THE ROLE OF THE STERLING 'BANK'
By NICHOLAS
DAVENPORT
THE process of enlarging and improving the statistical service of the Treasury was begun by Sir Stafford Cripps, who once confessed to me that, on the in- formation then available to Chancellors, the idea of any Government exercising economic control was absurd. Slowly, very slowly, the process has gone on until a really big advance was scored under the brief Treasury regime of Mr. Macmillan. I had proof of his determination, for he was courteous enough, on the eve of his 1956 Budget, to receive Sir Robert Boothby and myself on behalf of a committee and tell us how handi- capped he felt, 'always having to look up a train in last year's Bradshaw,' and what he intended to do to improve the statistical service and make it available to the public. The fruits of his reforming zeal were seen again this week when the Statistical Office published a new set of quarterly figures showing the amounts outstanding of our sterling balances and also of our acceptances, that is, our unofficial short-term debt. The former were previously disclosed only at half-years and the latter have never been officially published before. I can see no reason why they should not be pub- lished monthly, but one must be grateful for this quarterly extension. The feature of this edition is the slight improvement in the position of the sterling `bank'—quite apart from the rise in the gold and dollar reserve to £1,085 million. A sharp
reduction of £77 million in the three months to March 31 to £1,740 million in the balances of the Dominions and other independent members (India, Ghana, Malaya, etc.) was partly offset by rises in those of non-sterling countries (Colonies remaining steady at £888 million), leaving the total of our sterling balances £33 million lower at £3,234 million (excluding £650 million for the non-territorial organisations).
This provides a good opportunity to review our general banking and investing position. The Prime Minister is due to see President Eisenhower early next week before flying to Ottawa for talks on June 11, when problems of the sterling area are to be discussed. This will be a preliminary to the economic Commonwealth conference in Montreal in September. Mr. Macmillan is believed to be anxious to press for international action to avoid world trade recession, which will surely require the strengthening of our position as international banker and investor. God speed his talks at the White House! I see that Field-Marshal Mont- gomery has already told the President plainly that survival for the West in the next ten years depends upon our winning the economic cam- paign in the cold war. When generals get to talking economics the situation must be really serious.
I have long argued that we have not a strong enough currency, in spite of its recent improve- ment, to play the role of international 'banker' for nearly half the world's trade unless we receive financial support from the US. As everyone knows, our gold and dollar reserves are only 20 per cent. of our short-term liabilities against nearly 100 per cent. before the war. Sir Oliver Franks recently advanced the same view when he called for a 'stabilisation' loan and the re- inforcement of the IMF resources. But I do not want to see this 'banker' role given up, for I do not believe that any other currency could play the part nearly so well as sterling. Moreover, the role of international banker is so closely tied up with that of international investor that if we had to abandon the one, the other would suffer—and Communism would gain. In the seven years 1951 to 1957 we invested overseas £1,380 million—an average of £197 million a year. If we had used our trading surpluses—which only averaged £101 million a year in this period—to build up our gold and dollar reserves the sterling area overseas and other developing countries would have suf- fered—and so would our export trade. We gave priority (unconsciously, because the export of capi- tal to the sterling area is uncontrolled) to overseas investment at the risk of our reserves and we paid the penalty last year when sterling suffered a dangerous 'bear' raid.. But who—apart from Mr. Andrew Shonfield—wants to stop our overseas investment? Who would do it better if we had to give it up? I certainly think that it needs some control or supervision, for the figures show that we largely over-invested abroad in this seven- year period, but it is surely in the interests of the Western world that it should go on. Mr. Macmil- lan is said to hold this view strongly and to have a grand design for African and Asian develop- ment. If that is so, he must press Mr. Eisenhower for help in the strengthening of sterling. If we have to apply our surpluses to the building-up of our reserves, our overseas investment must suffer. We are not strong enough to play simultaneously the parts of world banker and world investor. * * * How is the strengthening of sterling to be
accomplished? Mr. Macmillan can ask the Presi- dent for a stabilisation loan or 'stand-by' credit, Mr. Eisenhower may point out that we have already. borrowed $506 million from the IMF and $250 million from the Export-Import Bank and have earmarked further credits. Mr. Macmillan will then try to convince the President of the necessity of writing-up the price of gold-- doubling or trebling it. This would double or treble our reserves in relation to our sterling liabilities. (The President could avoid inflating American bank money by carrying his gold `profit' to a suspense account.) If all these argu ments fail, Mr. Macmillan must ask the finance ministers of the Commonwealth at the coming Montreal conference in September to agree to segregation of the sterling balances in terms of short-term and long-term liabilities. I am not sug gesting funding. This word has been too loosely used in connection with the sterling balances. Funding in the strict sense is impossible; it would be too expensive and too drastic. But why should not Ghana, Malaya and the rest agree to the practical proposition that as they do not need to draw out all their.accumulated credits in one fling they should inform the 'bank' how much theY regard as short-term, liable to instant withdravvel, and how much they regard as medium-to-long term. If only the short-term debts were published in the quarterly returns of the sterling balances the sterling 'bank' would certainly look a lot stronger It certainly needs some window-dressing.
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