29 JULY 1972, Page 27

The real money crisis

Nicholas Davenport

In many respects the international monetary crisis is similar to our national crisis in dockland. The rule of law has broken down. In fact, the rule of law always breaks down when parties find it intolerable or impossible to work. When President Nixon formally declared on August 15, 1971, that the dollar was inconvertible — either into gold or into US reserve assets — he broke the rule of law of the IMF system but no one suggested that he should be put into jail or the dollar outlawed. Everyone agreed that the system had become unworkable and that a new one would have to be devised. So the City is right in taking the dock crisis with comparative calm, believing that this is not a revolution planned to destroy capitalism and the mixed economy.

With the release of the five offenders from Pentonville talks will no doubt begin to work out a new system for container-dock work. Myself, I regard Britain as ungovernable except by general consent of the workers and I am not going to be too upset because Mr Heath's government has stopped governing. The traditional British habit of muddling through should see us through this crisis. That is how I read the good behaviour of the money markets. But to return to the international monetary crisis. Believe it or not Mr Barber got the finance ministers of the European Economic Community and of the four acceding countries to meet in London last week and draw up formal Objectives for the coming hiscussions on international monetary reform. Eight Points were agreed. First, the new international monetary system should continue to be based on fixed but adjustable parities. Two, it should reestablish a general convertibility of currencies. Three, it should provide for international regulation of the supply of world liquidity. Four, it should secure the necessary adjustments in the balance of payments of participating countries. Five it should avoid the destabilising effects of short-term capital flows. Six, the principle of equal rights and obligations of all Fountries must be recognised. Seven, the Interests of developing countries must be regarded. Eight, the system must not be incompatible with the progressive achievement of economic and monetary union of the enlarged EEC. Mr Barber is to be congratulated on getting his class to agree the rules which none of them will obey when things go wrong again as they did under the similar rules of. the IMF. It was surely a waste of time to get the boys to write down a dreary set of platitudes which will be discussed at the annual meeting of the IMF not in September this year but in September 1973.

The real purpose of the meeting was to make sure that the boys do not kick over the traces, that is, break the new realignment of currencies drawn up in December (the so-called Smithsonian agreement). Britain has, of course, already broken it by floating the £ but every one had agreed that our Smithsonian parity of $2.60 was too high and that it would be sensible to return to $2.40 on January 1, 1973, when we enter the EEC. The experts of the OECD in Paris had estimated that the surplus on the British balance of payments would have vanished by the middle of 1973, if not before, if the $2.60 rate had been held. The Americans and the Germans do not want to see any more upsets until after their elections.

Mr Nixon in particular did not want anything to happen to the $ before he was re-elected President. And last week he authorised — for the first time since he suspended convertibility in August 1971 — the use of American reserves in support of the dollar. This will resuscitate their use of the network of reciprocal currency ' swaps ' with central banks which is believed to be in excess of $11,000 million.

These swaps' 'carry a compensation clause which obliges the Americans to make good any losses incurred by the central banks on any new re-alignment of the dollar, Since the £ was floated some $4,000 million have been spent by European and Japanese central banks in support of the dollar. It was certainly time that the Americans made a gesture and it came on the prompting of Dr Arthur Burns, the chairman of the Federal Reserve Board, who said that the Bank was ready to intervene in support of the dollar on whatever scale and whenever deemed necessary.' He began by buying dollars with the deutsche mark balances

held by the Treasury. The hard-liners were very angry because they wanted to force'. Germany and Japan to up-value their currencies once again.

All this emphasises how difficult it will be to implement the eight platitudes of Mr Barber's class-room. Take the fundamental point four — securing the necessary adjustments in the balance of payments of participating countries. The weakness of the IMF system was that it put the pressures on the deficit countries, not the surplus countries as Keynes ,wanted. It is now at last recognised that the pressures will have to be reversed, for no one expects the deficit countries to bring on social revolutions by allowing their unemployment of men and resources to worsen. It is interesting to observe that some of the experts believe that Germany will have to accept a 'crawling upvaluation' of 21 per cent a year to keep her surplus under control. But the most fascinating development is a recognition by the Japanese that their worship of growth has gone too far — that they cannot expect foreign countries to go on accepting an ever increasing flow of Japanese goods. It would be wonderful to have a war guilt replaced by a peace guilt for pollution and growth. At the moment the Japanese economy is going through a recession but already their economists are talking of a $5000 million surplus in 1973.

If an international monetary settlement is ever to be reached — and without one we shall all be forced into stiffer exchange controls and protectionist measures which will slow down the expansion of world trade — it will be essential to bring under some control the $60,000 million of more or less liquid dollar balances held abroad in private hands. Idealists would like to see a general pooling of all reserves — gold, SDRs, Euro-dollars, Euro-sterling, Euro-marks, etc — under the auspices of the IMF and their replacement by specially issued SDRs but I cannot see it ever happening. A German economist is reported to have said that from the point of view of guarding against world inflation he preferred a dollar standard to the SDR standard. Certainly the US economy has shown that it can resist inflationary pressures more successfully than the European economies. Once asset-convertibility has been restored to the dollar, so that foreigners can buy American equities as well as bonds, we may revert back to a dollar standard. As Mr Barber's point six declared, all currencies are equal but some are more equal than others,