IN INTERNATIONAL FINANCE, it's generally the disasters that attract attention. But one current success, the rescue of the British pound, deserves both attention and applause. It is a historic moment, for the British have agreed to end the role of the pound as a reserve currency. But there is much more to it than that. What has occurred in Britain could provide some very useful precedents for helping other countries in financial trouble.
Whe the pound started its long and dangerous slide last spring, the other rich countries quickly put together an emergency loan for Britain. But they told the British that, for the longer term, help would have to come from the International Monetary Fund. The IMF sets conditions on its loans, and those conditions would require Britain to cut its deficits and its expected levels of spending on social welfare. A long, tense debate ensued; it ended in December with a $3.9 billion loan from the IMF and the announcement in London of certain spending cuts.
But what about the official sterling balances, which had played a particularly damaging part in the pound's decline? They are the pounds belonging to foreign governments, which had been selling and depressing the pound well below its commercial value. Britain will now offer these governments a substitute, in the form of bonds denominated in other currencies like dollars or German marks. Perhaps some governments will continue to hold their pounds for the present, but will take fright sometime in the future and suddenly dump them. At that point, Britain can call on $3 billion in standby loans from its economic allies to maintain its equilibrium. In return f4or this financial insurance policy, Britain has made a promise: not to take in any more deposits from other governments.
London will continue to be a world center of finance. Foreigners doing business in Britain will continue to have balances in British banks. But foreign governments will no longer send their cash to Britain for safe keeping and high interest.
Agreements of this sort are extremely difficult to work out, for the conditions reach deeply into nations' domestic political affairs. But Britain's acceptance of the rules has a meaning that goes far beyond the present case. Lined up behind Britain are a great many other countries in need of international financial support. The list begins with Italy, Brazil and Mexico. If a nation of Britain's stature accepts this kind of financial conditions, the others must take them for granted.
These loans and agreements will hardly cure the ills of the British economy. Their causes run far deeper. but the IMF, and the nations that lead it, have prevented the kind of monetary crisis that paralyze commerce and destroys jobs in a widening spiral. The perils of the pound, over the past year, have been a great test of the strength of the international monetary system. The system worked.