Sterling Outlook
By JOHN WOOD rro fortify sterling in 1958 undisputed priority I over all other aims of policy must be given to the task of doubling the London reserves of gold and dollars. As the sterling area's reserves would then be equal to only five times the assets of the Ford Foundation, rather less than Ger- many's foreign exchange reserves and still only about 8 per cent. of the currency reserves of the world, it is not perhaps an over-ambitious aim. Even so, can it be done? With great care, and much better management than we have displayed in the past, existing policies, reinforced by stricter fiscal discipline in the next Budget, could take us a long way towards our goal. For a num- ber of reasons 1958 may turn out very differently from our unhappy experiences in 1957. The com- petitiveness of British exports, the sharp fall in prices of many (though not all) of the goods we import and the 1.igh level of stocks, which may enable manufacturing industry to live on its fat for some time, make it certain that Britain's trading account will do well this year. The 'visible' trade gap should be exceptionally small. Invisible earnings, too, except perhaps for ship- ping freights, should improve. The City may earn even more than the £125 million which was attributed to it in 1956.
Fortunately, the prospect on capital account also looks favourable. The backwash from the speculation against sterling last autumn is now being felt—by the speculators. Dealers in cur- rencies overseas are cutting their losses and making their long-postponed purchases of sterling at a price ($2.811) which is very expensive for them. More important, traders throughout the world who buy or sell to this country or other members of the sterling area are no longer trying to accelerate or delay their bills in expectation of a devaluation of sterling. The 'leads and lags' are being replaced by a more natural pattern of commercial payments and the gold reserves will benefit from these trends during the spring. For all these reasons Britain may look forward to a surplus of even as much as £400 million on her current account this year, compared with one of perhaps £300 million in 1957. But when we come to examine what happens, or should happen, to this surplus, we reach the centre of an economic controversy. If the aim of doubling the reserves is to be strictly adhered to, then the whole of this surplus ought to be ploughed back into the reserves, to the exclusion of any other claims on it, such as the repayment of debt and the financing of further investment overseas. For better or for worse, however, these others claims cannot be entirely resisted, though it is a matter of debate whether more should now be done to oppose them.
But it can be argued that this year there is not likely to be a great burden on Britain to make a net repayment of her sterling liabilities (though we have other obligations, such as the loans from IMF and our debt to the EPU). Many countries with some or all of their reserves in London are now desperately trying to replenish them. In the sterling area this includes South Africa, Ceylon, New Zealand, and, within the transferable ac- count area, it is known that Japan, and it is thought that Russia and China, are all short of sterling and will try to increase their holdings here. In many European countries, too, balances have been run down below what is usually re- garded as the working minimum. To the extent that these countries do run up larger accounts with us (or sell us more gold) they will offset the strain of further inevitable withdrawals by India (in spite of the new aid from America) and the possible use of sterling reserves by Australia and Malaya. But all in all there may not be a substantial net claim on our current sur- plus for repayments of debt. It may be added that countries will now be particulary reluctant to draw down their balances here, since this will in many cases mean selling British government securities at a particularly poor price (only a small part of the sterling balances is held in cash and probably more than half is invested in government securities other than Treasury bills).
Ought we, then, to restrict the flow of capital out of Britain to the rest of the sterling area? This would be a major change of policy, leading to a transformation of the character of the ster- ling system. A much stronger case will have to be made out for such a change than its advocates have been able to produce so far. For instance, as the issue is one of distributing a scarce re- source (capital) some reference to price (rate of interest) might not seem to be out of place. This would reveal amongst other things that much in- vestment (especially by government) escapes the discipline of the capital market altogether. More- over, much depends on what is meant by a `transfer of funds' or 'outflow of capital.' Yet an article appeared recently in a bank review by a writer of academic status which concluded dogmatically that 'Plainly, there is a strong case for strengthening the defences against flights of capital' (note the emotive phrase) without ever examining either of these two aspects.
Even a superficial examination shows that the most upsetting manifestations of an outflow of capital could hardly ever be restricted or con- trolled even if the active co-operation of over- seas governments were forthcoming, which is unlikely. These include the 'leads and lags' of commercial payments, speculation by overseas currency dealers and the withdrawal by foreigners of their deposits in London. These funds react to `confidence'—an additional reason for strengthening the reserves. The buying of foreign securities by British residents has for years been regulated, though not prohibited. And borrowing through the London capital market, even for Commonwealth governments, is subject to the supervision of the British authorities. What remains, in effect, is straight investment by British companies in plants and subsidiaries overseas. Sometimes one might suppose that for funds to leave the country for this purpose is in some way a total loss. Nothing could be less true. It has been this investment (mostly equity investment) which has restored Britain's overseas income to a level higher than it was before the war (a fact widely unappreciated). The income from such in- vestment is in no way different from our earnings from exports (often it may be seen directly to replace them; remittances from British-owned motor-car factories in Australia are now more important than our export of cars to Australia). Such income, then, helps to maintain the reserves, and it seems contradictory to call for its curtail- ment while encouraging exports, to say nothing of the paradox of calling for more help for the less-developed countries of the world by restrict- ing investment in them 1 There is undeniably a dilemma here, but it is the familiar one of scarcity of economic resources. We could main- tain our role as the leading overseas investor without damaging our foreign exchange reserves only if greater fiscal discipline ensured, at long last, stable prices so that we could rely on an altogether greater volume of savings. It is up to the April Budget to make certain that we seize the opportunity 1958 offers us to restore con- fidence and order to our economic affairs. This may be our last chance.
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