ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846
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An Eye on the Main Chance

An Eye on the Main Chance? IT is not just the royal family and its extramural doings which are proving too much for the stodgy British. Nemesis is catching up in diverse ways. A unified Germany is determined to forget nothing, forgive nothing. She has set her heart to bring the British ego down a peg or two. The pound sterling, the German Bundesbank decided, was overvalued, the message was transmitted to the money markets, there was a run against the pound, the floor set for it in the European Exchange Rate Mechanism was soon breached. The British prime minister and his chancellor of the exchequer were outraged; was not London the capital of the world's money market, how dare the mother of all currencies be treated in such shabby fashion. There was much commandeering of imperial pomposity; fifteen billion pounds were thrown in to defend the pound sterling in the exchange markets; the aggregate number of unemployed workers approaching the three million mark notwithstanding, the Bank rate was raised, in the course of a daredevil Wednesday, first from 10 per cent to 12 per cent, and, within a further couple of hours, to 15 per cent. Increasing the Bank rate twice, and by as much as 50 per cent, within the space of twelve hours had never happened in the Bank of England's three hundred-year history. Nothing could be more bizarre for a recession-hit country than to raise the interest rate so high and so abruptly. It was nonetheless done, in the hope of attracting some hot money. But once mighty Germany had made up her mind that the British currency deserved to be devalued, such genuflections on the part of her royal majesty's government were of no avail. The slide of the pound continued, fifteen billion pounds went down the drain, the pound sterling was unable to re-enter the ERM band, and, at the end of the day, the prime minister and his chancellor of the exchequer had eaten the humble pie. Britain, for the present, has opted out of the ERM system. At the end of the day's travails, the Bank rate was restored to 10 per cent, and, after an interregnum of two days, brought down further to 9 per cent. The Germans have driven home the lesson they wanted to drive home. And not just to the British. The Italian lira as well, the Bundesbank held the view, was over-valued. It too was therefore given an identical treatment. The lira has also, in consequence, heavily depreciated and has temporarily been taken off the ERM discipline. It is a re-run of the 1930s though. The Italian prime minister is only too happy that the big brother of the Bundesbank has helped the Italians to Find a scaled down, realistic exchange rate for their currency. Some may feel surprised at this display of docility on the part of one who is supposedly a member of the Italian Socialist Party. They need to be reminded that, once upon a time, Benito Mussolini belonged to the same party.

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