The Price of Economic Freedom: A Guide to Flexible Rates

113 Pages·1970·10.16 MB·English

by  Samuel Brittan (auth.)

The Price of Economic Freedom:
A Guide to Flexible Rates
By the same author
Steering the Economy: The Role of the Treasury
Left or Right: The Bogus Dilemma
The Price of
Economic Freedom
A Guide to Flexible Rates
SAMUEL BRITTAN
Palgrave Macmillan
ISBN 978-1-349-00998-5 ISBN 978-1-349-00996-1 (eBook)
DOI 10.1007/978-1-349-00996-1
©Samuel Brittan 1970
Softcover reprint of the hardcover 1st edition 1970
All rights reserved. No part of this publication may
be reproduced or transmitted, in any form or by any
means, without permission.
First published 1970 by
MACMILLAN AND CO LTD
London and Basingstoke
Associated companies in New York Toronto
Dublin Melbourne Johannesburg and Madras
SBN 333 11706 9
Library of Congress catalog card no. 73-130745
Contents
List of Illustrations vii
Introduction: The Balance of Payments Myth XI
PART I: THE SELF-INFLICTED STRAITJACKET
I The Present System 3
2 Other Systems 6
3 Exchange Rates and the Balance of Payments 9
4 The Current British Situation 13
5 The Wider Effects of 'Fixed Rates' 21
PART II: THE CASE FOR FLEXIBILITY
6 Are Exchange Rates Important?
7 Objections to Floating Rates
8 Sliding Parities, the E.E.C. and the Outlook
Conclusion
Appendix: Inflation, Employment and Growth
Notes and References 96
Index 99
A2
List of lliustrations
Fig. 1. Prices of Exports of Manufactures 40
Fig. 2. Exchange Rates in the 1930s 6o
There still prevails, even in nations well
acquainted with commerce, a strong jealousy
with regard to the balance of trade, and a fear
that all their gold and silver may be leaving
them.
David Hume, Of The Balance of Trade (1742)
Introduction: The Balance of Payments Myth
During the whole of the last decade the nation was exhorted by
politicians, television programmes and many very worthy bodies to
accept two beliefs: (a) that the balance of payments was the biggest
industrial, economic, political and even moral problem the nation
faced, and (b) that it was the personal responsibility of every citizen. A
moralistic approach to economics prevailed in which specialised com
mentators were asked on television if people could feel less guilty when
the trade figures improved. There were documentary films, business
conferences, books, pamphlets and poster campaigns emphasising the
sinister threat of national bankruptcy, and our individual duty to work
harder to prevent it. Some of these - to the embarrassment of their
authors-saw the light of the day in the early months of 1970 when the
British balance of payments had, according to the official figures, never
been 'better'. Even then the syndrome did not disappear, and the most
serious statesmen, diplomats and even official economists believed that
the biggest obstacle to Britain joining the E.E.C. was the balance of
payments cost.
This book has three main objects. The first is to explain why the
balance of payments is a pseudo-problem, artificially created by the
attempt to freeze exchange rates and/or mistaken domestic financial
management. But like all self-created problems, it is capable of doing
untold harm if allowed to persist. If exchange rates were flexible, as
advocated in the following pages, there is a very high probability that
the balance of payments would be relegated to a very minor place
among policy questions for any country that conducted its affairs with
reasonable - not ideal - prudence.
The years of passing the begging bowl around the I.M.F. and central
bankers, and the imaginary picture of national poverty conjured up for
so long, were, I shall argue, quite unnecessary. Yet if we attempt to
stick to a rigid exchange rate these events could all too easily recur.
Nothing would be more foolhardy than to predict what the balance of
payments will be when this book appears in the reader's hand. The only
certainty is that under a fixed exchange rate it can change with lightning
rapidity. This book is going to press in Spring 1970, at a time when on
Xll THE PRICE OF ECONOMIC FREEDOM
almost any defmition Britain has a larger surplus than any country
in Europe or North America. Yet only nine months previously the
world's fmancial statesmen were alarmed at the persistence of an
apparently incurable British deficit, and the letters oft he Greek alphabet
were nearly exhausted in devising contingency plans for different types
of emergency.
Thus, however good the balance of payments figures for 1970 appear,
it is far too early to say that the pseudo-problem of the balance of
payments is a matter of history. (Nor should one forget that there
would also be troubles and embarrassments of a less familiar kind if a
fixed exchange rate were to lead to a large and continuing surplus.) It is
important to expose all the recent propaganda which saw the balance of
payments as a battle for national survival as the confidence trick that it
was, if we are to avoid being taken in on future occasions.
This basic argument, which occupies the first part of the book,
should be of interest to anyone who has followed British politics and
the way it has been dominated by mysterious payments crises and
equally mysterious periods of apparent recovery. The second aim of
this work is to outline in a little more detail in Part II the positive case
for flexible exchange rates and in particular to discuss the objections
raised by those who are sceptical of the idea. The 'question and answer'
approach adopted here (as well as in some pages of Part I) is for the
reader's convenience and is not intended to convey an impression of
omniscience. Part II covers both floating exchange rates, in which the
price of a currency would be determined by supply and demand in the
market place, and compromise plans for limited flexibility under which
exchange rates would change more easily and more gradually than
under the present system. There is some discussion of what is probable
as well as of what is desirable (pp. 88-9) and Chapter 8 includes a dis
cussion of the effects of joining the E.E.C. Although written from a
definite point of view, I hope that this book will elucidate and inform,
as well as persuade. For its third purpose is to provide an outline guide
to the basic economics of exchange rates, reserves and the balance of
payments, which will be useful even to those who do not go along with
all the policy conclusions.
It is best to explain at the outset in what sense the balance of payments
is a pseudo-problem. Examples of real problems include the pressure of
population on limited land in the South-East, bad industrial relations,
or an unsatisfactory productivity performance. These cannot be tackled
by a uniform alteration in any set of numbers. If wages and prices were