No fixed parity
At last it has happened: in spite of the pressures exerted by our new European partners, the Chancellor has announced that Britain will not return to a fixed exchange rate for the pound by January 1, even though he said he would as recently as October 24. Reality, as I keep saying, will break in: the only question, usually, is whether politicians have the capacity to recognise reality when they see it, and act accordingly. Mr Heath persdnally, and his Government collectively, showed great courage earlier in the year when they abandoned very deep-seated prejudices to acknowledge the force of reality by floating the pound, and allowing the currency to find its true level on the market. They have since, if only rhetorically, sought to snatch back that obeisance by insisting that they will sooner rather than later, return to a fixed parity. Now that date, demanded most firmly by President Pompidou, has again been put off.
Some of the consequences of this — as I think creative — procrastination may be badly summarised. First, January 1 having been put off because nobody has the confidence to fix a workable value for sterling, the next favourite date must be put off too. For that date is the end of stage one of the freeze, and it will be impossible, given the uncertainty that will attend that moment, to do anything as evidently silly as sticking a pin in the dollar parity table and settling what the Pound is worth. Secondly, the next favourite date will have to be postponed: that is the ending of stage two of the freeze — which is bound, though theoretically optional, to be invoked — for the same reasons. Third, the next favourite date will have to be cancelled, because it, being uncertain at the moment, will coincide with the trial period of what by then will be Mr Heath's experimental statutory and permanent prices and incomes policy; and that trial period will be fraught with all sorts of domestic industrial activities and crises which will tempt those inclined to speculate against a fixed sterling rate. And all this is in spite of the planned expansion of a European Monetary Fund next April. In fact, I will here and now wager the Chancellor a set Of Adam Smith's Wealth of Nations that he will not be in a position even to Consider ending the float before the end of 1973. (Even if he did it then, he would be wrong.)
All this should be highly gratifying to those who have long advocated a Permanent floating currency. That it is not Is because of some of the consequences of the contradictions between the Chancellor's rhetoric and reality. Mr Barber's ' statement on Friday that the float would Continue beyond January 1 was the first Open acknowledgement by a member of the Government that conditions would not Permit of a newly established fixed parity by that time Unfortunately, a number of (admittedly foolish) businessmen sold sterling on the forward market, and their chickens are beginning to come home to roost. In order to prevent such wicked speculation as now require sterling to meet their obligations actually getting hold of the stuff, the Bank of England have been buying themselves. This means that sterling is in short supply for the private speculator or investor. And it means, further, that the true market value of the currency is being nowhere established: this is what is called a "dirty float," where a government agency, like the Bank, since it cannot dominate the market by regulation, is trying to dominate it by its superior purchasing power. In such conditions the purposes of a float — to find the true value of a currency — is lost.
There are probably two main reasons for the Bank's behaviour. The first is that sense of (comic) moral outrage that rises in the breasts of such as Sir Leslie O'Brien at the thought of people actually making money out of trafficking in currency (as it might be, in drugs, or in white slavery). The second is the determination of the Bank and the Government to keep the operating exchange rate of sterling up, partly to satisfy the EEC, partly (as The Spectator argued some time ago) to avoid having to pay penalties for a low rate under the Basle 'agreement. None of these reasons are in the least degree substantial, and they play havoc with the market. In consequence, proponents of floating, while pleased that it continues, must attack the method of its continuance.
The great advantage of a continued float is that it makes the best of Britain's position during the first year of membership of the EEC. With a floating pound the full consequences of the cost of the Common Agricultural Policy will not be felt by this country — and that is a consumption devoutly wished by proand anti-marketeers alike. Indeed, if one major country continues to float, the CAP will, ultimately, be destroyed. More generally — and this is not an anti-market point, merely one that accepts that there will be difficulties attending membership — a floating pound saves Britain from being trapped, in a highly competitive new economic environment, full of dangers and pressures by the old tension that has bedevilled our international performance since the war, between domestic economic development and the challenges of our international exchange position.
Whenever this country has boomed in the recent past, we have run into a sterling crisis, which has caused such deflation as to destroy the boom. With a floating currency, there can be no sterling crisis. There is, however, another way out of that domestic-foreign clash of problems. That is, over a long period of deflation, to build up — and a fixed parity system — such a huge surplus on the balance of .payments as will finance a long period of growth. This is what the Labour Government tried to do, and on their surplus the Tories have tried to live ever since. But — and this is perhaps the most startling information to come from the Treasury in recent weeks — the Labour surplus has been almost wholly dissipated. There is no cash in the bank to pay for a period of growth, such as Mr Barber's tax cuts envisage.
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