12 May 1988 - 14 May 1988

Managing Exchange Rates in a World-Wide Economy

Chair: The Rt Hon the Earl of Limerick KBE

The conference which brought together participants from all seven of the members of the Group of Seven (G7), was held amid press reports of dispute within the British Government over exchange rate policy. The title and the terms of reference were not intended to pre-judge the issue of whether the management of exchange rates should be through some system (however defined) or left wholly to the market. However, they were generally interpreted by participants as assuming the necessity of some system, perhaps because all, albeit to varying degrees, agreed that in the light of experience over recent years, some conscious management was desirable. In this the conference was contrasted with the previous Ditchley conference on the topic in 1983, at which the arguments for free floating had featured strongly.

The conference quickly rejected the idea of an objective anchor or standard, for example, gold or SDR's. Indeed, no standard was necessary. Equivalence of purchasing power, zero trade balances, stability of exchange rates were all seen as measures of equilibrium, but none was felt to be wholly satisfactory. In the end it seemed, and there was much discussion of this, that the dollar would continue to be the key currency, although the Deutschemark and the yen might even now be emerging as supplements to it, a development for which Japan was claimed to be ready, though doubts were expressed about the political acceptability of this to the Federal Republic of Germany.

The point was made that economic, fiscal and monetary policies were all directly relevant to exchange rate policy, one participant saying that exchange control policy amounted to the coordination of monetary policy. For example, governments could be obliged to act to remedy defects in their economic and monetary policies, through pressures on them in the field of exchange rates. Against that, an inflexible system of exchange control management might encourage them to persist too long in their errors. The Bretton Woods system it was felt had broken-down in the end interalia because, on the one hand, governments had come to see as essential, not the defence of the system which in fact provided for adjustments, but the defence of specific rates of exchange, with consequent damage to their economies, and, on the other, because the US had no longer been willing to shoulder the burden of supporting the system. At the heart of the whole issue lay politics: states and their capabilities differed and for the foreseeable future nation states would continue to be the preferred unit with which we should have to deal.

Why did we need a system? Business had adjusted and could live with a floating rate, at a cost in hedging that was tolerable. Capital flows, outwardly so large and destabilising, were in fact in-net terms not great (a point disputed by some, however). Against this it was argued that the economic and political costs were large and unquantifiable, e.g. the cost of being able to continue in a misguided economic policy. The consensus then was in favour of some system.

An ideal system should provide "moving stability" of exchange values, with rules and procedures for adjustment; it should help to identify how policy requirements could be reconciled, it should allocate responsibility for action to correct imbalances (a tendency to shift this on to others was noted); and it should provide a focus for the coordination of monetary and economic policies. The question was whether governments were as yet ready to derogate from their sovereignty sufficiently to make such a system possible. Most doubted it, though some suggested that governments might even welcome the creation of a system which would enable them to divest themselves of some responsibility without appearing to do so.

At this point, as it seemed to me, a gap emerged between those who believed that a system, while being easily, and if necessary frequently, adjustable, should set and declare target zones or bands within which currencies might fluctuate, as does the EMS; and those who tended to believe that the authorities should act to influence the market so as to moderate the speed and extent of market adjustments and thus to keep rates more or less within undeclared and confidential reference ranges.

The former it seemed to me were arguing for a system in which the authorities would defend declared ranges of value (target zones) - until such time as they were changed -, while the latter, with no announced target zones, would exercise pressures to ensure that the rates arrived at in the market were broadly consistent with their privately agreed ranges of value. These two views, if I have not is misinterpreted them, were expressed respectively by what were termed the dreamers (though one participant curiously felt that “schemers” would be a more complimentary word) and the practitioners, the latter arguing moreover that starting from where we now were, as we must, any new system must be constructed incrementally, by building on experience and encouraging the growth of confidence and hence of credibility. The practitioners further argued that by building on the Plaza, Louvre and subsequent meetings, the G7 were evolving, slowly but steadily, a "system" of management which, while it might lack transparency or automaticity (a positive strength in their eyes), had made much greater advances than was generally appreciated (a point which participants found particularly important). Even the advocates of a more cut and dried system - and some speculated about the possibility of a single world currency - rejected the EMS as a model, and, while disappointed, for the most part, I believe, accepted that the incremental approach, building on the Plaza and Louvre meetings, was politically the most practical, perhaps even the only, way forward.

Finally, there was some discussion of the need for a smaller grouping (the Group of Three - the US, Japan and the Federal Republic) to reach agreement and steer it through the rest. On the whole, however, participants concluded, that this would be a mistake and that the G7, perhaps with subsidiary groupings round the individual members to ensure wider representation, was the best available forum.

The above is a very condensed and subjective layman's account of a long and detailed debate. If I have misrepresented it in any way I apologise and would ask readers to obtain the full Rapporteur's report.

A number of fascinating subsidiary points were also made which I have not attempted to cover: the impact on the EMS of British entry; a possible regional system for South East Asia; the setting of rates of exchange for the Newly Industrialised Countries (NICS) and the developing world; the difficulties of maintaining continuity from one administration to another in a democratic system of government; the future of the current Trade Bill before the US Congress; and the need for a Ditchley conference to cover not only exchange rates, but also trade, agricultural and defence policies and their impact on economies, and thus on exchange rates. These, however, are for the Rapporteur's full report - and another time.

This Note reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression.

Conference Chairman: The Rt Hon the Earl of Limerick KBE
Deputy Chairman, Kleinwort Benson Ltd. (Director); Director, Kleinwort Benson Lonsdale pic; Director, TR Pacific Basin Investment Trust pic; Director, De La Rue Co pic

List of Participants by Country

Mr David A Acland

Chairman, Barclays de Zoete Wedd Investment Management Ltd; a Governor, the Ditchley Foundation
Mr Roger Bootle
Economic Adviser, Lloyds Merchant Bank Ltd; Consultant, Mayflower Group
Dr Jeremy Bray MP
Member of Parliament (Labour),Motherwell South; Opposition Spokesman on science and technology
Mr Samuel Brittan
Principal Economic Commentator, and Assistant Editor, Financial Times; Visiting Fellow, Nuffield College, Oxford; a member of the Programme Com­mittee, the Ditchley Foundation
Mr S H Broadbent
Department of Economic Advisers Foreign and Commonwealth Office, London
Mr John Forsyth
Group Director, Morgan Grenfell & Co Ltd, London; a Member of the Council, Royal Institute of International Affairs
The Rt Hon David Howell MP
Member of Parliament (Conservative), Guildford; Chairman, House of Commons Select Committee on Foreign Affairs; Trustee, Federal Trust for Education and Research
Mr Will Hutton
Economics Correspondent, Newsnight, BBC Television
Dr DeAnne Julius
Director of Economics, The Royal Institute of International Affairs, London
Mr Anthony Leohnis
Executive Director, Bank of England
The Hon Sir Michael Palliser GCMG
Deputy Chairman, Midland Bank Group; Chairman, Samuel Montagu &Co Ltd; Chairman, Council of the International Institute for Strategic Studies; a Governor and Member of the Council of Management, Ditchley Foundation
Mr Rupert Pennant-Rea
Editor, The Economist; author
Professor Richard Portes
Director, Centre for Economic Policy Research, London; Professor of Economics, Birkbeck College, University of London; Directeur d ’Études Associé, Ecole des Hautes Etudes en Sciences Sociales, Paris
The Rt Hon John Smith QC MP
Member of Parliament (Labour), Monklands East; Principal Opposition Spokesman on Treasury and Economic Affairs; Advocate, Scottish Bar; a Governor, the Ditchley Foundation
Mr J B Solandt
Vice Chairman, J Henry Schroder Wagg & Co Ltd; Group Managing Director, Treasury and Securities; Chairman, Schroder Securities Ltd and Schroder Securities International Ltd
Professor Susan Strange
Montague Burton Professor of International Relations, London School of Economics; author
Sir Douglas Wass GCB
Chairman, Nomura International Ltd; Chairman, Equity and Law Life Assurance Society pic; a Governor, the Ditchley Foundation

Dr John Helliwell

Professor of Economics, University of British Columbia; Clifford Clark Visiting Economist, Department of Finance, Ottawa

M Pierre Jacquet

Director and Head of Economic Studies, Institut Français de Relations Internationales (IFRI); Professor of International Economics, Institut d’Études Politiques, Paris

Dr Michael Endres

Member of the Board, Deutsche Bank, Frankfurt am Main
Herr Christoph Groscurth
Managing Director, Bank of Liechtenstein (Frankfurt) GmbH

Dr Lamberto Dini

Director-General, Bank of Italy, Rome

Mr Koei Narusawa

Economic Adviser to the President, Bank of Tokyo, Tokyo
Mr Hajime Ohta
Deputy Director, International Economic Affairs Department, Keidanren Kaidan, Tokyo
Mr Tatsuya Tamura
Chief Representative in Europe, Bank of Japan

Mr T Jefferson Cunningham III

Director, Midland Bank plc, New York; Vice-Chairman, Kissinger Associates, Inc; a Governor of the Ditchley Foundation and Member of the Advisory Council, American Ditchley Foundation
Professor Peter Kenen
Walker Professor of Economics and International Finance, Princeton University and Centre for Eco- nomic Policy Research(CEPR) Visiting Research Fellow; Visiting Fellow, Royal Institute of International Affairs
Mr Dennis Longwell
Senior Vice President, Area Executive (Europe, Africa, Middle East), Chase Manhattan Bank, London; a Governor and Member of the Council of the Ditchley Foundation
Mr Malcolm S MacDonald
Assistant Treasurer, Ford Motor Company
Mr David C Mulford
Assistant Secretary for International Affairs, Department of the Treasury, Washington DC
Mr Richard S Simmons
Vice-Chairman, Chemical Bank; Member, Council on Foreign Relations
Mr Francis X Stankard
Executive Vice President, Chase Manhattan Bank, New York
Dr Herman Starobin
Director of Research, International Ladies’ Garment Workers’ Union, New York; corporate economist; advisory committee various US government trade agencies