Thursday, January 3, 2013

Devaluation of the Pound - 1949: History of finance

The following is excertped from Dean Acheson's 1969 book Present at the Creation: My Years in the State Department.  Once upon a time, politicians actually CARED about the consequences of favoring financial institutions over voters. 

"The British Are Coming"

In July 1949 John Snyder, Secretary of the Treasury, met Douglas Abbott, the Canadian Finance Minister, in London.  There both were informed by Sir Stafford Cripps, Chancellor of the Exchequer, that the British financial situation was precarious indeed.  British monetary reserves of gold and dollars were low and getting lower, although Britain appeared to be enjoying an industrial boom with full employment and high prices. (MG: OMG! A disaster in the making with full employment! Lord, please save us from the horrifying situation of full employment and high prices!) Indeed, this presoperity was, quite paradoxically, a cause of the trouble (PARADOXICALLY my eye). ln countries of what was called the sterling area deposited their reserves in London.  since pounds sterling were not freely convertible into hard currencies, principally dollars, these depositers, when they wished to make purchases, which they were eager to do for their own internal development, found it easier to make them in Britain or other countires of the sterling area.  This situaion, in effect, gave Britain a protected market at higher prices than would be competitive in the United States, so that she was paying her depositors with exports and using up her reserves to buy raw materials and food.  This was almost a sure route to bankruptcy (Because the dollar, even then, was a FIAT CURRENCY, and the British Guv couldn't print them, although, paradoxically, the U.S. government could).

Sir Stafford wanted to talk about what should be done.  John Snyder interpreted this as a euphemism for help and got out of the country as fast as possible, with the suggestino that talks be held in Washington at the time of the International Bank and Fund meeting in September.  He flew back like a modern Paul Revere crying "The British are coming!"  and come they did to create a situation of great complexity and embarrassment.  Someimte before it had been decided to take advantage of the presence of the finance ministers in Washington to get the foreign and defense ministers of North Atlantic Treaty countries there alwo so that a start could be made on treaty organization and plans in their diplomatic, military, and financial aspects.  To all of these was added the unplanned influx of foreign diplomats coming to the United States for the fourth meeting of the General Assembly of the United Nations.  In the midst of this considerable and busy international gathering, we now proposed to add Anglo-American-Canadian discussions of great delicacy and secrecy.

One can readily imagine the quandry of Ernest Bevin and Sir Stafford Cripps when they arrived in Washington on September 5 with the secret authority of the British government to take up with the International Monetary Fund the devaluation of the pound sterling from $4.03 to $2.80.  They could not discuss this until it was done, and without knowledge of this essential fact discussion of Britain's economic crisis was futile.  furthermore, discussion of currency matters had been excluded from the agenda of the American-British-Canadian meeting, since they fell within the jurisdiction of the Fund, about to convene its annual meeting.

The first few days of the the meeting were everything a conference should not be, and too many are--a complete waste of time with rising exasperation among the conferees.  Hoffman announced that the European Recovery Program would be completed in 1952 and that the European countries should plan to have the balance-of-payments problems solved by then.  The American delegation turned down a British request to waive Article 9 of the British-U.S. Loan Agreement of 1945-46, prohibiting discrimination against United States exports (how amusing; how quaint; discrimination against United States exports - this hearkens back to a much different day - now that we have NAFTA, CAFTA, etc, etc, etc, and basically do not give a flying fig about the American worker, whose wages, when adjusted for inflation have stagnated (rather than declined) only because the American worker's spounse (in many situations) too has gone to work), in an effort to lessen the outflow of dollars (the dollars are leaving, the dollars are leaving!).  Then Paul Hoffman, who had an evangelical delivery and faith in salvation by esports, exhorted the British to forgo the easy markets of the sterling area, cut their costs--which obviously included wages and some of the welfare state--and earn dollars by exporting to the American market.

This was too much for Ernie Bevin, who ... [departed] from the scenario, much to his colleagues' confusion, and having a go at this economic ecumenicism.  He had been interested, he said, for many years in British industry and several times he had heard free traders urge the British workers to make the sacrifices necessary to compete in the great American market (so now, perhaps someone ought to urge American workers to make the sacrifices necessary to compete in the great world market, especially against companies that pay their 18-22 year old female workers $0.25 per hour, which, any Republican will assure us, is a wage such workers are HAPPY to get, for the privelege of working 12-16 hours a day, 6-7 days a week).  Every time, as soon as they made a little progress, the Congress set up a howl about cheap foreign labor and raised the tariff to new heights, the last time in 1930.  He was not going home to flimflam the workers again.  Mr. Hull had done a fine job, but imports during the Depression and he war had not been a big factor in the American market.  Would we guarantee that if Europe sought to balance its payments by exports to the United States, congress would let them come in?  There was a good deal of sense in this and plenty of vigor.  "Even the ranks of Tuscany could scarce forebear to cheer."

However, this polemical exchange did convince the British that at least the principal American and Canadian representatives must be told [about the devaluation] ...

Once we knew the facts, our meeting got down to the business of improving the British economic position. ... [D]ue to an [unexpected] improvement in the [economy] ... the devaluation was more effective than any of us had thought it would be ... [t]his [ensuing] recession proved to be short-lived; our recovery and cheaper sterling prices increased our buying.  This, when the Korean war started in the middle of the next year, created problems through its excesses.

Before recovery had started, however, we talked among ourselves about Britain's still-unsolved basic dilemma, a British politician's nightmare.  This was to tell the workers and voters (and still hope to stay in office) that they must work harder and get paid less (we don't do this in the U.S. -- rather, we tell the workers they must work harder and get paid the same, and have their benefits reduced, or even eliminated ... and our workers are so terrified of losing their jobs, that, by and large, they keep re-electing the same representatives to office) --for a time, at least--and, at the same time, tell the Commonwealth that their sterling deposits were really long-term investments and not available in cash of goods on demand.  It seemed to us that, before the fundamental weakness of the British financial situation could be cured (the biggest weakness being that they could not print U.S. currency to keep up their reserves), there must be some refunding of the sterling balances and, with outside help, some reform of the British role as the international banker and its incorporation in a larger and more inherently solvent arrangement.  but this was something that one could not usefully discuss with the British except in time of crisis, and the recovery in 1950 ended that.  The problem, however, still remains and darkens the entrance to the Common Market.