MONEY

After the storm

NICHOLAS DAVENPORT

What an anti-climax to the world's currency crisis! After a week's closure the exchange markets opened quietly, dealings were restrained and the £ expressed its freedom to float upwards — but not downwards — by closing at $2.4390, a premium of nearly 2 per cent over parity, after touching £2.47. Those of us who have been through this before were not surprised. To begin with, speculation was discouraged by the wide margins quoted and the technical difficulties. France and Belgium set up a two-tier system — one quote for the ' free ' franc and other wor the fixedparity franc reserved for normal business transactions. The ' free' franc applied to financial and tourist transactions — a crazy way to help the lucrative tourist industry. Next, the rush out of dollars into yen did not materialise because the Japanese banks in London withdrew from the market perhaps on instructions from Tokyo. The rush may come later, for this seems the only way open for speculators. But no government can be trusted on curreney matters, least of all the Japanese, who at the moment are not in a giving mood.

The Americans must have been extremely disappointed not to see a heavier depreciation of the dollar on the 'first day of floating. But every one in authority was playing the occasion down. The Treasury issued a classic document of equivocation. It read: "The London foreign exchange market will reopen on August 23, 1971. The parity of the pound sterling is unchanged at $2.40 £1. For the time being dealings will not necessarily be confined within the existing limits. The Bank of England will continue to publish daily dealing limits." And the first limit on the down-side was $2.38. We certainly do not want to see an up-valuation of more than 2 per cent during this floating period. Eventually the Common Market Six will have to agree upon new fixed parities. They have not given up their dream of a common European unit but at the moment the French are poles apart from the Germans and the Dutch on the question of a gold exchange standard. It will take a long time before these differences are resolved. In the meantime floating within limits prescribed by the central banks is the only way out. And what a relief it is for the monetary authorities — and us — to have the calm ease of a float.

It was not always so. Floating can be hectic. When we were pushed off gold in 1931, when the official parity was £2.86, frantic dealings took place and by the year end the rate had fallen to $3.40 — after a low of $3.23. In 1932 it averaged $3.50 but in 1933 it jumped to $4.22 on the devaluation of the dollar. In those days of world slump the dollar was under grave suspicion and in the years 1934 to 1939 it moved around $4.90 to $5.00. As war approached the dollar improved to around $4.45 and on the outbreak of the war floating stopped. The £ was pegged at $4.03 for the duration. This floating period was memorable for one great achievement — the cheapening of money. As the economic strain was taken in the exchange rate the Chancellor, who happened to be Neville Chamberlain, was able in 1932 to reduce the rate of interest and actually to convert 5 per cent War Loan to a 3i per cent coupon. It had risen to par! The patriotic holders rejoiced that they could contribute to the nation's recovery. If only they could have seen that it would fall to 35! Disgust with Chamberlain as Prime Minister should not make us forget that the cheap money made possible by the floating exchange in the 'thirties did make for expansion and allow something like a boom then to develop in housing and industrial investment.

It is much to be regretted that the Chancellor did not seize the present occasion of floating to announce a reduction in Bank rate from 6 per cent to 5 per cent. It was widely expected in the market and would have been the logical move to guard against a large inflow of foreign money into London and an undue appreciation of sterling. However, the gilt-edged market has begun to see the new possibility of cheaper money and I look forward to a further rise in government bonds.

What is the future of gold? The price of it was last raised by an Act of Congress in 1934 from $20.67 to $35 an ounce. It was said at the time that President Roosevelt got bored with having to fix a daily price for gold after the floating of the dollar in 1933 and thought of a new easy-to-remember fixed price of $35 during breakfast The managing director of the IMF M. Pierre-Paul Schweitzer, has now angered the Americans by saying that he would like the United States to increase the dollar price of gold and return to the gold exchange standard as soon as possible. The embargo on the sale of gold, he said, should be "as short as possible." This view is anathema to the American authorities who want first to see the strong currencies, particularly the yen, fairly revalued upwards against the gold for monetary purposes. M. Schweitzer seems to think that a long period of floating currencies might be "quite disruptive" to world trade and might even start up a trade or monetary warfare. Floating rates, he added, are not by themselves leading to a satisfactory pattern of exchange rates. The resentment caused by these remarks deepened when a working paper prepared in the IMF on the revaluations required was leaked to the press.

The fact that M. Schweitzer has spilled out his discontent with American monetary policy without waiting for any formal discussions to be held either at the IMF or the Group of Ten is undoubtedly a diplomatic faux pas which could lead to a demand for his resignation. Perhaps he sees his job coming to an end in any case if a new monetary system is to be devised. The American desire to see a decreasing monetary use for gold is likely to be fulfilled because the output of the South African gold mines has passed its peak and is bound to decline gradually over the next ten years. It is not generally appreciated that South African gold production would be largely uneconomic today if the companies were forced to pay more than pocket money to the black workers. It is only because the higher price of gold on the free market — now $43 — enables the South African government to pay a premium over $35 to the mining companies that production has held up so well in the last three years. Whatever M. Schweitzer or his compatriots at the Quai d'Orsay may say, the world will certainly object to handing out a bonus to South Africa and Russia by increasing the monetary price of gold. So it looks as if we shall go on merrily floating until the next meeting of the IMF in late September.

" I know that I shall sleep better when we are in the Common Market," we were told by Mr Robert Carr, Minister of Employment and Productivity during a recent Conservative party television broadcast. Mr Carr lacks an assaulting vigour but his unexplained fatigue is not surprising with unemployment rising to nearly a million. Germany is reported to have 750,000 vacancies, 200,000 of which are for skilled men including 130,000 in engineering. With the mark effectively revalued by 6 per cent or so on Monday and the 10 per Cent surcharge on imports to the United States these figures will fall quickly and even the simple, hopeful Mr Carr will not be able to rely on the transportation of Britain's outof-work to Europe much longer.

Mr Barber's financial strategies are glimmering and Mr Carr will find he will be able to sleep if only he will let the Prime Minister's generous mix of material success orientated, hedonistic, sensual, aesthetic, individualistic, collectivist (with a preference for the past) ethics work.

Bridget Riley

I suspect we shall look back as pityingly on Bridget Riley's work as our parents did on the Pre-Raphaelites. Why does anyone except a textile maker pay so much for what appears to be the output of the fish eye lens, kaleidoscope and spirograph. Once the flood of novelty, over-stimulation and confusion has worn down there is a profound lassitude as her studio's tidy but unharmonious effect ceases to bring its premeditated zymotic response.

In short her art is ridiculously pricy, gives me a headache and will not gain more as an investment than a frock in one of her patterns and is less use in my view.

UCS

Robert C. Smith, the liquidator of Upper Clyde Shipbuilders, looked after the liquidation of Fairfield's Fairfield Rowan engine works a year or two ago successfully. I hope Mr Archibald Kelly, who is negotiat ing to buy all or part of the yards involved, is successful for the sake of the thousands fighting for their jobs. He will find Mr Smith approachable, pleasant but shrewd. There is a story that during the liquidation of one of the works handled by Mr Smith the winning bidder paid out a greater number of pounds sterling than the runner-up from the United States had offered in dollars.

Last with the least

B.B.C. Television Southern News Extra 11.31 pm Tuesday 17 August: "Trafalgar House the historic manor near Salisbury ...

has been sold for £75,000 . . the new owner is Mr Jeremy Pinckney, a banker."

This column 3 July "Trafalgar House was snapped up for £75,000 by Jeremy Pinckney . .

PETER QUINCE

I am glad that the grouse season is proving a good one this year, not because I have any significant sporting interest in the shooting of Lagopus scoticus, but because I love the places where the sport takes place and so have a concern for their prosperity. I also derive a vicarious satisfaction from a good season through an old gamekeeper friend who has spent his life caring for a remote and rugged stretch of Yorkshire grouse moor.

Whenever possible I visit him in his hillside cottage around this time, in the early