Britain’s Economic Plight SOME BACKWARD GLANCES AT LAST YEAR’S RESERVES CRISIS

Press, Volume CV, Issue 31009, 15 March 1966, Page 16

Britain’s Economic Plight SOME BACKWARD GLANCES AT LAST YEAR’S RESERVES CRISIS

“Lynceus”

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" of the “Economist"!

[From the “Economist" Intelligence Unit./

The Old Lady of Threadneedle Street, as the Bank of England has for long been popularly known, has never believed in exposure. In recent years, like an elderly spinster who repels the curiosity of those who suspect she has lost her hair by never taking off her hat, her discretion has reached almost bemusing proportions. Throughout last year any pretence that the published figures for Britain’s gold and dollar reserves represented the true state of the reserves, was abandoned.

In the last few weeks, however, the trend has been reversed. We have been given some fascinating backward glimpses of what might be called the state of the Old Lady’s under-garments. First there was Mr Wilson, back in January, publiclyadmitting that in the early days of August, 1965, Britain was within 48 hours of a forced devaluation of the pound. Reserves Exceeded And then at the beginning of March we had Mr Callaghan, Britain’s Chancellor of the Exchequer, greatly daring, revealing just how much of the Old Lady's plumage was borrowed. He showed that at the climax of the latest sterling crisis last August Britain’s short and medium-term borrowings—from the International Monetary Fund, and the United States and Swiss Reserve Banks —exceeded the published figures of the gold and dollar reserves by nearly £3OO million. But just as the elderly spinster does not remove her bonnet until her wig is firmly in place, so Mr Callaghan was revealing these figures not just to make Parliament’s flesh creep, but also to emphasise what progress had been made since August. Since September he revealed £3lB million of short-term borrowing had been repaid to the Federal Reserve Bank, and after transferring the British Government’s holding of short-term United States Government securities into the reserves, plus the February balance of payments surplus, he produced a total of £l3OO million—£22s million up on the month. Add to this the loans from the Federal Reserve and Export-Import Bank, now available for use once more., and the British Government’s portfolio of United States equity shares, and you arrive at a grand aggregate of £lBOO million. Speculators On Notice The purpose of this little exercise did not escape anybody. Since the latter days! of February the pound has had another mild fit of the wobbles. The reasons for this were various. There were the poor January trade returns. There was the fear of a national strike on British Railways in February. There was the continuing break-neck advance in British wage costs And finally there were election uncertainties (the fear that a newly-elected British 'Government might seize the ichance to devalue the pound). I So Mr Callaghan was trying

to put the speculators on notice that there were now ample defences for the pound. In this he does not seem to have been altogether successful. At the end of February the pound had dipped below the official dollar parity for the first time since last September. And there it has stayed. This is not altogether surprising. For Mr Callaghan's careful figuring cannot disguise the fact that in order to pay off only the shortest dated quarter of Britain’s total medium-term indebtedness he has had to dip into what has traditionally been thought of as the last line of defence—the official portfolio of United States investments taken over by the British Government during the last war. There is still another £9OO million or more to be repaid before the end of 1970. while the import bill must be expected to bump up when the 10 per cent special surcharge conies off—as come off it must —probably before the end of this year. So it is still a i daunting prospect. Against A Brick Wall All the same, certainly in the short run, the speculators must be beating their heads against a brick wall. The determination to defend the parity of a Government which was prepared to accumulate short-term liabilities £3OO million in excess of short-term assets can hardly be doubted—nor its ability to do so, when it is remembered that even in this dire situation yet another guarantee, of undisclosed value, was obtained from the central bankers.

But what ought to cause concern both in Britain and also among the nations which

isupply her with food and raw materials was one little-notic-ed phrase in Mr Callaghan's speech on March 1. Referring to the £514 million debt to Switzerland and the United States which falls due for repayment in May. 1970, he entered the qualification “unless other arrangements have been made meanwhile.” “Other arrangements” could take one of two forms. There could be an agreement to stagger the repayment of this £5OO million over say a three-year period of grace. This might not be too difficult to arrange. But it would mean inevitably that the expansion of the British economy, and with it the expansion of British purchases from abroad —including from countries like India and parts of Africa which are counting on the expansion of their sales to Britain to solve their balance of payment problems —would have to be delayed for the best part of the decade De Gaulle's Attitude The other (and relatively harmless) arrangement would be to fund the British International Monetary Fund debt rather as the post-war loan.-, from the United States and Canada were funded —for repayment by the end of the century. But judging from the latest news from Paris, of that there is little chance General de Gaulle, having sacked a Finance Minister who really understood the intricacies of the world payments system, has now returned to his original position —which might be summarised as “back to gold." So the outlook for a “liberal” solution to the gradually deepening problems of the free world’s trade and payments looks as bleak as ever.