The Morning After IMF ECO:NONI A- TT ETV
By NICHOLAS DAVENPORT
AFTER their exciting fisticuffs the finance minis- ters at the- IMF jamboree trooped home— 'primitive barbarians' (French) and 'unlicensed
amateurs' (Americans) and all—none the wiser, none the friendlier but on the whole none the worse for the encounter. Mr Callaghan must be commended for making his official speech mild and conciliatory in tone and withal circumspect. World trade, he warned, would in time feel the consequences (in reduced liquidity) of the efforts of the two reserve currencies to eliminate their deficits. Those countries with substantial reserves (like France) would help if they allowed their current trading accounts to become unfavourable (as if they would!), but, if they didn't, there would clearly be more and more pressure on world liquidity, which lately had not even been keeping pace with the increase in world trade. 'We accept,' he added, 'that the level of world reserves should not depend upon the deficits of the reserve currency countries. But it is equally illogical that it should depend on the (haphazard) amount of gold that the world's mines produce.
What the IMF raw revealed—not in the open sessions but in private conversations behind the scenes—was just how near the Americans and French came to an open declaration of war on the monetary front. Everyone knew that the gold exchange standard had become unworkable under IMF rules and that the French were not prepared to go on being party to a substitute dollar ex- change standard. But no one had quite appreci- ated that the French were insisting on gold only being held. in the reserves and gold only used for international settlements. Confronted with this French intransigence Mr Henry Fowler. the Sec- retary of the US :Treasury, became so enraged that he let every eavesdropper know that if the Frencla drove the gold reserves at Fort Knox (now $13,300 million) dawn below $10,500 million (that is, below the 25 per cent gold cover reqnired for the domestic currency), he would not put up a notice to say 'Na more gold sales at $35' (which would in effect devalue the dollar because it would send the dollar gold price rocketing on the open market), but on. the contrary,, he would put up. an immense placard to say 'No more gold purchases at $35.' That, of course, would be tantamount to a declaration of war on the gold standard as con- ceived by France and a call to the trading world to rally to a paper dollar standard. The dollar divorced from gold would then float in the exchange markets against the gold franc and all other currencies still adhering to a gold standard. How the price of gold would fluctuate on the open market after the US. Treasury had declared that it was demonetising gold is anybody's guess, but most people believe that after an initial spurt Upwards. it would soon fall below $35 an ounce because nervous hoarders would begin to unload and cash in what remained of their profits.
Now a floating rate for the dollar against the European gold bloc is exactly what the Brookings Institute. recommended to the late President Ken- nedy as a relief for the strains of the. rickety gold exchange standard. Economically it might be very stimulating for world trade--4 am sur- prised that Sir Siegmund Warburg in his Sunday Times defence of -sterling did not give serious, thought to the floating rate idea—but politically it could be very dangerous to split the western world into two currency blocs and' (as the SPEC- TATOR commented last week) it would be extremely awkward for Britain seeking to join the European Common Market. For let us make no mistake about our delicate monetary position. It would be impossible for us to join the 'Six' if sterling were completely tied to the dollar as a reserve currency. It should not be necessary, on the other hand, to tie ourselves as completely to the European gold bloc as M Debre desired. At Washington the French did not openly disclose their stabilisation plan for sterling but it involves funding the sterling balances which are held by sterling area countries as 'reserves,' so that sterl- ing could give up its 'reserve currency' status, and be admitted into the European Community at a reasonably devalued rate. As Malaysia, Zambia and some others would like to convert their sterling balances into gold and dollars, as Aus- tralia has made no secret of her desire to reduce the sterling content of her reserves, and as the funding loan would carry a nominal rate of interest instead of the 61 per cent paid on sterling balances held in Treasury bills, this plan has definite attractions. But to what extent would such a tie-up with the European gold bloc mean a severance of our economic and political ties with the United States? Clearly, there is a risk in belonging to one camp as against another if monetary war is likely to break out. Clearly the wise course is to avoid war and to get the United States as well as the Europeans to join together in a funding scheme for the 'reserve' sterling balances which would remove this old millstone from our monetary neck. So it is something that the IMF meeting should have ended with an agreement to, continue talks—yet again !—be- tween the deputies of the Group of Ten (of which our Mr Callaghan is now the new chairman) and the executive directors of the Fund 'to consider the questions (including a new reserve unit) that affect the world economy as a whole.'
The weakness of the French case is that there is not enough gold in the world to allow a gold standard to work and that if this objection is met by doubling the price of gold (which. apparently. would not shock Mr Douglas lay!) the wicked gold hoarders and speculators would be favoured as well as the good gold producers (mainly South Africa and Russia). M Pierre Paul Schweitzer, the managing director of the IMF. called attention at the IMF meeting to the alarming increase in gold hoarding in the last two years. Last year the hoarders took about three-quarters of the new supply and in the first six months of 1966 Laos took $32 million of gold for sale, no doubt. in various forms to Thailand and South Vietnam The traffic in gold can be an evil thing and the French would have a better case if private hoard- ing could be stopped.
But let us also understand the weakness of the American case. Their defence of sterling has become a vested commercial interest, for if sterl- ing were forcibly devalued, bringing other Euro- pean currencies down with it. immense losses would be suffered by the great American corpora. tions whose remittances into dollars from their vast industrial investments in Europe would be so much less. That is why we hear so much talk of sterling being good 'to the last dollar.'
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