CONVERTIBILITY HARE
By NICHOLAS DAVENPORT
THE Commonwealth economic conference at Montreal resolved that a common aim was to make sterling convertible. 'as soon as the necessary conditions have been achieved.' A similar resolu- tion was passed at the Common- wealth conference of December, 1952, and has been repeated at various times since then. On his return to London the Chancellor was reported to have said that `encouraging progress had been made towards the convertibility of sterling but I can give no date when there will be a free pound.' If he had said that encouraging progress had been made towards universal acceptance of 'transferable' sterling as a world-trading currency, which any non-resident can now freely convert in a floating market at a very small discount, I could have understood him. Conservative politicians have been making this sort of statement for years but it must be obvious even to them that we have as much convertibility as any foreigner or trader could reasonably want, that is, for legitimate trading purposes.
As everyone should know, there are three main types of sterling. There is 'registered' sterling which can only be acquired by the sale of dollars or gold : this is a fully convertible sterling. There is dollar-account sterling which is also fully con- vertible for trading purposes, but not for capital purposes. Any American or Canadian who has sold goods to this country or made trading profits by doing business here can freely convert his accruing sterling into dollars—unless he is in the film business, which is subject to a special exchange agreement. Finally, there is 'transfer- able' account sterling which applies to all other foreigners holding non-dollar, non-sterling accounts. This is freely convertible among them- selves, but is only convertible into dollars in unofficial markets outside London. These will deal in transferable sterling for both capital and trade Purposes. Since 1955 these unofficial dealings have, in fact, been supported by the Bank of England through the agency of the Exchange Equalisation Fund and for the last few years the transferable rate has never been allowed to fall significantly more than I per cent, below the official rate. It is now a little over z per cent. discount. The fact that our exports to foreign countries have increased steadily over this period is surely some proof that world trade has npt' been incon- venienced by the different degrees of converti- bility allowed to dollar and transferable accounts.
The only non-convertible sterling is that held by us poor residents of the sterling area. But capital can move freely about inside the sterling area and we can buy dollar goods under open or restricted licence. In the last few years traders in
the City have been allowed to buy dollar com- modities freely in exchange for sterling. Up to the Montreal conference nearly two-fifths of our dollar imports were subject to quotas, but these have now largely been removed and Sir David Eccles even promised to free dollar consumer goods next year if conditions were favourable. Moreover, the sterling-area resident is not denied all access to'ciollars for capital purposes. He can buy dollar securities from the dollar pool; he can emigrate and convert £5,000 into hard currencies if he is registered with the Bank of England as an emigrant, and he can sell the rest of his capital in the unofficial market in security sterling at a dis- count at present of a little over 1 per cent.
No Treasury spokesman, not even his Bank of England shadow, has yet Suggested that we should grant full convertibility to resident sterling. The most that an official 'leak' has allowed is that the official and transferable rates should be merged together and it was apparently Mr. Butler's inten- tion, when Chancellor, to let the merged rate float between wider gold points. But the 'leak' led to
speculation against the and the scheme was dropped. Nor was it supported at that time by the United States, for it was said that the Presi- dent was not prepared to grant the large sterling stabilisation loan Mr. Butler wanted. If the re- sources of the International Monetary Fund are now to be reinforced at the meeting next week in New Delhi, as the Americans are proposing, no doubt sterling will be all the stronger (we have already borrowed $561 million from the IMF), but that is not the same thing as a direct dollar
stabilisation loan which most experts would regard as essential if ever 'transferable account' sterling were to be made convertible.
There is a very good reason why the two rates —official and transferable—should not be merged and why formal convertibility should not be adopted. It would mean abandoning the safeguard clause under GATT which gives us the right to impose import quotas to meet an exchange crisis It would probably mean abandoning the EPU system, for three other currencies are expected to follow the £ back into convertibility and this would automatically force the European Payments Union to give way to the European Monetary Agreement. This provides for settlements in gold or convertible currencies and allows for no 25 per cent. credits as at present. Even if the EPU remained it would be exceedingly dangerous for the £ to be convertible when the European corn• mon market comes into operation. Western Europe earns nearly £1,000 million a year in exports to the UK and if it again became short of dollars it would be tempted to acquire them by restricting its purchases of British goods—in order to gain more convertible pounds.
I cannot believe that Conservative statesmen would be so foolish as to offer convertibility of the £ without first making it conditional upon a reduction in the American tariffs (lifting of the American quotas on lead and zinc, etc.) and a writing-up of the price of gold. If the £ is to be a stable world currency it must have free multi. lateral trade in which to function and adequate gold reserves to cover the inevitable fluctuations in our international trade account. It would not be safe in a world trading with a protectionist America or a protectionist Europe. If, however, Conservatives are pursuing convertibility for the sake of us residents in the sterling area, it looks as if they may have a political motive—to allow for a flight of capital in the event of a Labour victory at the polls. I would hate to think so un. worthy a thought.
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