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Pound Watching: Thatcher to the rescue

4 minute read
John S. Demott

Like the Royal Navy and India, the pound had always been a jewel in the British imperial crown. But last week the government of Prime Minister Margaret Thatcher had to rush to rescue the once proud pound from sinking below $1 in value. The pound has always been something of an anomaly in international currency markets. While it takes several deutsche marks or French francs, and hundreds of Japanese yen, to equal one U.S. dollar, the British pound is the only major Western currency worth more than a dollar. In 1949 a pound was worth $4.03, and as recently as 1980 it was $2.41.

At the start of last week’s currency trading, however, the pound had dropped to $1.1132 in London and only slightly more in New York, and it was sinking fast. Prime Minister Thatcher, an ardent champion of free markets, had always opposed official attempts to prop up a currency’s value, but enough was enough. Said one minister: “No government sits on the sideline and lets its exchange rate disappear into the sea.” On Monday the Thatcher government ordered the Bank of England to boost its prime lending rate from 10.5% to 12%, forcing corporate rates and home mortgages even higher. The new interest rates halted the fall of the pound by attracting new foreign capital into the country. During the rest of the week, the pound rose slightly and closed on Friday in New York at $1.1210.

The latest run on the pound was triggered primarily by concerns about the future of world oil prices. Because of the current glut in crude, petroleum + prices have been sliding for several months. Britain earns nearly $13 billion from the export of oil, and lower prices would be a serious blow to its economy.

The sinking pound was a new and embarrassing political problem for Thatcher. Opposition Leader Neil Kinnock called her handling of the crisis an “epic of bungling indecision.” Two weeks ago, Thatcher’s press secretary, Bernard Ingham, aggravated the tense situation by telling reporters that they could be “absolutely certain that we are not going to defend” a particular value of the pound. That unfortunate remark helped speed the currency’s slide and forced Thatcher to abandon her hands-off policy.

The pound’s troubles brought a sense of urgency to a routine meeting in Washington of finance ministers from the U.S., Britain, France, West Germany and Japan. After the session, Treasury Secretary Donald Regan said that the U.S. had eased the conditions under which it would intervene to try to influence prices in the currency markets. Said Regan: “We are willing to undertake coordinated intervention when we agree that it would be helpful.” Previously the Administration had said it would buy or sell dollars or other currencies solely to prevent “disorderly” markets. The Government intervened only in such serious situations as after the shooting of President Reagan in 1981 and during the near collapse last May of Chicago’s Continental Illinois bank.

Treasury officials, however, quickly pointed out that there has been no change in the Reagan Administration’s opposition to fixing the dollar’s value. Said one senior aide: “The basic view remains that intervention against market forces is like spitting into the wind.”

Nonetheless, American officials are not totally happy about the overly strong dollar. During the past year alone, the U.S. currency has risen an average of 15% against those of its trading partners. Says one key Federal Reserve official: “As a central banker, I like a strong currency. I also like chocolate sundaes, but that doesn’t mean that I want one every hour.” The high dollar value has hurt U.S. exports of farm and industrial goods, pushing up the U.S. trade deficit.

American tourists have happily profited from the falling pound. Thousands have jetted off to London to snatch up woolens, suits and china at bargain prices. Just before New Year’s, Harrods, the stylish department store, took out a full-page ad in the New York Times to attract U.S. customers to its | annual post-Christmas sale.

Although Thatcher’s action last week stemmed the pound’s decline temporarily, the long-term effectiveness of such rescue efforts is questionable. During the past few years, several governments have attempted to intervene unilaterally in world money markets in order to push the value of their currencies up or down. They have had only brief, limited success. Ultimately, the markets determine a currency’s value.

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