Behind the financial scenes
Nicholas Davenport
The amazing £2 ballon d'essai flown by the Government in furtherance of its antiinflation crusade could only have been conceived at one of the many convivial occasions of the tripartite talks at Chequers. "How shall we start the ball rolling, Vic?" "Well, Ted, you think of a number and I'll double it." "Not a bad idea, Vic. Now William" — turning to Sir William Armstrong — "think of a nice number." "Right Sir, I will give you £2 a week." "Good. Let's say £2 a week." "OK I'll double that," said Vic. "But what made you think of £2?"
Sir William then explained. If the rate of economic growth over the next twelve months is taken to be 5 per cent and the rise in home costs per unit of output is no more than 5 per cent the current value of the gross national product next year will be £60,250 million. On the assumption that the share of the GNP which will go to wages and salaries will be 61 per cent — the average for the past ten years — the total for wages and salaries will rise to £36,750 million, that is £3,000 million more than at present. Now the number of wage and salary earners is taken to rise to 22i million. Do your division and you will get a rise of nearly £2.60 per head per week in average earnings. But allowance must be made for ' drift ' — from basic wage to overtime pay. On past experience an across-the-board rise of £2 per week would be compatible with earnings rising to £2.60 per week. Ergo £2.
"Bloody clever," said Vic. "But don't forget," added Sir William, "a cut of one hour in the standard week with no change In pay is equivalent, other things being equal, to a pay rise of about 2i per cent or 75p per week." "And don't forget," rejoined Vic, "that £2 would leave our chaps earning £30 a week worse off in real terms."
Of course, the TUC immediately rejected the Heath proposal as shocking and unfair, and Mr Daley of the miners' union said that they would be going ahead with their Claim for an extra £7 a week, but Vic Feather was careful to say that the £2 was not taken to be an ultimatum but negotiable and that the TUC would attend the next tripartite talks fixed for October 16 with their own proposals.
The sort of compromise which is being talked about behind the scenes is a £3 per week basic increase in wages, £1 extra for pensioners, restrictions on dividends and rents, no increases in the prices of gas, electricity and coal and VAT fixed at 7i per cent instead of 10 per cent. At best this sort of compromise would mean that Mr Heath might be able to contain the present rate of inflation of around 7 per cent but certainly not reduce it.
Vic is no fool. He would be the first to admit that Mr Heath has been clever enough to mobilise public opinion behind an honest attempt to curb the inflation and that it would therefore be much more difficult for any union to proceed to antisocial strike action to back up an unreasonable wage claim. So while he will make angry noises he will be willing to negotiate. He knows that the £2 calculation does not bear analysis and that the Government cannot guarantee a 5 per cent growth for the economy or limit price rises to 5 per cent if external factors are pushing prices up. But having said that the TUC would co-operate to lessen inflation if its conditions for helping the lower paid and for growth are met, which they have been he cannot back out. But I cannot see the highly paid workers agreeing to make a real sacrifice if the heads of public boards with £25,000 a year don't accept a cut too.
All this dialogue, with its dire implementation of a coming confrontation between Government and labour, caused the worst panic in the stock markets I have seen for many a long day. The FT ' thirty ' index fell 35 points in the last account to 467 — having touched the 460 level. It was the opinion of most wise men that the fall had been overdone. But there is a whiff of calamity in the air. Here is Mr Anthony Barber suddenly leaving the IMF conference , in Washington and arriving home to ask whether the nation really wants to commit economic suicide. Let us see what happened behind the scenes in Washington.
A lot more than what appeared to happen in open session. The bad monetary feeling between the Americans and the Europeans blew up in the corridors and anterooms. The Americans made a faux pas when they opposed the re-election of M. Pierre-Paul Schweitzer, the French managing director of the IMF, who has no intention of resigning when he comes up for the vote next year. The Europeans got their own back when they opposed the American candidate (Dr Ossola) for the chair of the new Committee of twenty Finance Ministers and carried the election of our clever young Jeremy Morse, who is being groomed for the Governorship of the Bank of England when Sir Leslie O'Brien retires. The Committee of Twenty has the task of working out the detailed reorganisation of the world monetary system which they hope to have ready for the 1973 meeting of the IMF in Nairobi. The Americans were apparently suspicious that M. Schweitzer — and for that matter — Mr Morse might be more inclined than their candidates to take the French view over the use of gold.
It seems to me to be a storm in a teacup because a majority is now agreed upon a diminishing use of gold in the world monetary system and an increasing use of SDRs (Special Drawing Rights) as the new numeraire. It will be necessary, as Mr Barber said, to devise a satisfactory relationship between the new SDR and gold, if gold continues to be one of the reserve assets for the foreseeable future, but it is something to hear Mr George Schultz, the new American Secretary of the Treasury, declare that he is willing to restore convertibility of the dollar into an IMF reserve asset as soon as the world agrees upon a new monetary system. But will it ever do so? Only on paper I fear.
The Americans were right to stress behind the scenes that a monetary settlement was not nearly so important as a trading settlement. They insist that the world has been trading unfairly — that American goods have not been allowed free access to European and Japanese markets, that the EEC agricultural policy is an outrageous discrimination against American agricultural products and that other countries manage to give unfair subsidies to their exports. All this is true. But at the same time the Americans are accused of persuading Mr McNamara, President of the World Bank, to deny additional aid to Chile which has nationalised the American copper companies. In the twenty-two -months since the Allende government took over no new loan projects have been authorised. Was Mr McNamara being hypocritical when he pleaded for more aid to the world's poor nations whose people receive on average less than $200 per capita against incomes of $8,000 per capita for the people of the rich developed countries?
Behind the facade of these annual meetings of the IMF and the World Bank grim realities lurk in the economies of the nations attending. It is no wonder that Mr Barber got bored and came home early to face the grim reality at home.
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