in Basle has warned its members that a rapid or vigorous recovery from the present deep world recession is unlikely and singles out Britain as the country which has failed to show the improvement achieved by most of the others in curbing the universal scourge of inflation. -Our inflation," says the National Institute of Social and Economic Research in its very latest Bulletin, "is the most serious problem facing the policy-makers. At the present rate the retail price index will virtually double every three years. What is more, inflation is now almost wholly domestic in origin — driven by a rise in wages and salaries far in excess of the past rise in prices." On the basis of recent settlements the Institute believes that our inflation will be accelerating in 1975. It concludes: "A stalemate is therefore developing in which the Government is saying that the social contract guidelines have been broken and that therefore it is not prepared to keep its side of the bargain so far as unemployment is concerned and at the same time the trade unions are apparently unable to enforce the

Mr. Healey, our tough and highly intelligent Chancellor, is trying to break the stalemate. In the Referendum debate he objected to Mr Benn's false statistics and to his throwing the blame for all our difficulties on to the Common Market in order to divert attention

from our real problems. -The stark fact is," he said, "that we are not producing enough of the goods which either foreigners or our own people want at a price they can afford. We have been getting a much smaller return in productivity (from new investment) than do other countries.If excessive wage claims go on being made he has therefore threatened to cut gov

ernment expenditure more sharply and so increase unemploy ment, hoping thereby to bring the trade unions to their senses.

The situation in Britain has therefore become so absurd that foreigners — not necessarily foreign bankers — are saying that we are either ungovernable or out of our minds. Fortunately there are signs that the penny of common sense is beginning to drop. Mr Jack Jones, the most reasonable of the trade union leaders, has realised that the stalemate must be broken. He has suggested a flat rate increase which would, of course, help the poorer workers and penalise the nouveaux riches in this powerful new "third estate" of the realm. But everyone knows that we cannot justify economically any increase at all and I venture to suggest to Mr Jones that he should consider a simpler device — a wages and salaries freeze for twelve months indexed for those with incomes under £30 a week.

The stock markets have naturally come down and in my view will continue to remain nervous and depressed until there are more .positive signs that the Government is prepared to take firmer action to bring their trade union masters to a more reasonable stance. But will they come to their senses before the foreign holders of sterling lose their patience and begin to unload? The balance of payments returns published last week show a welcome improvement in our trading account but a worsening in our capital account. There was an idenfitied outflow of E405 million in investment capital and the drawing of £423 million on our Euro-dollar loan has now exhausted that facility. We are getting nearer to the point when our friends abroad will refuse to lend us anything further to finance the more ridiculous extravagances of our socialist fantasy.