Page 164 - DECO303_INDIAN_ECONOMY_ENGLISH

Unit 9: Indian Currency System

respective shares in real national income. The unions pushed for real wages growth that at Notes
times exceeded the growth in productivity and capital pushed for increases in real profit
margins at the expense of the workers real wages. Each group used their individual price
setting strength (unions to push for higher money wages and firms to raise prices) to react
to a claim by the other for a higher real share.
The result was a creeping inflation problem and rising costs which undermined Britain’s
trade position. By the end of the 1950s, Britain was finding its dominant trade strength had
waned significantly. While much of the focus was on the so-called abuses of trade union
power there was also a noted lethargy on behalf of British industry to invest in latest
technology and drive labour productivity higher. The United Kingdom’s balance of
payments situation was becoming more influenced by monetary movements than by its
current account (trade position) which exacerbated the sensitive of the currency parity to
economic growth and meant the stop-go nature of economic development was accentuated.

In 1964, the continuing themes of persistent domestic inflation, a current account deficit
and loss of confidence in the currency were dominant policy issues and the Government
responded in 1965 with some limited austerity measures but overall unemployment fell
and the budget deficit widened.
Wages growth kept domestic demand strong and to formalise the government’s desire for
wage restraint, they introduced the National Board for Prices and Incomes in 1966 to
produce and enforce wage guidelines. Throughout this period, the British economy was
struggling with the seemingly incompatible goals of maintaining strong domestic growth
with rising living standards and managing its external payments situation. Of course, the
reason for that incompatibility was the rigid view that the British authorities had with
respect to maintaining the sterling parity.

But the current account was in deficit through 1964 and 1965 with a drain on reserves
leading to another drawing from the IMF in May 1965 of $US 1,400 million, the second
largest to that date and the Fund’s sterling holdings were equal to 198 per cent of Britain’s
quota. The restoration of reserves combined with the tightening of domestic policy saw
the trade position move into a small surplus by the end of 1965.
Both Britain and the US, introduced various constraints on international monetary
movements in 1965 to reduce the net outflows of their currency, an increasing source of
weakness. The following graph is taken from Boughton (2000: Figure 1, Page 23) and
shows the IMF financial assistance to member-states between 1948 and 1999. The two
major UK drawings in 1961 and 1965 feature prominently.

Figure 1: IMF Lending, 1948-1999

Contd...

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