That, crisis again
MONEY
NICHOLAS DAVENPORT
De Gaulle retiring for good to Colombey-les deux-Eglises, Chancellor Jenkins flying off to Washington to see the Secretary of the us Treasury, the £ and the franc slumping in the foreign exchange markets, the price of gold soaring on the not-so-free market in Paris—here were all the elements of another world financial crisis. The Stock Exchange was not at all sure what it signified but reacted instinctively in. the normal way. Gold shares and the equities of export and overseas companies went up and government bonds went down. But there was no panicky dealing. Before long equity shares came down from the top because no one, quite knew whether our export companies would gain from the crisis or-whether the price of gold would ever be raised. But government stocks remained flat because everyone knew that the Treasury had made a hash of the bond market.
Certainly the immediate outlook for investor or speculator is obscure. We all know that the French franc is overvalued and the German mark is•undervalued, but nothing can happen to the latter .until after the September elections or to the former until 'after a new President has been elected in a feW. weeks' time. In the mean- time the new Governer of the Bank of France, M Worrnser, has Sufficient reserves—close' on $4,000 million—and international backing— around $2,000 million—to defend the present parity for, the time being. One may rest assured . that the Central bankers will lend their full sup- port. After all, if there is•a rush of money from country A to country B the Central bank of B can re-lend it back to A. This is called re-cycling —the most pleasurable of all Central banking games.
Now if the franc is' devalued by the new President only by the amount suggested by the previous government (but rejected by de Gaulle), which wa,s around 11 per cent, and this was „fol- lowed after. September by an upvaluation of the mark by about 5 per scent, no great disturbance to the world's monetary system would be felt. Herr Stetiuss, the West German Finance Minister, 'suggested in a speech this week that he would be prepared to see an 8 to 10 per cent upvaluation in the context of a more general realignment. But monetary crises have a way of getting out of control—those managing big lines of capital tend to get bad attacks of nerves—and it is not impossible that violence in the French streets or closures in the factories will provoke the French authorities into devaluing the franc by 22 per cent. Such a drastic devalu- ation would certainly upset our European ex- port trade unless the mark were upvalued by, say, 10 per. cent. Fortunately we do more busi- ness with Germany than with France and may the more cheerfully await the outcome of events. But it is strange to think that events are now determined, not by rational statesmen, but by mobs running riot in the streets or factories.
In Washington Mr Roy Jenkins will no doubt be thanking the New York Federal Reserve Bank for supporting the f in the hectic dealings of this week at S2.38i. As I write he is lunching with Mr McChesney Martin, chairman of the Federal Reserve, after long talks with Mr Schweitzer, the managing director of the n.w.
The Americans will be telling him how far they are prepared to go in a monetary 'show-down.' They will remind him of the recommendation of the Joint Economic Committee of Congress that 'the IMF should examine somewhat greater variability in exchange rates as a means of facilitating adjustments to eliminate chronic deficits and surpluses.' This could mean either widening the official dealing points or even allowing a floating exchange.
There is no doubt that the Americans have developed a more radical approach to monetary reform than the Europeans and that the new President's advisers have accepted this radical- ism. They are all dead against raising the offi- cial price of gold. They have welcomed the unofficial or free gold market as a measure of protection for their own reserves—which they do not want to see fall below $10,000 million for strategic purposes—and they really would not care very much if the free market price went to $70. No one can now tap the American gold reserves at Fort Knox except a central bank for a strictly internal monetary purpose. If there were a speculative attempt to convert dollars into gold they would make the limited embargo on gold sales at Fort Knox a com- plete embargo. Dr Milton Friedman, the pro- fessor of the Chicago 'money supply school,' has just informed an investment seminar in Geneva (organised by Bache, a firm of New York brokers) that the world is in effect already on a. dollar standard, not a gold standard. He favours a floating dollar rate against the gold
bloc countries and he expects the f to follow the dollar. He even went so far as to suggest that the British Treasury would have no real control over the UK money supply unless it let the f float.
Investors in this country should, therefore, be chary of, buying gold shares if they wish to hedge against the uncertain monetary pros- pect ahead. They should confine themselves to the big mining groups and the overseas trading companies on the grounds that the commodities in which they trade may soon have a higher currency value. But they cannot expect the limited sales of South African gold on the free market at premium prices to have more than a marginal effect on gold company profits.
This monetary crisis is not the sole cause of the slump in government bonds. The Treasury made matters worse by confining the freedom from capital gains tax to government and gov- ernment guaranteed bonds. By outlawing local government bonds they have made it virtually impossible for the local authorities to raise money on the open capital market. Commer- cial companies also will find it more difficult to raise money through loan stock issues now that they have to compete with government stocks enjoying freedom from capital gains. The de- moralisation of the bond market caused 93 per cent of the £20 million loan issued by the Agricultural Mortgage Corporation to be left with underwriters. Not being government guar- anteed it is subject to capital gains tax. It is a 91 per cent stock issued at 991 and it opened at 21 discount. The poor farmers now have to pay 101 per cent to 10+ per cent for their loans which will make most farming unprofitable. The time has come when the Treasury should really take the financial community into its confidence and have a round table talk, under the chair- 'manship of the Financial Secretary, Mr Harold `Lever, who as an ex-merchant banker under- stands the bond market, to see how the rot in the gilt-edged market can be stopped. Who will really want to support the £ at $2.40 in the next financial crisis if British government credit sinks to over 9 per cent? Shades of Dalton!
Previous page
