In the City
Can sterling be 'Levered' up?
Nicholas Davenport
The sinking pound is no laughing matter (We must keep it out of the pages of Auberon Waugh.) I know that some people think it is funny that foreigners, who were foolish enough to lend us money, should now be losing money, but they should remember that the pounds in their own British pockets are now worth much less in the shops. Imported goods are costing about 13 per cent more. The effective depreciation of the pound against leading currencies since the Smithsonian 'settlement' of December 1971 is now close on 40 per cent. The fall since the beginning of the year puts up our cost of living index by nearly 3 percent.
And it is foolish of businessmen to laugh their heads off because it is so much easier and so much more profitable to sell their goods abroad. It may be jolly to see foreigners swarming over the Channel to shop in Woolworths and Marks and Spencer ; or foreign tycoons rushing to buy up cheap British assets, especially property which is at present a drug in the market. But these are very shortsighted views. It is bad economies for the nation to have to export so much more in order to pay for the same amount of the food and raw materials we import. It is bad to throw the economy out of balance. It is bad to create new social tensions. And it is extremely dangerous to allow a sinking pound to threaten the wage restraint deal which Mr Healey is negotiating with the TUC.
Another danger which arises when the pound slumps is that the Bank of England is liable to panic and take the wrong action. It did so last week. It suddenly jerked Bank rate up by 1 point to 11 percent. It panicked a month ago when it raised the rate from 9 to 10i per cent. If foreigners don't want to hold sterling because they think it is a weak and vulnerable currency they will not be induced to do so by an extra 5 per cent. Yet the Bank persists in thinking that it must maintain a margin of over 4 per cent between our short money rates and American rates. They do not seem to care that dearer money is inflationary, that it knocks business investment and housing, that it makes everything more expensive and life on borrowed money more nightmarish, and—which is the most serious consequence of all—that it makes it impossible ever to reduce the borrowing requirement. And that means ever to make sterling a safe currency to hold.
What should or could the Bank have done ? One suggestion is that it should have suspended the foreign exchange markets for a week to give time to introduce a two-tier system of exchange on the Belgian model— one rate of sterling exchange for capital assets and financial deals and another for ordinary commercial trade. Both rates would be subject to tight controls. The first would mean the abolition of the dollar premium market and make it virtually impossible for residents to move sterling capital into foreign capital. The second would mean tightening up the rules against 'leads' and 'lags' in the export and import trade.
But what the Bank should be pressed to consider is the two-tier system of interest rates. It is perfectly feasible to introduce a higher rate for foreign holders of sterling provided the Bank cuts down the number of authorised depositaries, which presently number 40,000, and polices the deals of a smaller and more select number of depositaries. It is now more than ever essential to get the home economy moving up on cheaper borrowing rates and cheaper mortgages.
A second and more academic proposal for the defence of the pound is that of Peter Jay, the economics editor of the Times. This is a Currency Commission which would remove the control of the money supply away from the Bank of England and the Chancellor and vest it in seven super-monetarists working to a fixed rule, namely, that the money suPPIY (super-carefully defined) must keep in line— plus or minus 2 per cent over any twelvemonth period with the long-term growth In the productive potential of the British econ' omy (also super-carefully defined and esti" mated by super-economists). This is a suPer idea which the politicians will never adopt because they will never give up the power t° print money when it suits them to keep their worker-voters employed. One flaw in the proposal has been corrected by the moletarist Professor Friedman, whom Peter Jay consulted in Chicago. This was that the Pins 2 per cent would tend to build up a 2 per cent rate of inflation in the economy, but if the rules were based on the amount of innileiYi supply in January 1976 as the datum line a," would be well, especially for Sir KeIt Joseph and other Tory monetarists. My own suggestion is that the Prime Mirl ister should put Mr Harold Lever, who is.all expert in money, in charge of our sterling exchange affairs. He would not get into thef panic, which seems to affect the Bank England in a crisis, but would quickly get, down to horse-trading with the Central Banks and the IMF. In the last two months (March and April) we lost foreign exchange reserves of 82,200 million in supporting the pound in the exchange market. (This OS nearly a third of the February reserve total.) At the beginning of May the Chancellor announced that he had arranged a stand.,,, drawing from the IMF of 8800 million Willi no strings attached (repayable in betwel three and five years at 4 per cent). I eV°, this has already come and gone. We carrrnsi borrow another 8360 million from the Il'am increased quotas and there is a final $8v; million to come from the Iran credit. Iran has now to borrow in order to lend A's us.) When our reserves get down tovvar", 84000 million we cannot really go on draW.,, ing upon them without destroying our credile worthiness, that is, our ability to finance 0,, likely 83000 million deficit on the 1976 ance of payments. So we must go to the1M.ii for, say, 85000 million, but this time it have strings attached. As they have alreaw, approved of Mr Healey's financial and ec°, nomic policy the IMF can hardly refuse huit: they could insist on cuts in government e., penditure policy and limits on the increase money supply. This should be an object I-J loc son in economics and finance to the T leaders who remain so childishly ignorant °f
the facts of financial life. t if
The point I am coming to is this: tha Mr Harold Lever were in charge and in 1/( session of extra IMF credits of some 85711 million, not to mention anything more fr°
he
central bank 'swaps' he can pick uP, er would be able to stage an operation so, °Ilin or later to catch out the bears of sterlolghat the exchange markets. I am assuming. the official holders of some £4000 flu reserves would hold their hand while operation was in train.
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