Financial Resource

difficult to envisage a situation in which the UK would be planning to be short of foreign exchange in 15 years’ time than the UK were in the late 1960s. However, taking this scenario into account, this would mean that the UK could expect to have a fall in the preference rate over this period. This in turn meant that some subsidy would be justified.

This example was for a 15 year bond with a 7% British interest rate, and the preference rate falling from 20% to 10% between which the time the loan is contracted and the time the first interest payment falls due. The foreign currency borrowing would be socially preferable if the foreign interest rate is less than 7.97%, including exchange risks. Also, the difference in argument between the first framework and the second framework is the fact that the critical foreign effective borrowing rate should be the domestic interest rate plus the differential between the discount rates for domestic resources and foreign exchange, rather than the discount rate for foreign exchange.

Result

The UK Government completely agreed that the argument in favour of borrowing overseas depends on the interest rate differential between foreign funds and home funds being less than the differential between the discount rate on foreign exchange and the discount rate on domestic resources. That one only gets a difference between the discount rate on foreign exchange and the discount rate on domestic resources if the premium on foreign exchange is expected to change over the period of life of the proposed foreign borrowing. Also, the fact that there was not point in borrowing abroad just to pay it back tomorrow unless either:

(i.) The UK could put the real resource counterpart to use at home, to the UK’s profit; or

(ii.) The UK expected foreign exchange to be cheaper, or in some sense less valuable, tomorrow than it is today.

Taking this into account, with the first point was being ruled out, the second point was the only alternative left. Nevertheless, if the notion that UK preference for foreign exchange need not decline through time was assumed, the result would be that foreign borrowing is undesirable. However, due to the UK’s reserve situation in the 1960s in principle, foreign currency borrowing remained an alternative to other forms of borrowing, ways of liquidating existing assets, and reducing the UK’s overseas investment flows.

F. Conclusion

Ministers had for some time thought that medium and long-term borrowing abroad by public corporations and local authorities would make a significant contribution to the UK’s debt refinancing problems, even though the amount of borrowing that these bodies could do in overseas markets would in marginal be in relation to their total requirements. The chancellor shared this view, as did the Governor of the Bank of England, who reported that some of his central banking colleagues had expressed surprise that the UK Treasury had not so far taken advantage of the opportunities open to the UK in this direction. Some of the nationalised industries were keen to undertake such borrowing, and the UK had been equipping them with the appropriate powers when legislative opportunities had arisen. The Electricity Council and Gas Council already have powers, and the British Steel Corporation were to follow. In the local authority field, relatively few authorities had powers to borrow abroad; and there was a tax impediment in that the provision in the 1968 Finance Act enabling domestic concerns borrowing abroad to pay interest gross did not in its present form apply to local authorities. To get over this difficulty meant that legislation was required in the 1969 Finance bill, as the GLC were known to be interested in borrowing abroad, and other authorities would follow the GLC’s lead.

However, it became clear that neither the nationalised industries nor local authorities were likely to take advantage of the opportunities to borrow abroad, despite the lower levels of interest rates in some of the international capital markets, if they themselves had to shoulder the exchange risk. The Chancellor therefore approved a scheme which in suitable cases, the Exchange Equalisation account would in effect take the exchange risk, in return for a charge to the borrower which will be calculated as to leave the borrower with an interest rate advantage of ¼% a year as compared with borrowing from the National Loans Fund.

The Chancellor also considered whether this arrangement would prompt pressure for similar treatment for the private sector. As most private overseas borrowing by UK concerns at the first quarter of 1969 was to finance overseas investment in accordance, with the UK’s Exchange Control rules. The Chancellor decided that the government would not encourage borrowing by British companies for domestic expenditure, which would be in some respects at odds with current policies designed to squeeze liquidity. The defence to this decision was that the British Government were favouring the nationalised industries and the public authorities when pursuing its policies. These “business interests” was part of a controlled programme of overseas borrowing which would advantage the UK’s balance of payments, and the UK Government was not proposing to operate this programme through the private sector.

ENDNOTE

This paper is based on the following PRO Files:

PRO PREM 13/2593: Prime Minister Files, “1969 UK Economic Policy”, (January 1969 – April 1969)

PRO T 312/1772: Foreign currency borrowing in overseas markets by (1) the UK Government (2) public corporations and local authorities. File Number: 2F 403/229/02 “PART A”.

PRO T 326 “series”: This involves a review of a range of PRO files involving: T 326 816, T 326 817, T 326 455, T 326 678, T 326 819, T 326 822, all involving, Borrowing abroad by local authorities and nationalised industries, (January 1964 – December 1969). File Number: 2-FH 3/116/03 “Part A-N”

HITESH PATEL – About the Author:

Source: http://www.articlesbase.com/economics-articles/british-economic-policy-of-the-1960s-and-the-euro-224223.html

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