DEVALUATION
By HONOR CROOME
WHEN Sir Stafford Cripps left for his Swiss cure, wiseacres in a number of financial centres looked knowing and announced that the devaluation of the pound was certainly
imminent. The Chancellor had pledged himself against it ; obviously the Chancellor was being quietly pigeonholed while the decd was done. So far the knowing ones have been disappointed. But there is widespread belief abroad that devaluation will have to come, and a strong body of economic opinion, here as well as overseas, believes that it should come soon. The controversy is apt to leave the layman in a state of exasperated bewilderment. Half our troubles, we have been told, arc due to the pound's loss of value—the inflationary price rise—during the war and post-war years. Now it is proposed (if the word " devaluation " means what it appears to mean) to reduce the value still further, by deliberate official action. Either past warnings or present proposals, it seems, must be wildly wrong. Or are they, on some esoteric plane, reconcilable ?
They are ; and the plane is not even particularly esoteric. Devaluation is a technical term with a restricted but perfectly straightforward meaning—the re-pricing of the pound in terms not of home-bought goods but of other currencies and of gold. The official price of the pound, to a potential American buyer of British goods, is 403. That price, and consequently the dollar price to him of all goods with a British price tag, could be lowered by as much as 20 per cent. by the stroke of a pen (more drastic devaluation would, by international agreement to which Britain is a party, have to wait on the agreement of the International Monetary Fund) without producing any immediate effect what- ever on the prices paid by British consumers on the home market ; that is, on the pound's internal value. The American buyer, con- fronted with an effective price reduction of 20 per cent, would certainly feel more disposed to buy ; the flagging export trades would get a first-class fillip ; the forbidding problem of getting costs down to the competitive levels suitable for a buyers' market would be solved (for the moment) in a trice, without any of the painful concomitants of deflation. No squeezing out of the less efficient firm by the more efficient, no dismissal of employees of dubious value, no fretting over uncongenial redeployment schemes, no ominous prospect of industrial strife over frozen or threatened wage-scales, no writing down of capital values—the relief to the economy could only be compared with that felt by a patient hearing that a major operation is not, after all, necessary.
Of course, if the picture were really as rosy as all that, we should have devalued long ago. It is not. To lower the price of pounds to the American buyer of British goods means, automatically and obviously, to raise the price of dollars to the British buyer of American goods. Out of every category of goods which Great Britain now exports to America, that is, more would have to be sent to bring home the same quantity of American cotton, tobacco and machinery. Would the response of the American market be sufficiently enthu- siastic to make up the difference with a worth-while margin to spare ? A merely proportional increase would leave us just where we were— the poorer, indeed, for the extra goods shipped across the Atlantic instead of being consumed at home. A devaluation following, as did that of 1932, on a period of free exchange, would case the balance
of payments by automatically discouraging inessential imports ; but there are no inessential dollar imports today. Cut after cut has reduced our transatlantic purchases to the bare bone. The economist sums all this up by saying that our demand for American goods is extremely inelastic downwards, while the elasticity of the American demand for our goods is unknown ; which is only a conveniently brief, though technically cryptic, way of putting the distinction between the American " musts " which we are bound to import what- ever we have to give for them, and the British " mays " of which the Americans might—or might not—be willing to take substantially larger quantities if the price were right, but which they would certainly dispense with if the price were wrong.
Devaluation, in fact, would certainly sell more British goods, but might not bring in more of the essential imports which constitute the only reason for wishing to export at all. The same might be said, of course, of any other means of getting British costs down RI a competitive level ; but devaluation has enduring and cumulative effects which these avoid. Raising the price—in pounds—of all imports, it raises the price to the lime consumer of every com- modity into which imported ingredients enter. Shirts and sheets are dear enough already ; a 20 per cent. rise in the price of cotton would make them dearer. The food subsidies are supposedly pegged ; dearer wheat must mean dearer bread, dearer bacon and eggs a dearer breakfast. Unpeg the subsidies, and the taxpayer foots an addition to the already monstrous bill. It is hard enough today to hold the dykes against the rising tide of wage claims ; could they be held in face of a further rise in the cost of living—and a rise affecting the most essential of essentials ? And if they arc not held where is the distinction between devaluation and inflation ? Where indeed, in the renewed upward spiral of costs of production, that gain in competitive power which was the whole reason for devalua- tion ? The past history of the French franc casts no encouraging light on the durability of advantages so won.
Advantages, moreover, over whom ? It is not to be supposed that other countries with balance-of-payment problems as bad as, or worse than, ours will stand by and allow themselves to be undercut in every market. Any independently conceived and announced British devaluation would set off an avalanche of competitive exchange- wangling, throwing down all the painfully built-up fabric of inter- national economic confidence, distributing gamblers' gains and gamblers' losses, and convincing the whole world trading com- munity that dollars or gold are the only safe store of value—a conviction highly unpropitious to the City of London's dollar- earning activities, to the stability of the sterling area and to the precariously balanced structure of O.E.E.C.
It is hardly surprising that Sir Stafford Cripps, that realistic purveyor of pills without jam, has set his face against this super- ficially tempting device. One need not, however, suppose that he is perfectly contented with the present international structure of exchange rates. As between the non-dollar currencies present relative values may not be far out As between the U.S. dollar and the rest they are obviously very far out indeed ; so far that no practicable deflationary measures could, either here or elsewhere in the non-dollar world, re-establish a balance. A real balance, a balance in the old free-trading sense, without benefit of grants-in-aid on the one hand and a wary selectivity towards dollar imports on the other, is indeed painfully remote, even given the most enlightened exchange policy and the most heroic deflation of European costs. But the two together could bring the problem down to manageable size—enabling us, say, to buy all the American cotton and Canadian bacon we want even if we have to forswear American limousines and unrestricted tourism in the Rockies, enabling Congress to wind up Marshall Aid in due course while still using the American govern- mental machinery to encourage long-term dollar investment overseas.
In a nutshell, any alteration in exchange rates must be a supplement to, not a substitute for, genuine measures of cost reduction ; and it must not be the arbitrary and one-sided act of the British Govern- ment but part of concerted international effort to establish a lasting equilibrium. Next month Sir Stafford goes to Washington. It will
be surprising if the conclusions reached there differ very substantially from those outlined above. Whether it will prove politically possible to put them into effect is another matter.
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