THE ECONOMY & THE CITY
The Battle for the £
By NICHOLAS DAVENPORT
CTERLING has come under pressure aga,in- amonths before it is seasonally due-and opinions differ as to the cause. Some blame the financial ineptitude of the British government. Others blame the financial acumen of the Americans. No doubt the measures taken to strengthen the dollar-the repatriation of Ameri- can balances from continental markets and the acceleration of remittances by American com- panies trading overseas-are hurting the £, for there has been a rush to turn sterling into dollars. The discount on forward sterling has widened sharply and even with a Bank rate of 7 per cent it does not pay foreign bankers to move funds to London. And even if it did, very few of them would have enough confidence in sterling to do so.
I am not suggesting that foreigners now believe devaluation of the £ to be inevitable, but that very sensitive plant 'confidence' is certainly not blooming as it should. The National Institute of Economic and Social Research did not help matters by saying that it did not believe Mr. Callaghan would right the balance of payments by 1966. It agreed that the deficit on visible trade of £65 million in the first four months of the year was probably matched by the surplus on 'invisibles,' but it declared that there were no adequate grounds for assuming much accelera- tion in the 'slow upward movement in exports' (which the Board of Trade has strangely de- scribed as a 'strongly rising trend') and it con- cluded: 'Even allowing for a reduction in the outflow of long-term capital and for an improve- ment in the terms of trade the Chancellor's target of a balance on current and long-term capital transactions during 1966 seems rather optimistic.' Its own estimate is for a deficit in the first half of 1966 of £100 million. That was hardly calculated to restore foreign confidence in the £.
There was another remark in the National Institute's recent bulletin which would be read with some alarm abroad, although it was prob- ably intended to be reassuring. Having stated its reasons for expecting a continuing, if much reduced, deficit on the balance of payments, it added: 'However, it should not be too difficult to finance a further deficit, particularly as the Government has indicated that It is prepared, if necessary, to mobilise the second-line reserves -the substantial public and private holdings of foreign portfolio securities.' Now if there is any- thing calculated to make foreigners sell sterling short it is the sight of poor beleaguered Britannia having to eat up her seed corn. Every gnome in Zurich would assume this to be the foolish bankrupt's end. (Note the Oxford Dictionary's definition of gnome: 'Diminutive spirit of sub- terranean race guarding treasures of the earth.') A pity that Mr. Diamond, the Chief Secretary of the Treasury, chose this awful moment sto tell a London conference•on international monetary problems: 'Our long-term assets represent a great underlying strength. But to altogether too great an extent we have borrowed short and lent long-the classical formula for individual bank- ruptcy.'
Lest there should be any misunderstanding about our 'second-line reserves,' I think the Treasury should explain the statement which the Prime Minister made in his speech to the New York Economic Club on -April 14. 'The UK,' he said, 'is a country rich in overseas assets. We may have been adding to these at a rate too fast to be sustained but they are there neverthe- less. In all we estimate them conservatively to amount to £11,000 million. . . . The vast bulk of this is privately owned-£4,000 million portfolio securities and £6,000 million direct in- vestments. In addition the Government itself has a useful portfolio of foreign securities worth about $1,250 million which we regard as our second-line reserve -and are easily mobilisable. We have no wish to use these assets unnecessarily but clearly circumstances might arise when some drawing on them would be justified. Meanwhile they stand as backing to our currency and sup- porting our determination to defend it.' I con- clude from this statement that the Prime Minister technically looks upon the $1,250 million govern- ment portfolio of dollar securities as the 'second- line reserve.' It is, as he says, easily `mobilisable,' for a proportion of the fund has already been switched from equities into US Treasury bonds. On the other hand, the privately held portfolio and the direct investments are not easily access- ible or mobilisable. For the Government to take
over part of them or borrow against them would require an Act of Parliament which under present conditions would be quite impracticable; These privately held securities-the 'seed corn of the nation-must therefore be regarded as third-line reserve only mobilisable in time of war. But there is no reason why the government portfolio of $1,250 million securities should not be placed immediately in the gold and dollar reserves. Heaven knows they need a face-lift.
At the end of May our reserves rose to £1,021 million but allowance has to be made for recent credits. In November we borrowed $1,000 million from the IMF which went to re- pay short-term drawings from the central banks. In May we borrowed a further $1,400 million (£500 million) from the IMF and £392 million of it has gone to, repay drawings on the $3,000 million credit line arranged with the central banks this year. Our reserves were therefore replenished by a transfer of £108 million net, which accounted for the bulk of the rise of £181 million.
We can borrow no more from the IMF- unless by some miracle the warring factions agree upon the extension of the IMF into a new credit- creating super-central bank. We now can only look for help to the Americans, whose `swap arrangement is still available up to $750 million and perhaps $1,000 million. It is not a comfort- able position. The decision to hold sterling at $2.80 has made us the prisoner of the foreign central banks. We are, in effect, under their sur- veillance, and if we were to indulge in unsound financial practices or even fail to check the cur- rent wage-cost inflation we would quickly lose their confidence. The Americans, who understand the problems of a reserve currency, are likely 10 be in a crisis our only friends. Fortunately vie, have $750 million of the American 'swap arrangement still available.
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