Shrinking Sterling's Role

Once again, the central bankers of Western nations rallied last week to support the pound sterling. They agreed to give Britain $2 billion of stand-by credit. This time, however, Britain's creditors insisted on tough new terms to correct the anomaly of a country that seeks to retain prestige as an international banker while remaining perennially broke. The outcome was a plan to reduce--and perhaps gradually end --the pound's function as one of the world's two reserve currencies.

That role, which the pound shares with the U.S. dollar, has long strained Britain's resources. Accordingly, the plan lifts some of the burden of maintaining a reserve currency from beleaguered Britain, shifting the cost to the multination Bank for International Settlements in Basel, as backed by the central banks of 13 industrial countries.* The London Times said approvingly: "Britain has placed the pound in the hands of the public receiver."

Technically Insolvent. The aid package involves a fundamental if delicately controlled change in the world's intricate monetary system. Other nations hold pounds and dollars, along with gold, as reserves to help underpin the value of their own currencies, using them to bankroll trade and settle international accounts. British pounds constitute the main reserve asset for the 66-member sterling area, which consists of British dependencies and Commonwealth members (except Canada), plus Ireland, several Arab and a few Asian states. When Britain devalued the pound last November, the value of these other countries' reserves fell 14.3% overnight.

Fearful of a second devaluation, many sterling-area countries this year have been busily selling off large amounts of pounds. As a result, Britain has been forced to dip into its own gold and foreign currencies to buy sterling in order to keep the pound from falling too far below its $2.40 official price in foreign exchange markets. By midyear, British reserves had shrunk to $2.7 billion, less than half the amount of pounds held by individuals and central banks in the sterling bloc alone. With huge liabilities to many other countries as well, Britain was technically insolvent.

There is general agreement that Britain has made an honest stiff-upper-lip effort to right its economy. The fact remains that the country's balance of payments problem is chronic, despite such stringent measures as devaluation of the pound, a bare-bones national budget, tight wage controls and heavy new taxes.

Thus, Britain had little choice but to accept a lesser role in international finance. "The alternative might have been chaos," said Sir Leslie O'Brien, the governor of the Bank of England. "Our performance since devaluation has been disappointing, but I believe we will get it right. We have got to get it right."

Sudden Smashup. Before the central bankers hammered out final details of the scheme in Basel, the signs of a monetary storm were all too evident. Buffeted by the Czech crisis and persistent clamor for an upward revaluation of the strong West German deutschmark (a move that was drawing money out of London), the pound had sunk to within a whisker of its post-devaluation low of $2.38 1/4 in foreign exchange centers. Harold Lever, financial secretary to the British Treasury and a key figure in selling the scheme abroad, noted: "If the agreement had not been achieved, there would have been a real danger of sudden and uncoordinated disintegration of the sterling area and a tremendous smashup of the international monetary system, including the dollar."

That threat now seems averted for at least several years. Britain can draw upon its new funds from the Bank for International Settlements for three years, will have until 1978 to repay.

Some of the money will finance further withdrawals of the London reserves of sterling-area countries. But the amount has now been limited by individual agreements with Britain. If the British devalue the pound again, they will have to compensate their sterling allies for most of their losses. The bankers intend to give the British economy time to recover. If it does, the pound could possibly thrive again as a center of international finance. Even if it does not, a diminished role for sterling may help avert some of sterling's recurrent crises.

*Austria, Belgium, Canada, Denmark, The Netherlands, Italy, Japan, Norway, Spain, Sweden, Switzerland, West Germany and the U.S. France refused to participate for the time being.

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