ECONOMICS: The Quiet Crisis

Some international crises get into the headlines and some, no less real, hang quietly and ominously in the air. One of the quiet sort is now building up. Until a few months ago Britain’s recovery was one of the most hopeful signs in the world picture. In April, British exports to the U.S. dropped 38% below March, widening the famous “gap” between what Britain has to pay out for dollar imports and what she can sell for dollars.

Unchecked, this trend could set off a series of reactions that would run through the world, canceling out many of the EGA-inspired recovery gains of the last year. Naturally, speculation as to how to check it runs through world capitals. There is renewed and insistent (but muffled) talk of devaluing the British pound as a means of regaining Britain’s markets.

Unrealistic. The pound exchange rate is now fixed by Britain at $4.03. This rate has long been unrealistic in several senses. The easiest comparison is with free exchange rates in other countries. The pound now sells legally for $3.15 in New York and for $2.92 on the free market in Paris. These bargain pounds, however, cannot be legally taken into Britain (except for a £5 tourist allowance), and cannot be used in open commercial transactions for British goods. A much better comparison supporting the argument that $4.03 is an unrealistic rate is the fact that $4.03 will buy more of most goods inside the U.S. than £1 will buy in Britain.

In the postwar shortage of goods, the fact is that the overpriced pound was not a disadvantage. Buyers wanted the goods badly enough to buy, no matter what the price tags said. Now, however, world production is catching up with demand. Sellers have to compete because buyers turn away from the high price tags.

The U.S. domestic price level has been falling since last September. That means that a dollar buys more than it did last year. This, in turn, means that a pound buys still less, relative to $4.03, than it did a year ago. In other words, any British price tag, unchanged for a year, is now really higher because the dollars needed to buy the pounds to buy the article are worth more than they were before.

That is why Britain is finding it harder & harder to sell in dollar countries. In a few other countries, e.g., Belgium and Italy, British export trade is running into trouble for the same reasons, but, in general, the pound position as against other “soft” currencies has strengthened rather than weakened. In other words, if the British cut the official rate to, say, $3.50 in order to get in line with the dollar, other countries would devalue their currencies to get in line with the pound.

Most experts agree that this general “revaluation” has to come sometime. The question is when.

A growing body of U.S. opinion answers, “Soon.” U.S. Secretary of the Treasury Snyder is about to leave for Europe in a mood to ask European financial authorities why general devaluation, beginning with the pound, should not start.

Unstable. He will get no comfort from Britain’s Sir Stafford Cripps, who has repeatedly said that he will not devalue. Cripps stands on the flat statement; he will not argue. One of his associates explained last week: “It’s the unmentionable subject—like a lady’s reputation.” One man who recently talked devaluation with Cripps adds: “He would resign rather than devalue—and he is not in a resigning mood.”

Although Cripps will not state it publicly, the British case against devaluation at this time is a tough one to answer. It runs like this:

“True, devaluation would make British exports easier to sell, but it would also make Britain’s imports cost more in terms of sterling. Imports are already cut to the bare essentials. We are more certain that devaluation will increase the cost of imports than we are that it would increase the volume of exports. In the face of the U.S. recession, how do we know we can sell more British goods in the U.S. even if devaluation lowers the dollar price tags? If American domestic prices continue to fall, we would merely have to devalue again. The time to devalue is when U.S. and Continental internal price levels have attained stability.”

To this may be added another cogent argument which few Britons are candid enough to make, even privately. It runs:

“The real trouble with British exports to dollar areas does not lie in exchange rates, but in Britain’s high production costs. Get away from currency entirely and express these in man-hours per unit produced. The British product costs more than the U.S. product because British production is less efficient. No matter how she fiddles with the currencies, Britain cannot expand her U.S. market on a long-range basis until real costs are cut by more efficient machines, management and labor. The present crisis is a powerful pressure on British management and labor to become more efficient. Devaluation now would simply give them a temporary breathing spell and let them go on in the same way until they faced another devaluation.”

Good as this argument is, determined as Cripps is that there shall be no devaluation, it may come anyway. The very talk of devaluation persuades Britain’s potential customers to postpone orders in the hope of being able to pay for them later in cheaper pounds.

Cripps, silent and icy-calm, is caught between powerful forces. He is not going to find an easy way out.