AND A PORTENT…? Currency option for foreign creditors*

THE HOUSE of Lords decided yesterday that foreign creditors should not suffer in English courts from the combination of sterling’s falling exchange rate and the ancient procedural rule that English courts can award money payments only in sterling.

By a majority of four to one, the Law Lords ruled that in English courts, foreign creditors could now have their claims recognised in their own currencies.

The decision is of great significance for trade, improving the prospects for foreign creditors facing the possibility of litigation in English courts. But the very breadth of issues involved led Lord Simon of Glaisdale to dissent. He held that the issue was unsuitable for judicial reform as it required a wide range of official and commercial advice.

Fluctuations

The Law Lords confirmed the view that world currency fluctuations called for a change which would enable the foreign creditor to get what he bargained for in his contract - a view taken for the first time by the Court of Appeal with Lord Denning presiding, in Schorsch Meier ‘D. Hennin in November 1974.

They dismissed an appeal by George Frank (Textiles) of London, against a Court of Appeal decision of 10 February that they must pay their Swiss supplier, Michael Miliangos, Payerne, in Swiss francs.

When the case was heard before Mr Justice Bristow in the High Court last December, the British company did not dispute the liability to pay for textiles delivered in 1972, but they did contend that payment should be made in sterling. The judge accepted this view and delivered a judgement for £42,038 - the 1972 equivalent of the invoice in Swiss francs. This was about £18,000 less than was necessary to buy the same sum in Swiss francs at the exchange rate of the day when the case was decided.

The decision was however reversed by the Court of Appeal and the reversal has now been confirmed on further appeal to the Lords. The Swiss supplier will recover his claim undiminished by currency changes and the British importer will pay about £30,000 more than he would have paid in 1972, plus legal costs which are likely to double this amount.

Giving judgement, Lord Edmund-Davies said that to apply the old rule to the present case would perpetrate a great injustice.

Lord Cross of Chelsea said that the change in the foreign exchange situation and the position of sterling over the last 15 years justified the House in overturning the old rule.

Lord Wilberforce said that a creditor should not suffer from sterling fluctuation.

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* Reproduced with permission from The Financial Times, 6 November, 1975.

Choice in Currency

F. A. HAYEK

1. The chief root of monetary troubles is the scientific authority the Keynesians gave the superstition that increasing the quantity of money can ensure prosperity and full employment.

2. The superstition was fought successfully by economists for two centuries of stable prices during the age of modern industrialism and the gold standard.

3. Before then inflation largely dominated history.

4. Keynes’s (macro-economic) error was to suppose that labour demand and supply can be equated (and unemployment avoided) by managing total demand. Employment depends on demand in each sector of the economy. Managing total demand by expanding money supply creates only temporary and therefore unstable employment.

5. A ‘lost generation’ of economists who have learned nothing else continues to offer the quack ‘full employment’ remedy and to win short-term popularity for it.

6. No government, national or international, that wants to remain in office can be expected to limit the quantity of money better than a gold standard or any other (semi-) automatic system because in practice it succumbs to sectional pressures for additional cheap money and expenditure.

7. The gold standard, balanced budgets, fixed exchanges, enabled governments to resist sectional importunities. The removal of these ‘shackles’ has enabled governments to act more irresponsibly.

8. The only hope for stable money and resistance to inflation is to protect money from politics by removing the power of government to require its citizens to use its money as the only legal tender.

9. Government would then not inflate its supply, because it would be forsaken for other currencies.

10. Inflation can therefore be stopped by introducing competition in currency. The notion that it is a proper function of government to issue the national currency is false. Citizens should be free to use and refuse any currencies they wish: politicians would then have to limit their quantities. Then inflation would be avoided.