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Analysis
Witteveen’s warnings for policy-makers

Witteveen’s warnings for policy-makers

The Ghost of Britain’s monetary Christmas past

by David Marsh in London

Wed 14 Dec 2016

When the US is about to raise interest rates for only the second time in 10 years, the world would do well to heed the Ghost of Monetary Christmas past – Johannes Witteveen.

The former managing director of the International Monetary Fund was in London last week to commemorate the anniversary of a clandestine Yuletide visit to Downing Street, the home of the British prime minister, in December 1976.

Among the lessons of the 1976 sterling crisis commemorated by Witteveen, one stands out: when international confidence in a nation’s economy starts to plummet, for whatever reason, it takes a mighty effort to win it back again. Countries around the world might be reliving this effect as the dollar’s ascent gains further momentum in the wake of Federal Reserve tightening.

Witteveen, an alert-minded 95-year-old, was the boss of the Fund in 1976 when the UK was forced to turn to the IMF for a $3.9bn loan to stem a balance of payments crisis. He came back to London last week for a presentation at the British Treasury, presided over by Tom Scholar, permanent secretary to the Treasury, on the wrenching episode 40 years ago – and the parallels to today’s perturbations in the UK and the rest of Europe.

As Witteveen put it in a wry introduction to his speech, inviting back a former managing director to commemorate a stand-by credit in fraught political circumstances four decades ago is not an everyday occurrence. In London, as in his home country, Witteveen – Dutch finance minister during two spells in the 1960s – is not loath to step into the contemporary political fray. He castigated European nations (including the Netherlands) for an overdose of austerity that he said was turning voters away from European ideals.

Paying tribute to Witteveen as a ‘man of integrity and courage’, Lord (David) Owen, who was a junior minister in the Callaghan government in 1976 and became foreign secretary the following year, said the former Dutch finance minister paved the way for a ‘restoration of confidence’ in the UK.

In the series of issues debated during his London trip, involving many discussions with players in various monetary dramas past and present, three warnings for today’s policy-makers are of particular significance.

One is the importance of relationships with the US. The dollar – in 1976 as today – is the world’s supreme currency, as the manifold contemporary strains affecting all the other four reserve currencies – the euro, yen, sterling and renminbi – remind us. Washington is the ultimate source of power, for better or for worse. And America is the dominant capital market. For any country in balance of payments difficulties, ties with the US play a crucial role. This is an uncomfortable fact with which leaders will have to come to terms as Donald Trump prepares to move in to the White House. Witteveen revealed that he made his historic journey trip on 1 December 1976 to negotiate with James Callaghan, the prime minister, at the personal behest of President Gerald Ford, communicated to him via William Simon, the Treasury secretary. One of the highlights of his sojourn last week was a renewed visit to the Cabinet room at 10 Downing Street, the scene of parleying with the prime minister in 1976.

A second moral of the tale is the importance of foreign exchange reserves. The issue is much in the headlines after a sharp increase in official foreign exchange holdings over the past 20 years, much of it in Asia, as countries build up ammunition against potential shocks. One of the reasons for disquiet about the renminbi has been the fall of nearly $1tn in China’s reserves over the past two years, down to just above $3tn, as the Beijing authorities fight off an even steeper depreciation. For its part, in a little-noticed move by the British Treasury announced inn 2010, the UK government has more than doubled the level of reserves – up to $140bn now from $50bn or less before the 2008-09 crisis. This is a decision the Treasury has implemented continuously in recent years as part of a long series of adjustments to past exchange rate shocks including the experience of 1976.

The third lesson from the past relates to unity. Lord (Bernard) Donoughue, an adviser to Callaghan in the 1970s, highlighted the dangers of public disagreement between leading members of the government, emphasising how Callaghan did everything he could to paper over considerable cracks in the Labour cabinet. At a time when the UK government is deeply riven by differences in negotiating tactics among members of Theresa May’s team, this was a message not lost on the 150-strong Treasury audience.

David Marsh is Manging Director of OMFIF.

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