MONEY AND THE CITY
Goodbye sterling area
Nicholas Davenport
One must shed a crocodile tear or two over the death of the sterling area. It is always sad when any monetary freedom has to be given up in our disintegrating capitalist world. Before Mr Barber made his terse statement on June 23 — " with a floating £ there could be a speculative outflow from the UK to sterling area .countries . . . we have therefore taken immediate temporary measures applying exchange control to these countries" 00 less than one quarter of the world's Population could make payments between themselves and the UK more or less freely 10 sterling through London banks. Now only Ireland (gunmen and all), the Channel Islands (tax-dodgers and all) and the Isle of Man (trusts and all) remain in sterling club. All other former bers are now treated for monetary kses as foreign countries and investors who wish to buy their securities can only do so through the 'investment dollar' pool, paying the current 'investment dollar' premium which is 141 Per cent at $2.43. The only concession they get is that when they sell their sterling area securities they do not have to surrender 25 per cent of the premium as they still do — for some utterly perverse reason — when the securities are in dollar or European currencies. The sterling area dates back to 1931 When the £ was pushed, off its gold Pedestal. We then enjoyed a period of floating exchange which was managed by the Exchange Equalisation Fund set up in 1932. The management was highly successful and sterling ' reserves ' began to build up as many currencies followed us rather than the dollar which was then a suspect currency. When war broke out in 1939 the floating had to stop. A fixed Parity with the dollar at $4.03 was arranged with the American authorities and the amorphous sterling area system was then legalised and defined as the scheduled territories,' being the CornThonwealth countries (except Canada), J.t!pan, Sweden, Palestine, Jordan, Iraq, Libya and Iceland. After the war the scheduled territories' began inevitably to shrink but we were left with colossal sterling debts — £2,500 million to the sterling area countries and £1,200 million to the non-sterling countries. As a world trading currency sterling was thereafter at risk in the event of withdrawals on a big scale by the holders of these sterling balances.
The risk blew up during the Wilson regime when confidence in the £ began to disappear. In fact, a run from the £ on the part of the sterling area holders was only averted when the clever Mr Harold Lever, then Financial Secretary of the Treasury, was sent to the Basle meeting of the IMF in June 1968 to negotiate a settlement. After discussions with the American, German, French and Italian finance ministers he secured a promise from the major financial powers to support sterling up to $2,000 million against any run-down in the ' official' balances of the sterling area countries. Under this Basle agreement, which runs up to 1973, we have to guarantee these ' official ' holders against loss if the £ falls below $2.38. So you see why Mr Barber will be anxious to stabilise the present floating £ at $2.40. At the end of March the ' official ' funds covered by the Basle agreement amounted to £2,850 million out of a total of £4,343 million of sterling liabilities.
The rules of the old sterling area club were constantly being changed and the last Labour government, worried by the size of the ' funk ' money which was leaving socialist Britain for good capitalist holes in Australia and South Africa, imposed a 'voluntary restraint' policy on portfolio investments by the financial institutions of the City. This 'voluntary restraint ' was lifted in Mr Barber's last budget. So there is now no restraint on portfolio investment apart from the ' premium ' deterrent. As regards direct investment Bank of England approval has to be obtained but it will be given provided the investment does not leave the old sterling area. This is because direct investment in the dollar and European areas is not allowed unless it can satisfy the Bank of England that it will procure an early and substantial return to the plus side of the balance of payments.
In his Commons statement Mr Barber emphasised that the measures applying exchange control to transactions with the sterling area were temporary. This I firmly believe. They will obviously have to be modified before the next general election. In the event of a Labour victory the flight of capital both for portfolio and direct investment would be colossal if the Labour leaders stick to their present election manifesto which provides for statutorily fixed prices and a free run up for wages. Profit margins under those absurd conditions would disappear for most manufacturing companies and a large part of the private sector would have to close down. I would therefore expect Mr Barber to remove or modify these sterling area controls as soon as he returns to the $2.40 parity which he hopes to do before entering the EEC early in 1973.
I do not suppose that the old sterling area will ever be revived. The share of our exports to it has been slowly but steadily declining and a large number of the sterling area countries no longer link their currencies to sterling. The Australian dollar will probably go with the American, and the New Zealand £ may follow. Heaven knows what will happen to the South African rand which has decided for the time being to float with sterling. This is understandable seeing that Britain remains South Africa's largest customer, although British exports to that country have fallen by about 20 per cent this year. South Africa always runs a trading deficit — £250 million in the first quarter of 1972 — which she has to meet by the sale of gold. As the free market of gold has risen to $65 per ounce she is in no real trouble and in fact has been attracting a bigger inflow of capital this year. No wonder, seeing that the rand is now 11 per cent cheaper against the dollar, Ultimately, I suppose, she will peg her exchange on the dollar, that is, when the dollar ends its divorce from gold and monetary gold is written up to a more realistic height.
If only sterling could manage to stand on its own legs as it did in the fine floating days of the 'thirties! However, it is surely a good thing that the old concept of sterling as a sacred 'reserve' currency which must take priority over full employment in national economic policy is now as dead as the sterling area.
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