As the AUEW prepares for a struggle around Police escort scabs through picket lines ACT The pound sterling has for a year or more been like a tight rope-walker, perilously balanced on a frayed rope and holding a balancing rod which is much heavier at one end than the other. Last week it faltered once again and the capitalist world held its breath.
Over the two weeks up to 7 September, the pound fell 2 per cent in value. On that day it fell another 2 per cent in two hours, until the Bank of England began to pour in the reserves to keep up the rate. In spite of frantic efforts to persuade capitalists and governments to keep their money in London, by means of interest rates which are higher than ever before in this country, sterling is now worth nearly 20 per cent less in comparison with all other currencies than it was at the time of the Smithsonian agreement in December 1971. In comparison with the West German mark alone it is now worth over 40 percent less than then.
And yet, in spite of what should be a massive competitive gain for British capitalists, the balance of payments continues to worsen every month. In fact, the volume of exports has risen quite fast; the balance of payments has become so bad because the price of imports, especially of raw materials, has risen so fast. But faced with the same rise in raw material prices the German balance of payments, for instance, continues to flourish. What happens is that the potential gain which devaluation gives to exporters (who can lower their prices, or raise their profits without charging more has been largely offset by the contrary effects of devaluation in magnifying for British producers the rise in costs coming from rising world commodity prices.
Given the catastrophic balance of payments figures, it is surprising that the devaluation of sterling has been limited to 20 per cent. Figures released last week show both how serious the situation is and exactly how the balancing act has been accomplished. For the first six months of the year the 'current balance' (the balance of trade in goods and services) showed a deficit of £512 million, and it worsened steadily throughout the period. This didn't lead to an expected decline in the reserves. In fact they increased -mainly because the nationalised industries were instructed to meet all their needs for capital expenditure not from normal borrowing on the British capital market but by borrowing in Europe and Japan. For the second quarter of the year it is now known that this foreign borrowing amounted to as much as £290 million, and was probably nearly as much in the previous quarter. It was just about enough, in other words, to balance the gigantic deficit on trade and services and so largely explains why sterling has not yet collapsed even more rapidly. But foreign borrowing is no long term solution to the deficit, since the investment needs of the nationalised industries will decline and the borrowing itself demands a huge future outflow of currency to pay the very high rates on the loans. It was partly this fact which led the speculators to flee from sterling again in the last week. Also they feared the expiry of the dollar guarantee which the Tory government was forced to grant last year to foreign government holdings of sterling. They have now been forced to renew this guarantee.
The fact that about £3000 million worth of sterling reserves are guaranteed in this way (i.e. given a fixed rate of exchange with the US dollar) explains why recent falls in the value of the dollar have always carried sterling along with them. Now, however, with a recent improvement in the American balance of trade, and a continued worsening of the British one, sterling is the weakest of the major currencies. If it slips, Heath's precarious economic strategy will tumble with it.
Michael Price