A licence to print farthings

PAPER GOLD JOCK BRUCE-GARDYNE

Last Saturday, we are told, was "a great day in the history of international finance." Bank Holiday Saturday is not the best occasion to write a page in the history books,, and from the watching world the dramatic happenings at Lancaster House elicited scarcely a yawn.

Yet I find the tameness of the occasion sur- prising. Back in January I was warned in Paris that an agreement to give a licence to the Inter- national Monetary Fund to print money to supplement gold, dollars and sterling in national currency reserves would certainly lead to France's withdrawal from the Fund, and very possibly to her withdrawal from the London gold pool as well.

The imF has got its licence. But the French are still there, and not a word has been spoken about a withdrawal from the gold pool. On the contrary the French Finance Minister has des- cribed the agreement as a victory for the French point of view. Yet the Secretary to the us Treasury inferred that it was a triumph for the United States. Who, it might be asked, is kidding whom?

To most people in this country, exasperated with recurrent doses of squeeze and deflation provoked by the inadequacy of our gold and dollar reserves a licence to print money must sound like the answer to a maiden's prayer. But to many central bankers, particularly to the bankers and Governments of the European Community, it sounds like something vastly different. What the 'Anglo-Saxons' referred to as 'plans for world monetary reform' the French described as 'devices to enable the debtors to extend their overdrafts': and their Common Market partners tended to agree with them.

Superimposed on this rarified economic dis- putation was a much more full-blooded political battle. France, in her time, and Britain, more recently, have both been forced to adjust their policy objectives, at home and abroad, by the

demands of their Why should the Americans escape the same disciplines? But if the IMF were allowed to open up new lines of credit which the Americans could then use to purchase dollars (from France, for instance) which .would otherwise be presented for pay- ment from the dwindling American stock of gold, then at once the General's monetary ballis- tic missile would lose its warhead. So the French tried to convice the Six that agreement on a so-called 'contingency plan' for activation as and when the American deficit disappeared would be sufficient to make the Americans forget all about the need to cure the deficit.

They failed, and all the brave words of M Debre cannot disguise the fact. The immediate reaction to Saturday's news in the gold and foreign exchange markets gave him the lie. The gold-exchange system, it seems, has been given a new lease of life.

But has it? What was agreed last Saturday was that at some future date (unspecified) with the concurrence of countries holding at least 85 per cent of the Imes voting rights the IMF should be authorised to print a quantity of credit (un- specified). There was the „tacit understanding that the amount should be in the range of $1,000-2,000m.

That would be chicken-feed. The British share of such largesse, for example, would amount to f40-80m: the equivalent of one bad day on the foreign exchange markets, the sale of a half-share in the British Aircraft Corporation. or one quarter's 'balancing item' in the payments figures. Admittedly the distribution might be repeated. But much more probably it might never be made in the first place.

For an 85 per cent vote means that, as things stand, at least one of the Common Market countries would have to be induced to break ranks and support the activation of the printing presses, the American deficit notwithstanding. It is one thing for continental bankers to agree that circumstances could theoretically arise in which credit creation would be justifiable. It is quite another for one of them to agree that those circumstances have arisen and the time is now.

In short all that was agreed last weekend at Lancaster House was a scheme by which a derisory addition might conceivably be but probably won't be—made to the sum total of moneys available to finance national deficits at some stage in the future. Indeed it is arguable that the product of five years' gestation was not merely insignificant, but positively baneful.

The true threat to international prosperity is not that the us payments deficit will disappear: of that there is no sign whatsoever. It is rather that the persistence of the deficit will finally lead to the collapse of the elaborate network of stays and corsets which have been strapped around the dollar.

Saturday's agreement cannot by the wildest stretch of the imagination be expected to suffice to lubricate the wheels of international trade if the American deficit were cured. Nor can it suffice to reestablish confidence in the dollar while the deficit persists. But the French have a point when they argue that it could lull the Americans into a sense of false security. If so, it would actually compound the dangers of the present situation.

But if the Lancaster House compact leaves something to be desired as a salve for the inter- national economic malaise it is, as a contribu- tion to our own payments dilemma, about as relevant as an extra twig for Mrs Partington's broom. This is not only because on the most optimistic interpretation it cannot come into operation until 1969. It is also because, contrary to popular superstition, there is really precious little evidence that our troubles have been caused by that shortage of international credit that last weekend's agreement is supposed to repair.

We have, as it happens, drawn on the exist- ing supplies of international credit through the IMF far more heavily than anyone else. Other countries—Italy is a notable example—have corrected deficits at least as alarming as any we have faced without inflicting lasting damage on their internal economies and without drawing more than a fraction of the credit we have obtained. Indeed it is arguable that we have suffered from too much credit rather than too little: if we had been forced to deflate more

swiftly (probably in 1961, certainly in 1966) we would not in the end have been forced to deflate so harshly, or to apply deflation to an economy which was already running out of steam. If we have brandished sunshades in October, it has been largely because we have been allowed to borrow sun lotion in July.

Finally the belief that we have been vic- tims of the balance of payments worries of others is doubly fallacious. For we have run into sterling crises notwithstanding the fact that the fears of economists about competitive de-

nation provoked by shortage of international credit have so far proved groundless. World trade has continued to expand, and we have continued to run into trouble. And the current German recession, which Mr Callaghan (not without reason) has found so provoking, shows that payments fears are not the only cause of retrenchment abroad. A British Chancellor faced by the sort of surplus the Germans can expect this year would cut income tax by 2s in the pound. The Germans are talking grimly about the need for higher taxes to balance the 1968 budget. A fat lot of good an extra $1,000m of international credit facilities is going to do to that mentality.

Here, I believe, lies the real malaise which last weekend's peppermint pill will do nothing

to cure. The Bretton Woods system implied a

double discipline. A country which was in per- sistent payments surplus or deficit should adjust its exchange rate. Alternatively it would have to accept internationally supervised deflation (in the case of persistent deficit) or internationally supervised restrictions on its exports (in the case of persistent surplus).

For fifteen years, or thereabouts, the system worked as it was meant to. The Europeans, and others, devalued : the Americans were the object of export discrimination. But since the early 1960s the adjustment mechanisms have mostly fallen into disuse. Since the German revaluation in 1961 there have been no major currency adjustments; and notwithstanding a persisting and sometimes distended German surplus there has been no attempt to apply the Bretton Woods disciplines against the Federal Government. All that is left is the deflationary cure for deficits. So we have come to accept that creditors wear halos while debtors wear sackcloth. Yet there is

nothing more socially responsible about a creditor nation than there is about a debtor nation : if anything rather the reverse.

Unfortunately the international standard of morality will be hard to change. What we can change, however, are the exchange rates. It is time to take the parities out of the deep freeze. It is no use relying on a provisional licence to print farthings to take us out of our troubles.