LET THE POUND STAY FREE
There can be no doubt about the rightness and the boldness of the Government's decision to float the pound. Whereas, between the end of 1964 and the devaluation of 1967, the Labour government sacrificed its domestic policies and ambitions to the maintenance of an unrealistic exchange rate, its Conservative successor has struck out for freedom, has resisted deflation, and signalled its determination not to be blown off course at home by the cost of maintaining the existing rate abroad. That due meed of praise given, however, there remains much that is questionable about the Government's general exchange policy, and much cause for concern about the general reaction to the new policy since its introduction. The central subject of debate from now on ought to be not when to return to a fixed rate, but whether to do so or not. We believe that if a sensible debate takes place on this question the case for a permanently floating pound will be seen to be overwhelming.
On television on the Monday before the decision to float was taken Mr Barber explicitly ruled out a devaluation and insisted that the present exchange rate was not unrealistic. Given that our goods are more expensive in relation to those of both the United States and Japan than is healthy, more expensive in relation to those countries than they were at the date of the last devaluation, and only very slightly less expensive in relation to European goods than they were at that date, the Chancellor's statement was palpable nonsense. The decision to float, we must conclude, was arrived at not rationally but instinctively. The instinct was right, but reason must now enter in.
Although for convenience and in the current fashion we continue to refer to the prevailing system as one of fixed rates, the rates are not as firmly fixed as they would be if based on gold or arrived at through an international currency. If both nations were on a gold standard, there would be no more difficulty, in monetary terms, in trading between Germany and Britain than there is in trading between Lancashire and Yorkshire. The prevailing system is more properly to be called artificial : its rates are defined by agreement between governments, and the system allows for such fluctuations as are to be seen in devaluations and revaluations.
The purpose of the artificial system is to provide stability in international trading relations. It was — and in some circles still is — hoped that the system would lead to freer international trade and the provision of more world resources, especially through Special Drawing Rights (often called 'paper. gold ') which are purely notional assets invented by the International Monetary Fund and distributed to member nations. The first trouble that arises with an artificial system is that it is quite impossible to predict, or determine over a long period, what is the market value of one country's currency in terms of that of another : the artificial system thus progressively distorts the market. If a country's currency is overvalued then it will fall into balance of payments deficit, a policy of stringent domestic deflation will have to be pursued and, probably, a forced devaluation will eventually take place : if the currency is under-valued, the reverse process occurs. A payments deficit or surplus has nothing necessarily to do with the domestic economic policy being pursued. It has necessarily to do only with the rate of exchange, which a government can itself fix, or leave free to find its own level by floating. The reality of the 3ituation, of course, is that a currency is worth only what it can fetch on the market, just as exports will be sold only if someone wants to buy them at the price offered, or imports purchased because the price is right. Commitment to an artificial system involves not only the constant unreality of pretending to avoid the forces of the market, but also the sudden crises and shocks attending devaluation and deflation : it is the source of the vicious circle of stop and go through which sterling has suffered in the last decade.
Governments can have maximum impact through policy and legislation on overseas trade and domestic demand management. The two are not necessarily connected except when, in pursuit of the maintenance of an artificial rate — considered as part of a trading policy — governments alter their domestic policies. Any artificially fixed rate of exchange, determining as it does the place a country occupies in the international trading community, and its competitiveness, affects every facet of domestic economic life. If, as we have seen in recent years, a country is in deficit — a deficit which is purely notional, and created only by the artificial rate — some measures will be taken to deflate at home, thus reducing imports; and other measures will be taken to encourage exports. Both kinds of measure involve more and more government interference in the domestic economy, more state intervention in our lives and more unreality. To take a particular example, the kind of industrial subsidisation policy which a government adopts in the shadow of deficit or threatened deficit will be directed to securing, not the most efficient use of resources, but the maximum export level of goods having the lowest possible content of import materials, thus saving both ways in order to amass foreign exchange and restore a ' healthy ' balance of payments.
The domestic economy thus falls in thrall to an artificial exchange rate. So does the detailed management of that economy. Bank managers as has been pointed out by Mr Samuel Brittan, the principal native advocate of a floating pound — become semi-official servants of the state as they decide, in the light of government policy, to make loans and allow credit to favoured exporting firms. The attack on mono poly at home becomes more difficult, since monopolistic enterprises are allowed to plead export necessity for their constitution. Under an artificially fixed rate any increase in labour costs reduces competitiveness abroad because the cost must be passed on, whereas, under a floating system, a downward adjustment in the price of a currency compensates for such increases : a large part of wage inflation is thus to be put down to the prevailing exchange rate system. That system also inhibits social and taxation policy. Equal pay for women, and the introduction of a payroll tax to improve social security benefits, as well as the introduction of a value added tax, will all help substantially to reduce our competitiveness abroad and run us into another balance of payments crisis, unless the pound is permanently floated.
"They all lead," says Mr Brittan of fixed exchange rate systems in his important tract The Price of Economic Freedom, "to irrational criteria being applied in foreign or domestic policy. Many of them, too, are harmful to a free economy and even a free society." Nonetheless, there has, over the years, been an extraordinary psychological and political investment in the maintenance of given rates partly, no doubt, because habit dies hard; and partly because the ramifications of maintaining an artificial rate involve so many people, institutions and organisations in complicated deception that the trend becomes extremely difficult to reverse. What we must now face in Britain over the next few months is that the domestic economic and social policies of the Heath government — the policies of structural change and the 'quiet revolution' — are incompatible with the restoration and preservation of a fixed rate of exchange for the pound.
There is, however, one practical political reason why Mr Heath and his colleagues should wish to undertake to restore artificial and fixed rates : that is that the EEC countries want us to. There is every sign that the excessive revaluation made by Britain last year was designed to reassure the European countries of our anxiety to pursue the kind of policies they favour in advance of entry, even though these policies would be bound to hurt us. The final object of the European countries is, of course, full economic and monetary union, and last year's realignment of currencies was designed to serve that end. It is true that France and Germany have very different ideas on how union can be brought about : the French want rigidly fixed exchange rates coupled with domestic discipline — the mixture which has been so disastrous for us in the last decade; the Germans want freedom to float all the European currencies in common against other currencies. But both countries have an objective in common — to reduce British competitiveness in advance of our entry into the Market. It is common knowledge that the large reserves Britain has .built up through her balance of payments surplus in the last three years are to be used to make across-the-exchange payments which are part of the fee for EEC entry. It is less clearly understood that a combination of fixed rates, EEC taxation policies and the pursuit of announced social policies at home will all severely weaken our position within the EEC. It is encouraging only that, in his recent Luxembourg meetings, Mr Barber has made it clear that the policies so far adopted to serve the end of a monetary union do not work and cannot be sustained by the British government without disastrous domestic economic and political consequences. There is much less recognition of the fact that a monetary union is impossible for the foreseeable future.
The main charge made against multi-lateral and permanent floating is that business will be unable to handle a situation in which it knows neither costs nor prices for even short periods ahead. Aside altogether from the fact that this charge takes no account of the dangers in the present system, it is also the case that it ignores the possibility of buying and selling currency at stable rates on the forward market. It also assumes, which would not be the case, that floating rates would fluctuate wildly over short periods. And it ignores altogether the stranglehold which the present system places on domestic economic policy. There is no imaginable or even plausible objection to floating rates which suggests that they might cause anything like the crises and catastrophes which have occurred under artificial rates in recent years.
Letting the pound stay free will be no panacea for our economic problems. It makes wise domestic, monetary, economic and demand management policy possible : it does not ensure it. But the degree to which a policy of floating the pound, by removing the shibboleth of fixed rates, can clarify our understanding of our own situation is almost immeasurable. It can help to show the real extent to which wage inflation reduces our international competitiveness; it can help business and unions to make genuine productivity agreements, relating wages to the cost of living; and, above all, it can clear the way to a sensible policy of industrial subsidisation. All this would make it at last possible for Britain to concentrate on the genuinely efficient exploitation of her resources, in full realisation of the fact that it is such domestic efficiency, and not any abstruse international exchange theology, which determines a country's prosperity.
Whether the Government will have the unblinkered eyes to see things clearly and the nerve to act on what they see, is an open question. Certainly, on the brink of entry into the EEC the adoption of a policy of floating the pound on a permanent basis will require courage and obduracy such as only the French have demonstrated in pursuit of their interests within that organisation. But let it be understood that there is little alternative. Our exports are now only one per cent better priced in relation to the products of the EEC countries than they were at the time of devaluation in 1967. Almost the whole of the reserves will go in initial payments to community funds. Value added tax, the Government's prized new pension scheme, the common agricultural policy and the burdens it will impose, equal pay for women — all these and other policies, if they are allowed to encumber exporters operating through a fixed rate system, will seriously damage British competitiveness, while easier access to our market, and the accretion of British wealth to community funds, will have a highly beneficial effect on the economies of Western Europe. Even if the pound were to be re-rated at the end of the year at, say, $2.38 there would be no guarantee that this would be enough to compensate for the shock of Market entry. There would then be another cycle of disaster leading, among other things to a further devaluation and the defeat of the Government in the next election.
It cannot be disputed that the whole business of modern economic management, which involves so many controls, so much bureaucracy, so much limitation of freedom, business and personal, is intimately bound up with the maintenance of artificial rates of exchange. If we — and if the Conservative party in particular — are to put our trust in freedom there must be a great dismantling of controls and bureaucracy, and this can be done only through a float. Freedom must be given a trial. It may yet be seen that the past ten years, when we have so often seemed to have lost our sense of direction as a nation, when so much catastrophe has befallen us, and when we have so often nearly despaired, may have witnessed two historic decisions, one leading into a blind alley, the other to the broad paths of prosperity and freedom. The first decision was that of the Labour government to sacrifice everything to the maintenance of a fixed rate and the achievement of a payments surplus. The second was the decision — if its logic is maintained — of the Conservative government to set the pound free. We believe that the setting free of the pound is , an essential pre-condition for the setting free of the energies of the nation and its people.
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