it's been a bad year for sterling. During recent weeks, the pound has plunged to?
it's been a bad year for sterling. During recent weeks, the pound has plunged to new lows as Britain's inflation and economic crisis worsened. At the beginning of this week, the pound had reached a record depreciation of 29.2 per cent. And since it's a major international trading currency, fluctuations in sterling bring international repercussions.
The fall in sterling, the sharpest in recent years, has prompted the government to take emergency action in an effort to combat inflation -- threatening immediate legislation unless employers and the unions agree to voluntary restraint on wages. The aim is to cut inflation from 25 to 10 per cent.
The Bank of England is at the centre of every sterling crisis. On this occasion, while leaving the most drastic action to the government, the Bank did move in to support the pound and try to increase confidence. This support comes in the form of buying pounds in the international currency market.
But it's an expensive tactic, since to accomplish it the Bank has to spend Britain's precious currency reserves. And last month, the reserves showed a further sharp drop of GBP134 million (293 million dollars).
The general management of sterling is one of the principal functions of the Bank. It also manages the national debt, issues stock to raise money for the Government's budgeting on public works and nationalised industries, receives taxes into the Exchequer, and guards the gold and foreign reserves -- not only for Britain, but for many foreign countries as well.
This present coverage examines the traditional role of the Bank of England in view of the current sterling crisis.
SYNOPSYS:Printing your own money the sure way to inflation. The currency in this case is sterling. And, sure enough, the pound is one of the world's crisis currencies at the moment. This week, with the poind dropping to record low levels on the world money market, the British Government took drastic action to reduce the money flow... and cut down on the disastrous drain on the gold and foreign currency reserves guarded here in the Bank of England.
Even in the middle of a sterling crisis, the Bank of England preserves a traditional British air of calm and imperturbability..... although, as last week, it could be spending those precious reserves to support sterling on the world markets.
In the eighteenth century splendours of the Bank's London headquarters, the Governor and his deputies -- all experts on finances, commerce or labour -- meet each week to discuss the flow of money in Britain. At present it's linked critically to labour. And this week, the Government threatened legislation unless pay increases and dividends are voluntarily restricted to ten per cent.
The Bank's dealings are intricately linked to the stock exchange. When the pound plunged against foreign currencies last week, ordinary shares and Government stocks also dropped to their lowest levels for the Bank to intervene in an effort to restore confidence.
The Bank prints and issues Government stocks. That's how the government finances new public works -- big and small -- and raises money for the nationalised industries. Stocks are always bring issued to raise new money -- as much as four thousand million pounds per year. Simultaneously, the Bank itself deals in stocks, buying and selling under the most favourable conditions to ensure that the cost of Government borrowing is kept as low as possible.
To the man in the street, then most familiar function of the Bank of England is to print the banknotes. Though the value of the pound in the pocket has fallen drastically in recent years, the amount of money in circulation remains relatively constants -- six million new notes are printed every day, six million old ones destroyed at this printing factory in eastern Engalnd.
Today, the future of the pound is full of unanswered questions. In the short term, the credibility of sterling depends on the British Government's action to curb wage increases and cut inflation from the present twenty-five per cent to ten per cent. Otherwise, financial experts fear that foreign investors in Britain, particularly the Arab oil producers, could lose faith in Britain as an investment...and the Government could find its ability to raise money by negotiating loans abroad impaired. The initial signs were hopeful. As soon as the Government's action against inflation was announced last Tuesday, the pound's decline was sharply halted.
Overnight, the value of sterling went up one per cent against other currencies. But Britain has to stop acting like a country with money to burn if the pound is to remain one of the world's major currencies.