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