STERLING AND WORLD TRADE

HL Deb 09 November 1966 vol 277 cc893-986

2.53 p.m.

LORD ALDINGTON rose to call attention to the role of sterling in world trade and as a reserve currency, and to the impact of this role on Britain's economy; and to move for Papers. The noble Lord said: My Lords, I must at once declare an interest in that I am chairman of one of the British overseas banks, and your Lordships may wish to judge my words accordingly. But it is my contention that the interest which bankers may have in the international role of sterling is, in fact, a widely shared national interest. This may look to some noble Lords as a rather technical subject. It is, however, the national policy aspects rather than the technical points that I wish to emphasise; and in any case, as some of your Lordships may know, I am not competent to enter into any technical debate on this subject. My principal purpose is to provoke discussion in the search for the truth on the place in our affairs to-day of the pound's international role, and not even just to advocate the preservation of something because it has proved good in the past. In provoking this discussion I hope to draw from the rich well of knowledge and wisdom that there is in this House.

The Motion refers to two apparently distinct parts of the international role of sterling; first, as a reserve currency; and, second, as a currency widely used in financing world trade. My information is that over forty countries hold a substantial part of their currency reserve in sterling; but, of course, holdings of sterling by people who do not live in Britain and by Governments are far larger than the relatively small sums needed to back these countries' currencies. I prefer to base the importance of sterling in its international role not just as a reserve currency but rather as a key international currency which is used to finance a very large part of the world's trade.

The best estimate I have been able to find of the proportion of world trade financed by sterling in the immediate past is something over 25 per cent. It is well known that the proportion of world trade financed in sterling has fallen in the last twenty years; but the total amount in money value has risen with the steady increase in world trade. In 1960, for example, sterling, I am told, financed £12,000 million worth of world trade; in 1965, the rather more than 25 per cent. of world trade financed by sterling amounted in value to some thing like £17,000 million. Obviously, many people in many different countries will require to hold sterling, for a short period at least, in order to cover the financing of trade of this order.

The sterling balances, the external sterling liabilities, of the United Kingdom, which are an important consideration, amounted in June of this year to something just under £3½ billion, excluding liabilities to international organisations, most of which was the Inter national Monetary Fund. Of this £3½ billion, £2.8 billion—these are astronomical figures—were liabilities to persons in the sterling area and £634 million to persons outside the sterling area. I give these figures now so that they may be kept in mind; but I propose to return to the sterling balances for a short comment a little later in my speech. Both these figures of the balances and the large amount of trade which is financed in sterling are a sign of the importance in world finance of the City of London which is the centre of Britain's financial mechanism.

There is no need, I think, to rehearse the history of all this in this House. Many things have contributed to the importance which the world has attached over the centuries to sterling and to the City. The world power and the prestige of Britain, her earlier Imperial role and the reliability which the world learned to attach to the handling of Britain's economic and business affairs and, therefore, to her pound, clearly form one important part of the explanation of how this has come about. But it would be wrong to omit from the explanation of how this has come about the existence in London over so many years of a free and open market for money and the development of a most efficient and reliable money mechanism with a good investment market based, of course, on highly skilled and highly experienced individuals.

In the last thirty years or so part of that freedom has been mitigated by exchange controls. Nevertheless, compared with most other countries movement of the pound has remained free, and within the sterling area, subject to recent edicts about overseas investment, almost entirely free. I mention this point now because some of your Lordships may have heard a report during the week-end that a group of distinguished French people are presently urging the French Government to relax exchange controls and other restrictions in Paris so that the franc can be used more widely as an international currency. In other respects the London market has remained enviably free and open, and whatever may have been the historical causes of the international acceptance of the pound sterling, the survival of that role into the second half of the twentieth century has clearly depended mostly upon the openness and accessibility of the London market, coupled with the efficiency, skill and experience of Britain's bankers and of those who have been in charge of Britain's financial and economic policy. It is dependent upon these things rather more than upon Britain's dominance as a world Power.

The one remaining fact which I wish to quote to your Lordships before I come to deal with some arguments is this. A recent authoritative estimate of the annual earnings that accrue to Britain out of the City of London's activities gives a figure of £200 million a year. It appears that these earnings have more than quadrupled in the last twenty years. This sizeable contribution to the British balance of payments, which flows, I think, directly from sterling's international role, is not, as I shall shortly try to show, the only advantage that comes to Britain from this role.

I will now, if I may, turn to the general arguments against me, arguments which I hope I shall put quite fairly even though I may summarise them, and which I think are like these. It is said that Britain is sacrificing people to save the pound. The Governor of the Bank of England, in his masterly speech at the bankers' dinner on October 20, dealt with this point quite simply. He said: On the contrary, the pound is being protected for the sake of the people. I do not believe in the future of any economy where nothing ever gives way except the exchange rate. The Government's firm stand on this subject is most heartening. I would strongly agree with all that, including the last point.

The same argument can be put in a number of different ways, but I think it all amounts to the same thing in the end. There is a feeling, which is sometimes expressed quite openly, but more often lies rather low, as a tacit assumption in arguments about our economic affairs, that our economic troubles, particularly those of 1964 to 1966, are at least in part due to the burden of the pound being an inter national currency. And three or four years ago, when anyone who spoke about economic affairs in your Lordships' House or in the other place tended to concentrate upon growth in our economy, there was a feeling that the growth rate of Britain was held down by the wider roles of sterling. The argument goes on to suggest that we should abandon the international role of the pound. I do not believe that we can adandon that role, if we want to, and I do not believe that we ought to want to. This was, I think, the conclusion reached by the Radcliffe Committee which reported in 1959. Right in the last paragraph of its Report the Committee says this about the economy: that it is not so placed that it can by its own choice abdicate its responsibilities as the financial centre of the Sterling Area or determine the use of sterling as a means of international exchange. In other words, the Radcliffe Committee are saying that if we want unilaterally to abandon our role, we are not so placed as to be able to do it.

If I may continue from there, I should like to deal with some of the breakdowns of this general argument. It is certainly true that when confidence in the pound wavers, more people may want to sell larger sums of the pound than they would if the pound were not an international currency. But, my Lords, it is not the numbers of people who hold sterling, or the amounts of sterling that they hold, which causes the initial loss of confidence in the pound. In every case of crisis that we have known since the war the trouble has been caused by the worsening in our balance of payments or by manifest signs of inflation at home, or by both together. If the international role of sterling may be said to bring into sharper relief the evils of bad economic management at home, is that really in the long run a disadvantage? Is it not possible that this additional element of discipline might be an advantage?

In this connection it is said that a large part of these volatile balances which react to confidence so quickly are speculative in nature. In fact—and I have tried to check this—the amount of funds moved for speculative reasons is relatively small. There is plenty of evidence that the influential movements in times of crisis of confidence have a different origin. They are dictated by caution—for example, what are called the "leads and lags" in connection with the financing of our own trade and the financing of world trade. Perhaps I may explain this further. It is estimated—and this estimate I think has been given on behalf of the Government—that if every British importer decided to pay for his imports one week earlier than usual, that would cost the country's reserves £150 million. So your Lord ships can see how important this "leads and lags" factor may be.

But then it is said that there must be some part of the sterling balances, the size of which I quoted earlier, which are not, as it were, balances on call, available for immediate withdrawal, but are of a longer-term nature and ought to be funded or taken over by an international organisation such as the International Monetary Fund. We should, some people say, tidy up our sterling balances so as to protect us from the fear, which affects other people's confidence, too, that large amounts of sterling will suddenly be withdrawn. There may be a case for tidying up the sterling balances in this way, and this may be particularly relevant to our entry into Europe, but so long as the pound sterling is a key international currency there are bound to be large balances on call for which this tidying up process may not be suitable; and even after the tidying up, even after, if that were decided upon, the handing over of parts of these balances to an international organisation, such as the I.M.F., that would not relieve this country of ultimate responsibility. The credit, as it were, would be transferred from the present holder of a sterling balance to the I.M.F., but the sterling obligation would remain with us.

I should like to make one other point about sterling balances. These balances are vastly different in origin and in shape from what they were in 1947. In those earlier days, there was often a good deal of emotion about the large war-time balances built up, for example, by India and by Egypt. There are no such large balances there to-day. To-day's sterling balances arise from much more recent developments and, with the exception of Government holdings and some other special cases relating to oil and such like things, they are by their nature not necessarily of great permanence. Put another way, the holders of the balances expect to be able to call on their balances quickly.

Then there is another point, a point made by some, that interest rates in a country whose currency is international are often bound to be governed by international considerations rather than by purely domestic considerations. Put in simple terms, the interest rates in this country may be higher because of our international role than they might other wise have been. For it follows, of course, from the international nature of sterling that if the rate of interest here was not affected by other outside interest considerations, foreign holders of sterling might find it more profitable to switch their money to another centre. There is, of course, a point about this argument; but even if we accept the point, it is not all bad. And there is certainly no evidence that countries with high commercial interest rates have low rates of industrial expansion. Indeed, such evidence as there is is far otherwise. Both Japan and Germany, who have performed economic miracles of growth in the last fifteen years, have been noticeable in international circles for the high rate of interest charged on commercial advances. Compared with those countries we are not a high interest country.

In fact, this argument, like some of the others, is all part of the general argument that, because the pound is an international currency, we are not able to conduct our economy on autarchic lines. Even those who really believe that it is a good thing in economic terms to make England little England, and to seek autarchy in her economy, even those who believe—and I am not here casting accusations against the Front Bench opposite—that Whitehall does know best and should not be interfered with in doing best, must surely accept that the pound is not the only thing that keeps the windows of Britain wide open to world economic forces.

There is, as your Lordships know, the little matter of having to import more than half our food and nearly all of our raw materials for industry, both of which have to be paid for. And for a country which has to do that, may it not be a good thing, rather than a bad thing, that its currency should be so widely accepted? Can it really be argued that it is of no help to exporters that the pound is so widely accepted? Many of your Lord ships will know that the sterling area system still enables Britain to pay for the import of a very large quantity of our food and raw materials for industry with out having to find any foreign currency at all.

There is another consideration which greatly matters to Britain's economy—the consideration that there should be sufficient international liquidity. I can not see how the abandonment of the international role of sterling would do anything but reduce international liquidity at least so far as Britain and its trading partners are concerned. In this I am supported by the Radcliffe Committee's Report in the same paragraph as that from which I quoted earlier. Another consideration is that, with the complete break of the sterling system, if that should come about before the establishment of an international currency system, every member of the currency area would have to form special reserves for himself by taking more gold and convertible currency off the market. I would say that it is not impossible in those circumstances that Britain, left alone with no sterling area, might find it necessary to build up a much larger reserve of gold and other currencies than it was necessary for her to have when the sterling area system was working. All these arguments, of course, may well be different if and when one truly world currency has been introduced, but there is no evidence at all that the abandonment of sterling's international role would bring the achievement of that aim any nearer.

I have left until nearly the end of the argument the point made by some, and made in your Lordships' House during, I think, the economic debate in August, that the international role of the pound is an impediment to Britain's entry into Europe. I have no doubt at all that a weak pound, due to a weak balance of payments, will always be adduced as an obstacle to our entry into Europe, and I would say quite rightly, too. Moreover, convenient though it may be for us to argue that the best way of getting our balance of payments sound is first to get into Europe, would it not be wiser, and certainly sensible for our European colleagues, if we first showed that we can get our balance of payments in order—as I know we are trying to do? But, assuming that our balance of payments has been got into order, then I should have thought that, against the background of this assumption, certainly the wide use of sterling for financing world trade will be found to be a help to Europe and not a hindrance, and, in the end, will help us to get into Europe and not hinder us.

I am supported in this view, I think, by an interesting article in The Times Supplement of October 28, by Herr Hermanns Abs, a director of the Deutsch-bank, writing with all his authority about German and European finance. Having stressed the importance of Britain's getting her balance of payments put right, he said: It is, I believe, apparent from all this"— what he had written before— that if the United Kingdom joins the E.E.C., sterling will have a chance to preserve and indeed strengthen its position in Europe and in world trade. It does not seem appropriate to rely solely on the dollar as the key currency in world trade and no currency on the European Continent stands a chance in the longer run of being a key currency. Those I regard as very important words by a leading German authority on world, European and German finance.

What I have referred to earlier as the tidying-up of some part of the sterling balances may be found to be wise before our entry into Europe. There must certainly be discussions on this point, but I prefer not to rush into a decisive conclusion before we are able to see what is the climate of European financial opinion when Britain has again shown that it can run its economy with a surplus on its balance of payments. When that has been done, there may be no need to make any significant changes. On the other hand, there may be—we should wait and see.

I submit that all these points add up to evidence that Britain enjoys substantial advantages—substantial direct economic advantages—out of the pound sterling's international role. And it seems fairly clear that other members of the sterling area believe that they too enjoy advantages from the existence of the system. And there does not seem to be any lack of evidence that the United States themselves consider that a strong sterling in its present role is very much in the American interest.

I have not argued, and shall not argue, that the use of sterling in the world or the techniques employed in the City of London for financing our own trade, our own capital investment and investment in other parts of the world, must always remain the same. Manifestly this has not been so. There have been changes and developments all the time. Many of your Lordships will know that the City of London is adept at arranging finance for investment and trade, even for our own exports, in currencies other than sterling. Nor have I thought it necessary to deal at length with the charge that the supporters of sterling's international role are antiquated flag-waggers living in a bygone age, or with the other version of that charge that, in order to sustain sterling in this role, we in Britain have to incur very substantial defence and aid costs all over the world. It may be that aid programmes and defence commitments are part of the world role which those who criticise sterling's international role would rather Britain did not have, but those aid programmes and those defence forces are justified, or not justified, by considerations quite different from those which I have been mentioning to-day.

To sum up, the very substantial invisible earnings that accrue to Britain from what may be called City of London functions are perhaps strong enough arguments in themselves. To them it is right to add the wider advantages on which I have touched, to ourselves and to many other countries, that flow from the efficiency of the pound sterling system and the efficiency of those who are the professional financiers in London. In my submission, all these together justify in full measure the importance given by the present Government and their predecessors to the maintenance of sterling in this international rôle. Perhaps I may add to this my own personal belief that the powerful magnet of London as a financial centre attracts to Britain not only financial dealings, but also actual visible trade in manufacturing export orders. Those in the manufacturing and those in the financing side of our industry and trade are not two nations, but one. May I, who happen to have a foot in both camps, say quite simply that I see no economic or moral justification for regarding either one as of greater human significance than the other.

It may be that your Lordships will quarrel with one or many of the points that I have made, but I hope that at least this debate will result in its being accepted here, and perhaps by a wider audience, that neither the activities of the City of London nor the existence of sterling's international currency role are any part of the real cause of the economic difficulties which have struck Britain so sharply in recent years. And perhaps this debate may help, too, in a more general battle which our nation has to fight. That is why, whatever we as a country or as individuals think, where we are in the wrong we should acknowledge that we are wrong and set about correcting ourselves. We should not seek comfort in false excuses, and age-old defence of the immature and the irresponsible. My Lords, I beg to move for Papers.

3.18 p.m.

LORD GLADWYN

My Lords, may I say straight away that I do not intervene in this debate for the purpose of supporting with technical arguments any particular theory regarding the role of sterling, since I am by training not particularly qualified to do anything of the sort, though I must say, as perhaps some of your Lordships know, that I am a director of one of our leading merchant banks. Nor would I wish anything that I say to be taken as expressing any final judgment by the Liberal Party on the complicated question before us to-day. But I think one thing is evident, that is, that the role of sterling has a considerable bearing on something with which I am directly concerned—namely, the gradual unification of Western Europe. So it is chiefly on that aspect that I should like to make a few observations this after noon, which I hope will not be particularly controversial.

Before embarking on that, however, I should like to say in a general way that I personally support most of the points which the noble Lord, Lord Aldington, has made, in what I think we should all agree was a most admirable and constructive speech. In particular, I should like to support the noble Lord in his suggestion, if I heard him aright, that the famous sterling balances are not some thing which should be used as a kind of excuse for our present difficulties, or even as something which we could repudiate without very unfortunate consequences. Even funding some of these balances, which is constantly mentioned in the Press and elsewhere, from what I hear would be a most difficult operation and, indeed, I think that many would say that it is not possible to do this even without a great loss of confidence.

It is true, as Sir Siegmund Warburg pointed out in an article in the Sunday Times on October 2, which no doubt some of your Lordships read, that these balances, in so far as they represent what he called the enormous liabilities of the United Kingdom, which were fixed towards what was then India and Egypt were not cancelled or funded on a long term basis but, as he said, misguidedly treated as short-term debts and discharged by unrequited exports ". That was something which should no doubt have been done in 1945. But it was not done and, for the reasons which the noble Lord, Lord Aldington, has given, the situation is totally different today. In any case, it is certainly not my personal view that the unfavourable situation created by some of the balances would be improved if, as some people now suggest, sterling was simply devalued, if only by a small percentage. For as I see it this would clearly not improve our exports if others quickly followed our example—and there is considerable reason to suppose that they would—while as for our imports, most of these are essential, and devaluation would, after all, simply mean that we should have to pay more for them. As your Lordships are aware, there are many other arguments in favour of the maintenance of the present rate of sterling.

As your Lordships are also aware, there are some who believe that you could profitably arrange devaluation by stages. But while respecting the views of some economists on this point, I confess that I simply do not see how such a gradual devaluation of, say 2 or 3 per cent. per annum for a certain period could be accomplished in practice. I suspect that if you did adopt that policy the "gnomes of Zurich" might well be in for a field day. Anyhow, if your Lordships have been reading the Daily Telegraph lately, as no doubt some of you have, you will have seen that devaluation, as such, does not seem to appeal very much to my own leader Mr. Jo Grimond.

I am, therefore, an unrepentant advocate of the general prices and incomes policy, however difficult this may be to achieve and although the actual way in which the Government may be seeking to gain this end may well be open to strong criticism—and we Liberals often subject it to strong criticism—I believe that they were, and are, right to choose the tough way, and not be tempted to wander down the primrose path which, wherever else it led, would not lead us into Europe.

This brings me, as I said at the be ginning, on to a very few reflections on the prospects for sterling if we do go into Europe, which I think is hardly irrelevant if indeed we are to discuss the whole future role of sterling this afternoon. In his article in The Times European Supplement of October 28, Herr Abs said, broadly speaking (and the noble Lord, Lord Aldington, quoted his actual words), that if the United Kingdom joined the European Economic Community, it would be basically a good thing for sterling. It seems to me, having read the article with attention, that Herr Abs arrived at this conclusion on the assumption (a), that before joining the E.E.C. we had got our balance of payments situation more or less straight, and (b), that, on balance, entry into Europe would improve our exports and consequently the position of British industry as a whole, from the efficiency of which, we all agree, sterling ultimately derives its strength. I suggest that there is no doubt that Herr Abs is right, both in his assumption and in his conclusion. But not only that: I believe that the entry of Britain into the Common Market would increase trade all round and thus prove a great stimulus, not only to Britain, but also to the countries in the Common Market, whose economies, as we all know, are now enjoying a rather lesser rate of growth than they did two or three years previously. Is it indeed obvious that, whatever the inherent strength of sterling may be now, it would be even stronger if we joined the European Economic Community, if only for the fact that it is difficult to see how we could maintain an efficient British industry going at full blast if we were to a large extent cut off from the Continent and had to rely on increasing our exports to the markets of the Common wealth, some of which clearly now have a marked tendency to prefer trading with countries other than ourselves.

But it is as regards the possible position of sterling if we do join the Common Market that some of the remarks of Herr Abs, in the article to which attention has already been drawn, seem to me to be open to some question. He thinks that it is quite improbable …that within the foreseeable future a uniform currency will be introduced in the E.E.C.—and this also goes for the time when the United Kingdom will have joined. Notice, my Lords, that he says, "will have joined", so he is optimistic. He went on: Neither can I conceive of the majority of currencies in the E.E.C. countries being more or less displaced by the currency of one particular member. … In order to institute a uniform currency within the E.E.C. it would be necessary to pursue a uniform economic and financial policy within the community, which would clearly not succeed except under a supranational federation. Such a thing is of course not envisaged. As I see it, it all depends on what is meant. Herr Abs is quite right in saying that a supranational federation is not now envisaged, and the idea that the Community, even if we go in, will ever develop in the direction of the formation of a sort of copy of the United States Constitution, with a President, a sovereign Congress and States which would have only a very limited jurisdiction, is clearly out. Any political system which would emerge in Europe could in practice be formed only on the basis of our ancient nation States, with their separate histories, personalities, languages, and so on.

However, if you accept the idea of an Economic Union—and this, after all, is inherent and explicitly laid down in the Treaty of Rome which our Government now say they want to sign, provided only that it has suitable guarantees regarding our specific interests—then one thing leads to another. How can you have common agricultural, energy, transport, and migration policies, and many other policies, unless you have some guarantee that individual members of the group will not suddenly devalue or revalue their currencies? Even at this very moment when only the first of these policies—that is, the agricultural policy—has as yet been achieved, how could a member of the group change the value of its own currency when common prices have now been agreed on which will be valid from Lubeck to Messina? I quite agree that it will take a long time to hammer out even the policies to which I have referred, and of course there are others too. But if we come in fairly soon they will have to be hammered out with our concurrence in the Brussels machine, and eventually approved by the Ministers, including our own Ministers.

At some stage therefore—and this may, I agree, take a considerable number of years—the question of the possible formation of some European reserve currency which would necessarily include sterling must, as it seems to me, be considered, and I am sure that it is in evitable that it will be considered if we I come in. But I quite agree that this will appear evident only when all the States concerned have performed what one might call a common act of will to constitute something which is an entity in itself, and not a collection of individual and sovereign national States. I repeat that when and if this act of will occurs we shall not produce anything which is broadly equivalent of America but we shall, I am convinced, produce a political community in which certain decisions will be taken in common by certain new techniques.

This, surely, is the ultimate future of sterling which we can hope for and envisage. I quite agree that at the moment it is only a dream. But quite often in the practical world of affairs dreams do come true or, rather, they are often made to come true by the sheer pressure of world political events. In the mean time, I am convinced that sterling will have a most valuable role to play, both in the maintenance of world economies and in supporting the economy of these islands; and, further, that the right way to support it is to go forward, perhaps through a period of trial and error, with a prices and incomes policy that really does work.

3.37 p.m.

THE EARL OF LONGFORD

My Lords, I know that the House has greatly appreciated both the speeches to which we have listened: the noble Lord, Lord Aldington, strong and buoyant, and combining a knowledge of industry, finance and politics for which one can not easily find a parallel on the contemporary scene; the noble Lord, Lord Gladwyn, dedicated and inflexible in the pursuit of the European vision. Both have indicated an interest which they felt it right to mention to the House. I suppose in an excess of humility I should indicate also the interest of a Minister in these questions, which is not usually mentioned on these occasions. But the tone has been so non-partisan that I think we have all to put our cards on the table and approach these matters without any suggestion that one is trying to argue in favour of one group rather than another.

We must all be grateful to the noble Lord, Lord Aldington, for raising this great issue. The noble Lord, Lord Gladwyn, will forgive me if I do not spend very long on the European issues to-day. I have paid tribute to him before now for his unsurpassed services to the European cause, and I will say a word or two before I close about Europe. These are matters, as I think the general public are aware, into which the Government are delving very deeply at this moment, and therefore the noble Lord will understand if I do not say very much now.

LORD GLADWYN

I thought you were probing.

THE EARL OF LONGFORD

We can probe and delve and generally examine the matters, but all, the noble Lord will understand, in a forward-looking spirit. But I am not concerning myself with that topic this afternoon.

There is no doubt that the role of sterling is a subject which is well worth the attention of your Lordships for one day, and perhaps it should be more than one day. There are other features of our economic policy, some of them controversial, which we have frequently debated before and no doubt shall frequently debate again. If to-day I say nothing about productivity or the incomes policy—mentioned so generously by the noble Lord, Lord Gladwyn—if I refer hardly at all to economic growth or full employment, it is not because these things can be, as it were, separated off altogether from the consideration of sterling. But I feel that the noble Lord, Lord Aldington, was absolutely right to concentrate our thoughts for this one day at least on this major aspect of economic policy.

I would say one thing to anybody who becomes at all impatient in the course of these discussions about sterling and who wonders whether this is separating ourselves off from human life. Speaking of my own experience—and everybody has had experience of different kinds—I had considerable experience when I was responsible for the affairs of Germany in 1947–48 under Mr. Ernest Bevin, and everyone who remembers the transformation that took place in Germany when a sound currency was substituted for a non-existent currency will realise that one cannot divorce the soundness of one's currency from the standard of life of the mass of the people. The two are connected so intimately that this topic of sterling must be of interest to everybody in the country if only they could understand it, and admittedly it is a very technical topic.

Letme agree straight away with many of the important things said by the noble Lord, Lord Aldington—indeed, with the general line of his speech. In some cases I am afraid I shall repeat things which he has said, which is perhaps the sincerest form of compliment. He has stressed, as has the noble Lord, Lord Gladwyn, the vital importance of the role which sterling plays in international finance, and certainly that is absolutely right. We estimate that sterling finances about 30 per cent. of the world's trade. The noble Lord, Lord Aldington, seemed to be a little more pessimistic than that; he thought it was 25 per cent. plus, but perhaps he will allow me to inform him that according to the Treasury we calculate that 30 per cent. of the world's trade is still financed by sterling. It still accounts for the bulk of the reserves of sterling area currencies and for about 30 per cent. of the official currency reserves of the world.

If we have any knowledge of these matters we must be aware that the world needs an adaptable medium backed by a range of modern financial services for financing the ever-growing number of transactions between countries, and the world also needs a flexible medium backed by a wide range of what are some times called "investment opportunities"—in our case Treasury Bills or British Government securities, for example—for holding official reserves to supplement gold. Certainly we can see now that gold in itself is quite inadequate to meet the world's need for reserves. There are only two currencies which have been able to supply these needs—the dollar and the pound. No other national currency plays a comparable part; no financial centre elsewhere can offer facilities comparable to those of New York or London; and indeed some Governments have shown themselves actually unwilling to see their currencies being used for this international purpose.

Within the sterling area the pound is of course the currency predominantly used both for the holding of official reserves and for every kind of trading and commercial purpose. Large balances are held by Governments and by private firms and banks, but outside the sterling area also a great deal of sterling is held, especially by firms and banks in Western Europe, North America and the Middle and Far East. Central banks in a number of sterling countries also maintain balances in London, sometimes as an element in their reserves and sometimes in order to meet the demands from private banks and traders. All this is worth emphasising, and it is worth bringing out the extent to which sterling is held and used by the rest of the world, because there has been a tendency in some quarters—certainly not in the speeches to which we have listened to-day—to speak as if sterling was fading out as an international currency, and that is certainly not in any way the case.

Over a long period now since the early post-war years the net amount of sterling held by the rest of the world has remained fairly stable at somewhere between £3,000 and £3,500 million. The noble Lord, Lord Aldington, himself indicated the magnitude. That is on a net basis, deducting the United Kingdom claim from liabilities, but I am advised that the importance of sterling in international trade and financeis better indicated by the gross amount held abroad, and this gross amount held abroad is now substantially larger than it was in the early post-war years.

Despite the difficulties through which we have come, the rest of the world still holds well over £4,000 million of our currency, and that is certainly a colossal sum. It is true—and this is worth saying, although I think it has been said fairly often in the House—that these liabilities are much larger than our liquid reserves, but if we take all our assets and liabilities together, long-term and short-term, this country is a net creditor on quite a substantial scale. That is well known to every expert, but it cannot be said too often for the sake of the general public. There have also been sharp reductions in holdings from time to time when our balance of payments has been under strain, but these holdings have been built up when conditions improved, usually with less publicity.

The long-term trend in the gross amount of sterling held by the rest of the world has been upward. The increase has been mainly in private and commercial holdings, reflecting the continued need for traders to finance a growing volume of world trade. The amount of sterling held by central banks has not, on balance, changed very much since the war. It is not difficult to find reasons and all this was very well explained by the noble Lord, Lord Aldington. The advantages of holding sterling are many. They include the fact that it is a well-established and acceptable commercial currency; and then there are the comparatively high rates of interest, which were also mentioned by the noble Lord, Lord Aldington, and the great variety and flexibility of investment opportunities in London. The noble Lord, Lord Aldington, spoke enthusiastically, as he had every right to do, about the work of the City. I take this opportunity, on behalf of the Government, of paying cordial tribute to the immense diversity and world-famous efficiency of the services rendered by the City of London.

The noble Lord, Lord Aldington, has referred to the City's invisible earnings, and it may be that the subject will be raised in the debate and my noble friend Lord Shepherd may wish to deal with that in greater detail, but it is a reasonable estimate that the net earnings of this kind now amount to about £200 million a year. Certainly this is a substantial contribution to the balance of payments, and it is fair to say, though it might be difficult to work out precisely, that the greater part of this very large sum earned by the City is associated with the international role of our currency, both in the past and now. For the Government's part we fully recognise the value of these earnings, and we shall support all efforts to ensure that they make a maximum contribution to our external accounts.

The Motion of the noble Lord, Lord Aldington, refers not only to the rôle of sterling, but also to the impact of that rôle on our economy. It is important to keep this in perspective, and I certainly do not quarrel with the way in which that was handled just now. The international rôle of our currency brings both benefits and burdens.

The first point we make is that the condition of sterling depends first and foremost on the health of the United Kingdom balance of payments. That is, of course, a point that has been made already. Most of the periods of weak confidence since the war have been asso- ciated with deficits in our balance of payments. I am aware that 1957, for example, was an exception, but usually the trouble has come when we have had a deficit on our balance of payments. There are some who think that the measures the Government took last July were forced on us because the wide international use of our currency placed us at the mercy of bankers abroad, but we in the Government do not believe it is right to try to shift the responsibility on to others in this way, as was said very clearly by the Chancellor of the Exchequer at the Labour Party Conference. No country with a deficit in its balance of payments of the size that we have had for over two years, to go no further back, could avoid taking corrective measures.

If I differ from the noble Lord, Lord Aldington, on one point, it is almost my only point of difference: he seemed to feel that this international role of sterling could bring an additional element of discipline into the management of our affairs. It may be so, but I am bound to point out that things have not worked out that way very often in the past. If we take the first nine months of 1964, for example, there was a large inflow of short-term funds bolstering the reserves, and that presumably would not happen to a country which was not an international currency centre, and a good deal of trouble followed thereafter. I must disagree with the noble Lord on something, otherwise people would feel this was a collusive affair.

The main point is that if we can maintain a consistently strong and healthy balance of payments, but only if we can, we have no need to fear, or at any rate much less need to fear, the backward and forward flow of short-term funds from which we have suffered quite recently. So it is quite wrong to suppose that if we could shed the international functions of sterling all our problems would be over. But it is true, and one must face this candidly and not pretend there is nothing to be said on the other side, that because of the very large amounts of sterling held overseas we are more vulnerable in difficult times than others are. I think we must all ask our selves the question, "Why should fate pick on us?", so to speak. And it is true that there is something to be set on the other side of the argument. This vulnerability can be a source of instability not only for our own financial position but for the whole international reserve system of the world. The vulnerability of our reserves to large flows of short-term capital is clearly something everyone would like to see reduced.

I pose, therefore, in the forefront of our discussion this afternoon, the question of whether there is some kind of reform by which a change of this sort could be achieved. Here I must refer again to the familiar distinction drawn by the noble Lord, Lord Aldington—not familiar to everybody; certainly not familiar to the man in the street—between sterling as a trading currency and sterling as a reserve medium. Broadly speaking, one can judge the extent to which sterling is used for commercial purposes by looking at the amount held here by private firms and banks abroad as opposed to central banks and similar institutions. On a gross basis something approaching half of the balances is in the hands of non-official holders—there are refinements there, but that is putting it in very round terms. For the reasons I have already mentioned, sterling, and the dollar too, is bound to continue in use for as long as we can foresee as an international medium of exchange for commercial purposes. I have not come across any serious argument that sterling should be replaced, that the use of the pound and the dollar as the world trading currencies could be terminated. Proposals which are discussed from time to time for relieving sterling of some of its international functions refer to its role as a reserve currency, and these arguments usually go on to criticise or seek to modify the reserve currency system in general.

This question has to be seen very much in the context of the development of the international monetary system as a whole. We in the Government have been taking part in negotiations with the other members of the Group of Ten—that is, the main industrial countries. These discussions have been aimed at agreement on new methods of expanding international liquidity, and have now been extended so as to bring in the views of all members of the International Monetary Fund. We can surely all agree that the world does need a growing volume of liquidity if the growth of trade and output is to be sustained. A shortage of liquidity could drive many countries into policies restrictive of output and trade, and world trade would suffer, and so would everyone's prosperity. But we have to face the fact that world stocks of liquidity seem inadequate if we look to the future. The world's liquidity should certainly not depend on how much gold we can dig out of the ground, and in any case the amount of gold which has been finding its way into official reserves has been falling. And there does not seem to be much scope for adding to reserves by expanding the reserve currency holdings of the world. Official reserves of sterling have not increased over the last fifteen years or so, as I have said, and it does not seem that one can think of any way of rectifying this position by expanding our reserves or those of the U.S.A.

So we must find something new. There is now a wider measure of agreement among Governments that plans should be worked out for the creation of a new type of international asset. This would be held in the reserves of Governments and used for settlements between them. The precise form which the new asset should take and the conditions which should govern its holding and use are among the subjects on which detailed discussions are still going on; also the circumstances and manner in which it should be brought into being. Her Majesty's Government have made their views on this matter very clear. We think this should take the form of a specially created reserve unit—this is our proposal—managed by the International Monetary Fund or some closely related agency, and backed by deposits of the currencies of all the participating countries. This would be a great break-through for those who believe, as we do, that the world monetary system must evolve towards some new form of asset with international backing and away from excessive dependence on gold.

But we must not expect a miracle over-night. Clearly, gold will not be supplanted as a reserve asset for many years to come; neither will the reserve currencies. These two will certainly continue to furnish a large part of the world's liquidity. But the establishment of new types of monetary assets in the hands of central banks and Governments will affect the role of the reserve currencies. There are various complications which could arise and which would not always be beneficial but which I need not go into now. The Chancellor of the Exchequer, however, has made it plain that, in our view, if we can establish a new asset of this kind, provision will be needed to accommodate the ebbs and flows which would be unavoidable in a mixed asset system. But whatever the technicalities of this, and certainly in these remarks of mine I cannot carry them very far this afternoon, the urgent need is to press ahead with the preparation of a plan for the creation of new international reserves which we hope will be completed by next September.

These negotiations are by no means the only way in which the international monetary system can be developed and improved. There have been already some very significant innovations. One obvious example is the network of new arrangements including swap facilities which have been devised in recent years to help preserve order and stability in the international financial structure. I will not go into all the various steps of this kind or of analogous character, but I would just mention arrangements such as those announced last June for the support of sterling. Under these short-term assistance can be provided to offset pressures which do not arise from the United Kingdom's own balance-of-payments deficit. Some may say advisedly that this relieves us in some measure of the risks which are involved in running an international currency. As time goes on we hope it will be possible to carry this process further. Certainly we are always interested in constructive ideas in this field. Different proposals are often brought forward. We are sometimes urged, for example, to transfer the sterling liabilities to the I.M.F. or to some other international body.

I have spoken about our hopes for the reform and development of the world monetary system; but on this particular point about the future of the sterling balances I must make one thing perfectly clear, echoing, I think, the general philosophy of the noble Lord, Lord Aldington, and I think also the point of view of the noble Lord, Lord Gladwyn. We cannot simply off-load liabilities which represent the continuing debt of the United Kingdom. We recognise that these liabilities represent the liquid re serves of a large number of countries, and obviously there can be no question of abrogating them or diminishing their liquidity in the hands of the holders. The interests and wishes of those holders are of the greatest importance. Indeed, in the whole of this field we could advance only on the basis of the widest international co-operation.

I have nearly done. The noble Lord, Lord Gladwyn, asked me a number of questions about the effect on the development of the Community of the emergence of a European currency. I am not referring now to our own position, which I am sure will need to be discussed at Greater length on another occasion, but, taking the Community, I should certainly expect that they would move gradually towards some form of monetary union, which might lead ultimately to a common currency, to common external reserves and a common budget. But in practice the Six have made but slow progress in monetary co-operation, as the noble Lord, Lord Gladwyn, is well aware, and it is reasonable to suppose that a move towards a common currency still lies several years ahead.

My Lords, I would turn, in conclusion, for just one moment to the immediate outlook for sterling. I am sure that we are all pleased to see that things have taken a turn for the better, that confidence is reviving. The reserves in October rose by £20 million, even after some repayment of debt. The main reason for this improvement is the far-reaching policies which the Government have put into operation to restore the balance of payments, and these steps should carry us into a comfortable surplus next year. The measures affecting domestic demand, painful though they be, should soon show a marked improvement in the balance of trade. The invisibles account will be helped by the measures affecting travel and the cuts in Government expenditure overseas; and the steps we have taken to improve the balance of long-term capital flows are already showing results. These policies directed to the stability of the pound are confirmation of our repeatedly expressed determination to maintain the strength of sterling. As I say, the measures have already had a beneficial effect on sterling, and I am sure that in the next few months any remaining doubts about the future of our currency will be finally dispelled.

Sterling, as we should all agree, is not an end in itself. We are not here dedicating ourselves to a symbol of prestige or to a dogmatist's abstraction. We agree, as does Lord Aldington, with the Governor of the Bank, who said recently that The pound is being protected for the sake of the people. That cannot be said too often. We are convinced that the safety and stability of our money at home and abroad is the prime requisite and an indispensable condition of any social or economic progress, and only with the help of a strong and stable money shall we begin to achieve our social dreams.

4.5 p.m.

LORD HARLECH

My Lords, we have just listened to a speech from the noble Earl the Leader of the House which contained some most important things, particularly about international liquidity, and I find myself in profound agreement with him on that part of his speech. I hope to develop this point later on in my remarks. The noble Earl said earlier in his speech that the subject which we are discussing to-day is a great issue. I think the subject of this debate may well be of greater importance to the future of our country than any to be discussed in your Lordships' House this Session. I will start by saying that I think we should be particularly grateful to the noble Lord, Lord Aldington, for drawing in his opening speech such a clear distinction between sterling as a trading currency and, on the other hand, sterling as a reserve currency. This was a point which was also made by the noble Earl. I think this makes it much easier for us to see where the true interests of this country lie.

Broadly speaking, we derive considerable advantage from the role that the City of London plays as the centre from which the manifold activities connected with the workings of a great trading currency are controlled. We derive little or perhaps no benefit, as some would say, from the fact that sterling is used as a reserve currency; indeed, as has been said, under certain conditions it has been a positive hindrance to us, although I would agree with my noble friend that sometimes this hindrance has been exaggerated—for instance, under the conditions in which we found ourselves in the earlier part of this year. The need for deflation arose from internal events and was not really forced upon us, as I think the noble Earl said. It was not forced upon us by the reactions of banks in the rest of the world.

The noble Lord, Lord Aldington, this afternoon, and others, have calculated that the invisible earnings which accrue to us as a direct result of the trading activities of the City of London are not far short of £200 million per year. I was particularly glad to hear the noble Earl, Lord Longford, say that the Government fully appreciate this, and indeed intend to give the City every encouragement to do better in this respect, because if these earnings were to dwindle the task of righting our balance of payments would be harshly increased. But why are people anxious to use these services which are based on sterling? It is because over generations it has been found convenient to carry out transactions in a currency that has proved strong and stable; a currency that is in almost universal use and can be converted quickly and easily into other currencies. Take away these attributes of sterling and the rest of the world would have little use for it. That is why successive Governments have fought to maintain the exchange value of the pound, and have made it clear that though they might in certain circumstances be forced into a devaluation, they would never deliberately or voluntarily seek one.

I am sure that they have been right. I doubt greatly whether London's role as a financial centre for the world could survive another devaluation, let alone one indulged in as a deliberate act of policy. Those who urge on us such a policy have a duty to explain why they think other nations should continue to have faith in the stability of the pound, or alternatively how we would make up for the £200 million a year we should in the end lose in invisible earnings.

Nor should we be blind to the fact that others would be only too delighted to step into our shoes and scoop the benefits which at present come to us. The noble Lord, Lord Aldington, has already made some reference to this. It is very significant, I think, that it is reported from France that President de Gaulle has asked for a scheme to be prepared which would enable institutions in Paris to take over progressively the role now played by London. Nor is this in any way a fanciful concept if the pound continues to be weak and unstable in comparison to the franc.

In any case, my Lords, there has been very little evidence that devaluation is necessary in order to cure our balance-of-payments difficulties. Every action that would need to be taken to strengthen our economy after devaluation can be taken before and if taken before would make devaluation unnecessary. Generally speaking—though this is not the time to go into this matter—our prices are not too high in the world's markets, but too often our delivery dates are too long. This is an indication not of British industry in general being uncompetitive, but of excessive spending at home and abroad, particularly by Governments.

My own impression is that this Government's actions, although some of them we regard as grossly misconceived, will at least, in the aggregate, right our balance of payments next year. If the correct actions had been taken in 1965 we could have cured the imbalance by now with far less damage to the strength of our economy, and with measures far less Draconian than those resorted to in desperation on July 20 this year. However, I do not intend to pursue this matter to-day. I will merely say that I think it was right to spurn devaluation as a way out of our difficulties, and that the sooner we achieve a surplus in our balance of payments the better for sterling and the greater the role we can play in the reorganisation of the free world's monetary system. This is a matter that is becoming daily more urgent, and I now turn to it.

I believe that there is now a very real danger of a technically induced world trade recession, and I will try to give my reasons, as shortly and as simply as I can. It has been estimated that in order to meet the rising level of world trade the equivalent of an extra 3 billion dollars of money is required each year to finance it. But the amount being added to the free world's currency re serves from newly mined gold has rarely exceeded 1 million dollars a year. I will come later in my remarks to some more recent figures. The shortfall has largely been made up by the United States and ourselves running deficits resulting in an outflow of dollars and pounds into other countries' reserves with the dollar until recently providing about three-quarters of the increase in such reserves. However, this process has now gone as far as is reasonable and practicable—indeed, in our case it has already gone too far.

The result is that both we and the United States Government are taking strenuous measures to halt the outflow. We expect to be in balance next year, and America may be not very far short of the same target. While, as for gold, the lack of total confidence in any major currency has meant that more and more of what has been newly mined is going into private hoarding and less and less into nations' reserves. I have seen a figure as low as 250 million dollars mentioned for gold going into reserves in the past year. Already finance for capital investment in Europe and elsewhere is desperately short, and there has been a general and substantial rise in lending rates. Our own bank rate has been at 7 per cent. for longer than in any post-war period, but rates elsewhere are so high that it is not going to be easy to reduce it substantially or speedily. All this is hampering expansion in most industrialised countries, and making it desperately difficult for the poorer countries to borrow money at a time when they are already finding it extremely hard to meet their obligations on earlier loans.

I can see no good reason why this situation should not get worse as the American and British deficits are progressively reduced, and as gold is increasingly siphoned off into private hands. This is the precise prescription for a world-wide recession in trade, and Heaven help this country if we are forced to wrestle with such a recession in our present rather delicate economic condition. To my mind, everything points to the urgent need to devise a scheme to increase world liquidity, not in order to bail us out once more, not in order to allow us to relax once more into a comfortable policy of drift, but in order to stop the free world from carrying out a self-inflicted wound, possibly of fearful dimensions.

We come to the much harder question of how it should be done. There will always be those who urge that the simplest way would be to increase the price of gold—and quite a formidable case can be made out for this. The fact that South Africa and the Soviet Union would be major beneficiaries would not seem to me to be a conclusive disadvantage if it really solved our problems. But in fact it is not worthwhile arguing the case, because the decisive voice in this matter rests with the United States, and they are not going to increase the price of gold and so devalue the dollar, and "There's an end of it", as Dr. Johnson would have said. In any event, it is perhaps high time we took some action to deflate the whole mumbo-jumbo surrounding gold and gradually organised a more rational monetary system. As the noble Earl indicated, digging up gold in South Africa at great expense and reburying it in Fort Knox ought not to be the main foundation for the world's credit structure.

What then is the alternative? The most generally acceptable proposal would seem to be one under which the I.M.F. would have the power to create and steadily expand the supply of some new reserve unit. The objective must be to devise a reserve unit which countries will be as willing to hold as, say, dollars. But it must not be substantially more attractive or we might see a flight from the dollar and sterling and a disruption of the existing system. It must, in the first place, be an addition to the dollar and sterling as a reserve, not a substitute, although as the years went by it might be expected to take some of the strain off these currencies, and off the pound sterling in particular.

I am sure that the new unit should not be directly convertible into gold, as some people in France from time to time suggest, or we shall find ourselves once more with the free world's credit facilities rigidly tied to the store of gold in central banks. It should be based on all the major usable currencies, and this really means the currencies of the Group of Ten, plus Switzerland; and it might have, in addition, some kind of gold guarantee as to its value. It would be the duty and the purpose of the I.M.F. to ensure that the availability of this addition to the world's reserves would increase as the potential of world trade increased. It is because I believe that the exactly opposite process is now at work that I suggest that action to increase liquidity is the most urgent task of Governments in the Western World. The noble Earl said that we must not expect miracles, but we are certainly not getting them out of the discussions which have been going on so far. Indeed, I think the sterile squabbling that has been going on in the Group of Ten in the past three years is a scandal, and shows how little progress, in my view, is to be expected if all the negotiations are left to experts.

Let us hope that better progress is made in the next few months. Let us hope that a solution is found by next September. But if our hopes are dashed once again, then surely we should consider urging on our friends the need for convening a new, and to some extent political, conference of the free world Powers to hammer out a reformed monetary system attuned to the needs of this generation. After all, it is now more than twenty years since the great, conference at Bretton Woods, and although what was achieved there has served us well, there must be some improvements we can make in the light of our experience in recent years. Of course, such a conference would need very careful preparation, but if it were now set for, say, 1968, I believe that it would concentrate Governments' minds wonderfully.

Heavy responsibilities lie upon Her Majesty's Government in this whole field. First of all, they have the responsibility of making sterling strong again, and of maintaining its stability. Only then can it continue to play a key role as a trading and transaction currency. Only then can we be sure of maintaining, and per haps expanding, the benefits we now obtain through the invisible earnings of the City of London. Secondly, Her Majesty's Government have the responsibility of playing a significant part in reshaping the world's monetary system, so that the non-Communist countries are able to generate their full economic potential. These countries must not be hampered in their expansion for outdated technical reasons. But Britain cannot play her part, and cannot have great influence in these matters, unless she has fulfilled the first responsibility of regaining the world's confidence in sterling.

4.22 p.m.

LORD ROBBINS

My Lords, in rising to speak on this Motion, I should first like to associate myself with preceding speakers in thanking the noble Lord, Lord Aldington, for proposing it. The subject is, indeed, one of great practical importance, yet of almost intolerable intellectual difficulty. It is a subject which is bound to be in our minds at the present time, and if it is not ventilated in public in a calm and responsible manner there is simply no end to the dangerous misconceptions which may prevail in the underworld of gossip and have a very unfortunate effect on action.

I do not wish to duplicate what has been so eloquently said by the noble Lord, Lord Aldington, of the international importance of sterling. The fact that in the recent troubles we received such extensive assistance from abroad is proof enough of that. It was not because of their appreciation of our superior virtue that so many central bankers, with their Governments behind them, were willing to come to the support of sterling; it was because of a lively appreciation of the adverse repercussions which would hit them if a major international currency were to collapse.

But while I do not wish to dilate on the international importance of sterling, I do wish to emphasise its advantages to our economy. In recent years, as the noble Lord, Lord Aldington, hinted, there has grownup a habit among some who ought to know better of blowing cold on any claim for advantages arising from the position of London as an international centre. Estimates are made, usually with a rather strong downward bias, of invisible earnings, and the question is then posed how trumpery this is in relation to the gross national product, with an implication that if it were to evaporate very little harm would be done.

I submit that this is very shallow thinking. I do not think we should make light of the direct contribution made by the invisible services. The figures which have been mentioned this afternoon are not small figures in relation to the balance of payments, and if this contribution were not there, there would be that much more to make some other way if we were not to be that much more out of balance. But I confess I find it difficult—indeed, almost impossible—to understand the frame of mind which does not see what a substantial indirect con- tribution is made in this way to the support of our export position in general.

Is it really to be supposed that we should get all the contracts we do get, if there were no international business in London? It is difficult to assess these matters quantitatively, but for me, at any rate, it is just plain common sense to believe that there is a substantial connection between finance and commerce in this respect. I think we do less than justice to the advantages of the position of sterling in world trade if we fail to take this into account. I think our economic development in the past would have been less considerable if it had not been for the City and the international business which goes with the position of the City. What is more to the point, I think our position will be much less satisfactory in the future if we throw away that position, or impair it by policies based upon a lack of under standing of what we owe to it.

Nevertheless, like most positions of privilege, it carries with it certain obligations and inhibitions which do not beset less exalted roles. It involves both greater responsibility in general policy and an increased sensitiveness to internal and to external shocks. It involves greater responsibility because we are handling other people's money as well as our own; and, quite apart from the morals of the subject which I hope are obvious, considerations of pure expediency compel greater prudence than if we were concerned simply with local finance. At the same time it involves greater sensitiveness, because if things go wrong there is a wider area of holdings to which the repercussions may spread.

This brings me to the subject of the sterling balances, which has been discussed already this afternoon in your Lordships' House and which is at the heart of much recent discussion of the advantages and disadvantages of the present position of sterling. Your Lordships will doubtless remember a debate last summer in which the noble Lord, Lord Snow, in a very memorable speech, confessed to increasing doubts on the suitability of the position in which we were liable to the withdrawal of such large amounts at such short notice. Let me say at once that, although I am arguing against short-sighted views and hasty recommendations for action in this respect, I do recognise that there is a problem here which deserves to be discussed with candour and with cool heads.

The essence of this problem, as I conceive it, is a change in our position as regards short-term debt. During the days when the ascendancy of sterling was being built up, the days before the catastrophic wars of this century, the world at large was indebted to London not only on long-term but also on short-term account. The volume of bills financed by London was such that it was comparatively easy to rectify any position of strain: a hardening of rates here and money flowed in more or less automatically. There was a spectacular demonstration of that, of course, at the outbreak of the First World War in 1914, when in a few weeks money was flowing into London at an overwhelming rate. Nowadays, whatever our position as regards long-term investments—and, with great respect, I do not think in the context of this problem that it is very helpful to add the long-term investments to discussion of the short-term debt problem—we have an immense short-term debt to overseas holders. Sterling balances are loans made to us. They are entitlements to payments which have not been cashed; and, clearly, if it were attempted on the part of our creditors to cash a large volume at any one time, it would be a source of immense embarrassment—and if things go wrong this is always a possibility. That it constitutes a position of great sensitiveness is certainly not to be denied.

At the same time, however, as the noble Lord, Lord Aldington, pointed out it is fundamental to realise that it is not the ultimate cause of trouble. The troubles of our day have been caused by deficiencies or, as in the case of 1957, expectations of deficiencies, in the balance of payments on current account. I do not deny that if out of the blue the owners of sterling balances wish to turn them into gold on a large scale, that would in itself be a cause of trouble. But that is not the way the world has worked—at least not in the years since 1947. The successive sterling crises have been made more dangerous by the fact that the balances were here and might be the subject of a chain reaction of great danger. But the cause of the trouble lay in the condition, or the prospects, of the balance of payments, not in the existence of the balances.

May I say in passing that when there were speculative influences operating against sterling in recent months, in the main it was not the large holders, the central banks and the rulers, who were acting in this way. There has been great loyalty and special consideration shown on the part of such clients. It was much more the vast mass of dealers and traders seeking in a way which was only to be expected to protect their own positions against anticipated payments. Nevertheless, the sensitiveness is there, even if it is not the ultimate cause of the trouble, and it no doubt enhances the difficulties of any psychological disturbance when it occurs. The question therefore arises: what can be done to diminish it? What can we do to get out of a situation in which fluctuations in the current account are attended by such grave potentialities?

It is sometimes thought—and perhaps I detected a shade of such implications in some of the things that have been said this afternoon—that these difficulties are just a local manifestation of a world liquidity problem, and that the solution of these difficulties is to be sought in some general solution of this problem. The financial corridors of power echo with esoteric talk about alternative schemes for the improvement of world liquidity; and it is all too easy to think that our troubles will all come right when one or other of these schemes has been adopted. But if we think this, my Lords, I am afraid we are living in a fool's paradise.

I do not in the least deny that there exist future problems of international liquidity. I am more sceptical, perhaps, than some noble Lords of the existence of an international liquidity problem up to date. Having regard to the fairly brisk inflation which has been going on in most parts of the world since the completion of the war, I find it difficult to believe that up to date a problem of this sort has been very urgent; but, of course, it is quite easy to see, as the noble Lord, Lord Harlech, has so well demonstrated, how such a situation could come about. It could come about if the majority of the important financial centres sought on a large scale to increase (or to protect, even) their metallic reserves, and if the increase of gold production was not great enough to sustain this movement without a general deflation of prices. This has not yet happened—we have not had world deflation since the war, and world deflation is not going on at the moment—but it easily may happen, and it is a tribute, I suggest, to the increased insight of the central banks and treasuries of the world that they are willing to consider the possibility in advance and to consider measures to meet it.

Of course, my Lords, if such measures are taken—and I hope they will be—we shall share in the common benefit. Situated as we are, we cannot fail to benefit from improvements in the arrangements for international financial stability. But I submit that we deceive ourselves if we do not recognise the existence of a special sterling problem—a problem which is much more urgent and much more deep-seated than any contemporary problems of international liquidity in general. No doubt the general problem of international liquidity is immensely complicated by the special position of sterling: but the sterling problem has its roots in particular causes arising outside the problems of the supply of gold or the general adequacy of means of international settlement.

The plain fact is that the perils of our position on capital account derive essentially from a disproportion between our short-term liabilities and the reserves we have to meet them—a disproportion far transcending that of any other leading financial centre. We are bankers to a large part of the world, and our reserves by themselves have proved insufficient to maintain confidence if anything looks like going wrong. It is true that in the recent crises the skill of our expert representatives and the belief of the rest of the world in their good faith and probity have been effective in providing extraordinary reinforcements sufficient, in combination with measures taken at home, to restore confidence. But this is not something that we can count upon as a matter of right. We cannot retain our position as one of the world's bankers on the basis of continued support from the rest. Somehow or other we must diminish the special potential sensitiveness of our international position.

Let me say at once that I do not know of any quick or easy solution to this problem. During the war, when we were spending money like water in the interests not only of ourselves but of our Allies, there was some talk in high quarters of special measures to deal with the sterling balances which had piled up as a result of our spending—the by-product of the defences of Egypt and India, for example. Our American friends, who had lent to us on such a prodigious scale and who had cancelled so much, were anxious that we should seek similar treatment at the hands of other creditors; and, as some of your Lordships will know, the expediency of alternative ways of doing this was the occasion of much controversy at high levels. But all that is past history—it is utterly irrelevant. There is no analogy to that state of affairs in the present position.

The war-time accumulations have long ago been used up. Look at the position of India and Egypt to-day. The balances of 1966 are for the most part funds which have been accumulated since the war—funds whose loan to us has to that extent made easier the day-to-day position of the balance of payments. They represent money which has been left in our hands, not in the exigencies of total war but in the circumstances of peaceful trade. It is doubtless a convenience for their owners to keep them here if things are not going wrong. But there is no special service which we have rendered to them individually which would warrant us in asking for any but the normal restraints customary in the relations between client and banker. It is quite clear that we are not entitled to expect any solution of our difficulties by some sacrifice on the part of our creditors.

Nor do I think that we should base policy on the possibility of some ambitious settlement of the kind proposed in the first drafts of the original American plan for post-war settlement, drafts which suggested a taking-over by the proposed fund of responsibility for the then-existing sterling balances—a proposal which had vanished by common consent by the time we came to Bretton Woods. Whatever the merits of that proposal at that time, circumstances have now so changed as to render it not immediately relevant.

Needless to say, I am sure that for some time to come we shall need in the back ground of our efforts at recovery the assurance of the friendly support in special emergencies of the kind that has been so splendidly forthcoming in recent months. It may well be that the main central banks of the world will come to formalise—as has been hinted in the course of this debate, either inside the Fund or without, in the ambiance of the Group of Ten—arrangements for mutual assistance in the event of extraordinary crises on capital account. I hope we shall play our part in those discussions; I hope we shall contribute to the general sense of the urgency of the solution there; but I am clear that we should not base our own policy on the assumption that we solve this entire sterling problem that way. I hope we shall not base our own policy on the assumption that we shall necessarily be included in these beneficial arrangements unless we continue to convince the world that we ourselves are taking steps to prevent a recurrence of the trouble.

We show a naïve unawareness of our position in the present world perspective if we imagine that, regardless of how we behave, we have a right to expect continual succour from the international community. After all, they have already advanced upwards of a billion of sterling. If this is so, then I submit that the conclusion follows that there is no way out of this situation but the hard way of earning more and so strengthening the capital position. In the last resort it is the current account which matters, both in relation to the strengthening of the debt position and in relation to the day-to-day confidence in sterling.

This view is surely amply supported by the evidence of the recent past. In the past, disproportionate as has been our short-term indebtedness, confidence in sterling has never been seriously shaken save when the current account was adverse or was expected to be adverse. Although one can think of all sorts of hideous possibilities, I see no reason to suppose that they need happen, given international good-will and good sense. In any case, I am sure that they are less likely to happen if we are once more paying out way and accumulating reasonable surpluses to pay our debts and strengthen our reserves.

For this reason, together with other speakers I welcome the continued efforts of the Government to put the economy once more on a paying basis. I hope it will not be thought by this that I am prepared to support every detail of Government policy. I adhere to my view that the present measures hit investment too hard and consumption and certain kinds of Government expenditure too little. I think some measures are too severe and some too easy, and I should be hard put to it to find an apologia for the selective employment tax. But the broad policy of adjusting aggregate expenditure to the volume of production and to our overseas obligations so as to avoid domestic inflation and external unbalance is surely the correct policy and one which deserves the support of all men of good will regardless of Party.

4.45 p.m.

VISCOUNT HALL

My Lords, let me say that unhappily I have no interest to declare in relation to the City of London, but I should like to conjoin with the remarks made here to-day of the vital importance of the City of London and the part it plays in its eminent position in the international financial field. As we have already found from our expert speakers here to-day, this topic is one of the most complex of the post-war era, and I want to reassure noble Lords that I do not wish to make it more complex by perhaps giving a rather lay view on certain of the complexities. However, to touch for a moment upon the past history of a chronic problem of all currencies—for sterling is not alone—I would say that the commonest fallacy has been to judge the health of the currency by looking only—and I emphasise "only"—at the visible trade account; that is, the monthly figures of imports and exports. Although the current account is an important element in sterling's overall position, it is not necessarily vital to the "above the line" balance of payments, nor does it always indicate a need for review of long-term national financial policies.

It is the capital account that calls for close and more consistent attention than has been paid to it among the financial fraternity to-day, quite simply because a surplus must be available to finance items of net long-term capital exports, in which the United Kingdom has yet a major role to play. Nevertheless, the international standing of sterling will not continue to meet the ad hoc difficulties unless these items in capital account are supported by a healthy day-to-day current account. Two of the seven post war sterling crises took place at a time when our export-import position (and, therefore, the current account) was relatively favourable. In 1947, we suffered from an overseas sterling deficit plus the problems of convertibility. In 1957, we were hit by an external crisis of confidence following French devaluation, plus the prospect of revaluation of the German mark. The causes of both these crises were effectively out of our hands; indeed, four years later, in March, 1961, the appreciation of the Deutschmark produced a wave of speculation causing a tremendous capital outflow from this country, and the consequent depression of the overall balance of a basically strong United Kingdom balance of payments for that year.

The contagion of an overseas sterling area shortage of U.S. dollars caused a crisis in 1949. Adverse movements in terms of trade during the Korean war were also beyond our control, but events such as stock-piling after the relaxation of import controls in 1960 and the heavy steel imports of 1964 were well within our control. What then are the lessons to be learned from this mixed bag in relation to our international well-being at the present time, and in relation to the pitfalls of our economic road in the immediate future? For I can assure your Lordships that pitfalls will occur in both the current account and the reserve account, and in spite of the new reserves union.

One thing is certain. Monetary stability, as we have heard this afternoon, begins at home. The economic performance of the United Kingdom provides the only fundamental base for the international assessment of the reputation of sterling and of the international trading level resulting from sterling. Ipso facto rapid inflation here at home not only ravages the home economy but has a disastrous effect on the international level of the currency. I am aware that inflation exists abroad, too, but in this respect and certainly on the inflation front it is a race in which the slowest horse wins.

So where do we stand to-day, my Lords, in strengthening sterling from now? It is important that we give London, and I mean the City of London, all the support that we can in continuing to hold this country as one of the two main reserve centres in the world. First, I think it is important to be quite clear that in this country we do not deserve the self-imposed label of second-grade exporters or international laggards; for, as the Chancellor recently declared, in 1965 our exports per head of the population were three times those of Japan and twice those of America. Our gross investment income from abroad has risen from £500 million annually in 1952 to the order of a billion pounds annually at the present time. In this country we spend roughly £10 per head annually in Government expenditure on military and aid programmes; that is against America's £11 per head and Germany's £3 per head. Sterling is willingly held as a reserve currency by foreign monetary authorities and represents the financing of a surplus or a deficit from the stand-point of the country holding them. So I, for one, do not think that for the present programmes here at home we owe the world any apology for those elements of sterling accounts over which we can exercise control. But, my Lords, the question is, can we as bankers to nearly half the world do more to contain those events which are largely beyond our control?

We in this country, as do people in many other countries, depend heavily upon the confidence in sterling, yet only two days ago I received a letter from an old friend, sophisticated in the field of international finance, with whom I have been discussing this problem for the past two years. He wrote: The uncertainty regarding sterling makes it difficult to visualise a loan in Australian currency against a sterling collateral, as both currencies may not be moving in sympathy in the case of a sterling devaluation which is quite likely.

LORD SHEPHERD

My Lords, may. I ask my noble friend—did he say that he thought a devaluation of sterling was likely? I just want to get that correct.

VISCOUNT HALL

My Lords, that is so, but it was not I who said it. May I repeat this? I received a letter from an old friend in the international field and he wrote: The uncertainty regarding sterling makes it difficult to visualise a loan in Australian currency against a sterling collateral, as both currencies may not be moving in sympathy in the case of a sterling devaluation which is quite likely. The actions taken by the present Government and the level of unemployment we are prepared to tolerate provide more convincing evidence to gentlemen such as this of our political will not to devalue than public pronouncements from senior Ministers which, I venture to suggest, on this subject have in themselves been devalued over many years. So I hope that official comments will be withheld on this point for the duration of the present crisis. But something is required to contain two quite possible events that may occur in the near future, for in the future I foresee that sterling is going to be called on to play a larger international role than it ever has.

The increasingly determined efforts by America to put her payments in balance is draining dollars slowly out of the rest of the world, and so long as there is only one other acceptable commercial international currency—that is, sterling—then sterling must come into greater international use, even in spite of the reserves union. We all know that the redistribution of gold and the creation of reserves of U.S. dollars associated with the U.S. balance of payments deficit have in the past made it easier for us to achieve a balance-of-payments surplus. What if the United States brings its balance of payments into balance rapidly as the whole world has been so warned? Then the scope for surpluses outside the U.S. will be greatly narrowed and our own efforts necessarily all the more pertinent to a strong pound if the "above the line" balance-of-payment calculations are to provide realistic pointers to our future well-being.

Furthermore, there is mounting talk of an approach by Great Britain for entry into Europe. Britain's entry must be related to the strength of sterling and its repute as a reserve currency. The letter to which I earlier referred came from the capital of an E.E.C. country—not France—but as I outlined some months ago in your Lordships' House, entry into Europe, which I strongly endorse, is fraught with negotiating difficulty. For instance, we hear that France can be expected to make matters difficult by requesting that the sterling area be dissolved prior to Britain's entry, rather than gradually afterwards. This, together with the weekend action in Paris, seems to be the rumblings of an anatomy struggling with indigestible gold.

I believe that in sterling we have, not a liability, but a major asset in the negotiations; for Europe is well aware of its lack both of an international currency and of an international capital market. Certainly, as we have heard this afternoon, no individual currency in the Continent of Europe has a hope of being a key currency like sterling. I go further, and prophesy that the European currencies that we are faced with to-day will not in our lifetime merge into a European Monetary Union, so that no base will be provided for a new international unit comparable with the standing of sterling.

These two impending circumstances in themselves, especially the importance of our E.E.C. entry negotiations, pretty well forbid us from allowing sterling to devalue, either for intrinsic reasons or from external pressures. The Government's recent action makes talk of devaluation seem like idle chatter. Even now I doubt that our 1949 devaluation was necessary. It was certainly not the nostrum it was then held out to be. Its value as a stimulant to exports was limited by the shortage of substantial spare capacity in British industry. Nor did it have any worthwhile effect on the commodity sales of the overseas sterling area, as the noble Lord, Lord Harlech, pointed out.

These arguments remain valid to-day, strongly reinforced by two others. Since 1949, Government spending has more than trebled, and the annual return we pay on foreign investments in the United Kingdom rose from £112 million in 1950 to £530 million in 1965. Devalue, and we impose upon ourselves far heavier burdens on these accounts than we are ever likely to gain as benefits on others.

Once having killed the spectre of devaluation, which (I mean the spectre) is pretty well with us now, we must effectively lay its shadows, for far too much speculative attention, at home and abroad, is focused upon the bank rate and its movement. Against this, speculative operators have the warm security of knowing that an all-out effort will always be made nationally—and, as we have recently seen, internationally—to maintain the pound/United States dollar rate, within the two cents range at as near 2.80 U.S. dollars as possible. What have the speculators to lose for their money? When the weather is good, they are in and when it is bad, they are out, and we lose heavily in subventing their gains.

I believe that there is a great deal to commend the idea that we should declare bank rate fixed for a given period of time, and I hope that the present rate will be declared to exist for at least a further term of months, irrespective of any public relations gestures which we may need at home, and which are likely to be misinterpreted abroad. Such a declaration will allow banks to discharge their market functions with some certainty of the limits beyond which the rates for money will probably not move and will provide them with a stronger base for looking more closely at the international sterling market.

At the same time, let us consider—and I would emphasise the word "consider"—the long-term objective of widening the limits inside which sterling is allowed to fluctuate on the exchanges. The two cent. range put speculators virtually on a winner-to-nothing, whenever there is a crisis of confidence. The gradual development of the hazard in the speculative market of a range of, say, 2.75 to 2.85 dollars—that is, a 10 cent range—gradually introduced over the next two or three years, would help to dispose of this very troublesome aspect of fine-weather friends for sterling. Also, it would reflect realistically moves in the relative prices of our imports and exports, and as the pound moves to full recovery, as I believe it soon will, its international level of strength will be all the more evident to the world as a future stable international banking currency.

Finally, my Lords, it is my view that we should reconsider the degree of encouragement we give to foreign investment in this country. The initial impact of all these investments is admittedly a windfall for the reserves, but an increasing encouragement of foreign investment here, combined with the discouragement of United Kingdom investment abroad, is, in my convinced mind, sowing disastrous seeds for the future. The servicing problems are giving us a continuous and serious drain on our current account, and it is upon the current account that we depend for our capital account. We cannot do both. I have maintained, and always shall, that battle-scarred sterling remains firmly a currency of prime inter national standing and does not recognise the word "devaluation". If we this afternoon are firm in our defence of her, we defend also the flag, both in areas where it has flown in the past and in areas where it has not flown, and the result can be nothing but complementary and parallel to the stringent efforts we are now all making here at home.

5.11 p.m.

VISCOUNT WATKINSON

My Lords, thanks to my noble friend Lord Aidington, we are this afternoon touching the heart of the matter. I think it has been extremely painful and frustrating to all of us, in whichever Party we may be, or in whichever Government we may serve, to see, time after time since the war, these crises forced upon us, by one cause or another often outside our control, at least to some extent. Along with my noble friend Lord Harloch I feel slightly despondent about the outlook for world trade, unless we can make rapid progress—and this seems unlikely—in the sphere of some new move towards better international liquidity.

As one noble Lord after another has said, we are moving into a difficult situation. Countries like the United States are, quite rightly, seeking to put their own balance of payments right, but perhaps not entirely counting the cost of this on the rest of the free world's trade pattern. So it seems to me that one may liken our position at the moment to the man running up the descending escalator. We have to run extremely hard to stand still, and if we relax our efforts for a moment we are inexorably carried down to the depths below again.

Nobody, however, is sorry for us—and there is no particular reason why they should be. As the noble Lord, Lord Robbins, said, we do not get any credit now for what we did during the war. Our external and internal debts and owings, so to speak, are matters that have largely arisen since the war. But I believe that our failure to rebuild our balances over the years since the war has been one of the great causes of the difficulties that we are facing now.

But I want for a short time, not to get into these long overall problems, so ably discussed by noble Lords who have spoken before me, but to turn for a moment to the short-term problem; be cause, as the noble Lord, Lord Robbins, said, it is the short term by which we are judged. If one takes what I might perhaps call "the poor man's view", the non-technical view, of this problem of sterling, then it is really our current sterling balances, our current balance of payments, which the average man takes as the criterion of the health of sterling.

There are, I am sure, many things that we ought to do in the long term. I hope that the Government—and I would entirely support them if they did—will try to produce some new initiative on international liquidity. But what I should like to deal with for a few moments is what could be done now to try to strengthen sterling, and give those of our overseas trading partners and customers a greater confidence in our currency. I think that the letter which the noble Lord who has just spoken read out represents a fairly general view of some of our overseas trading customers and partners on the stability of our country at the present time. If this is so—if it is the short-term problem that we have to examine, and if measures to improve the short term are of the most immediate importance—then I think one must raise this question of whether we are doing enough at the moment to improve our balance of payments by selling as much as we can overseas and by rebuilding our position overseas.

Again I agree with the noble Lord who has just spoken: it seems the wildest of folly to encourage a massive foreign investment in our own country while applying the maximum disincentive to our investments overseas, on which, incidentally, we are still drawing adequate returns, very often on relatively small capital injection.

Looking at these two problems, one is clearly exports and whether we could do more in the short term and long term; and the second is the problem perhaps better described as overseas trade and our overseas trading position. I do not in any sense want to argue whether or not the present measures produced by the Government were to cure self-inflicted wounds. They are very bold and painful measures, but I hope they will not lead to a belief that we can cure our troubles, reinforce sterling and keep it as a world trading currency, by continually cutting back. If this is the answer, then our country will be able to support only 30 million people and not 55 million. If we can face that, then we can support sterling by continually cutting back, but if not, we must seek expansion.

Here the answer lies, I think, in over seas earnings and direct exports. I wonder what we can do to put these on a firmer footing and thus buttress the short-term position of sterling. I would make only one or two suggestions which I hope might at least be looked at. I am not asking for immediate replies from the noble Lord who is to wind up the debate. These probably need to receive as long-term examination as the problems of liquidity and all the rest. But I must say again—and I do not want to add to the slight air of gloom which I feel rather lies over this debate—that if you take as an example our export position to the United States, with which I am somewhat intimately concerned, on the surface it looks good.

If I may here pay this tribute, that is certainly the greatest possible credit to those who formal the export team in the United States, from the Ambassador downwards, the businessmen who go out and all the rest. Great credit is due to all those concerned in that way, and very little to my Committee, which only tries to point the way. We are 28 per cent. up on our exports to the United States at this moment on last year, and last year was 23 per cent. up on the year before. We could have a very happy air of euphoria and say, "How wonderful!" But when you begin to examine these figures you find, for example, that the current figures owe a good deal to sales of B.A.C. 111 passenger aircraft—and they are expensive things. I do not see any more of these aircraft on American order books.

I must say to the Government that, when we look at this export problem, we must ensure that in the export mix there is a proper proportion of British capital goods. If it is really thought by the Government—I do not think it is—that you can make up for these capital goods in mini skirts or socks or other things, then they are deluding themselves. These are necessary, and they take a great deal of hard work; but unless we get the right mix and sell enough British capital goods abroad we cannot reinforce sterling by paying our way in the world. This is not an easy problem.

I hope that I have said enough to show that I do not think the export position is any more encouraging than the position of sterling, which we are examining this afternoon. Therefore, I should have thought that we should re-examine any possibility of reinforcing the position. I should like to draw attention to just a few things. I think that corporation tax should be modified to avoid penalising overseas earnings. I have nothing against corporation tax as a whole, but I think it would be better if it were modified to encourage more overseas investment. I can give chapter and verse of a company that will earn £2 million overseas this year for a capital investment of under £1 million; and they will bring nearly £1 million of that money home, and so will nearly recover their capital investment in one year. This is overseas investment which at the moment is penalised, anyway in some countries, by corporation tax.

LORD SHEPHERD

My Lords, I presume the noble Lord is referring in this particular case to investment in a non-sterling area?

VISCOUNT WATKINSON

I am really referring to investment in both sterling and non-sterling areas.

LORD SHEPHERD

I am quite sure that if that company wished to put that investment into the sterling area there would be no difficulty.

VISCOUNT WATKINSON

Far be it from me to say anything about my own interests, because this is not the place to do it, but if the noble Lord wants to pursue this matter I will give him chapter and verse and I will show him quite plainly that the present tax system which I have described is a considerable disincentive to my company and to many others, earning quite large sums of money overseas for very little direct capital investment, by licence arrangements and franchise arrangements. I do not want to pursue this now, but I will gladly do so if the noble Lord desires me to.

To return to what I was saying, I think S.E.T. should be scrapped or modified or changed into some form of tax which will offer a direct export re bate. For example, if it had been an added value tax I believe it is entirely within GATT to allow the added value tax to contain a direct export rebate. I must say frankly that there are a large number of exporters who will do this job because they think it is in the national interest (I hope I am included among them) but there are others who do not see why they should do it unless they can make something out of it. That is not an entirely improper point of view; therefore some direct export incentive must be provided in our taxation system, and provided fairly soon. As a measure of rough justice perhaps one could do something in a tax sense to help those who have to travel abroad. It is hard work and there is very little glamour in it.

The British National Export Council is exactly the right instrument to pro mote exports, and I think the Council is grateful to the Government for backing it very well in various direct ways, through the Board of Trade and so on; but I wonder whether the Government listen enough to the B.N.E.C. when it talks of certain broader Government policies which could help exports and at the moment are not being pursued. In other words, if we want to reinforce sterling in the short term the Government must apply a total export concept to all its major policies. If it does not, then it is not doing the best it can to support sterling in the short term.

Overseas expenditure should always be a tied loan; it should always be tied to exports. I think all Governments have been at fault in this in the past, but we ought to learn from our mistakes. We should not lend money abroad unless it is tied to British goods. We should remember that we are not in breach of GATT in anything we do if it is done for the direct purpose of reinforcing our currency and avoiding any possible devaluation, which I agree with all other noble Lords is now improper, impossible, undesirable and unlikely. I think we have this short-term problem, and I hope noble Lords will excuse me if I have strayed a little from the previous tenor of the debate to try to indicate some ways in which an immediate strengthening of sterling could be made. For example, if our export figures continue to show a good expansion in foreign markets, particularly in difficult markets like America, our foreign creditors take note of it and add their belief in sterling to them.

I would say to the Government—and I hope the noble Lord, Lord Williamson, an old friend and colleague of many years ago in the Ministry of Labour, will not feel I am saying the wrong thing—that they should not be afraid of the late Mr. Hugh Gaitskell's 3 per cent. unemployment figure, provided it is purely transitional. It is not something we seek, but something we may have to accept for a transitional period, as part of the operation to make ourselves more competitive and to meet our export targets. My Lords, I have tried to look at this very narrow aspect of our debate because I fear myself that the long term measures which my noble friend Lord Aldington so clearly and ably set out (and he has been followed by many other noble Lords) may not have time to reach their predestined conclusions unless it is seen in these next few months that the Government, apart from taking tough and brave measures, are also passing to a policy of planned and practical expansion which will lead to more exports, more business overseas of a profitable nature. Only if our creditors see this will they have complete confidence and trust in sterling in the short term as well as in the long term.

5.25 p.m.

LORD SHERFIELD

My Lords, one of my main reasons for intervening briefly in this debate is that I have been more or less involved in several of the nine principal exchange crises which have occurred since the war. I was present with Lord Franks and Lord Plowden, in a room in the British Embassy in Washington in 1949, when Mr. Ernest Bevin, in dressing gown and pyjamas, settled with Sir Stafford Cripps the rate of the devaluation of the pound; and I certainly should not wish any British Ministers or officials to go again through that experience and the subsequent explanations and discussions which followed it in and around the International Monetary Fund. I suppose we have learned a good deal more now about the problems involved since that evening in Washington seventeen years ago. Certainly there are more statistics, though some would say they are still not enough and others might say that we are not much the wiser.

At this stage of the evening it is not appropriate to hash over the arguments used by previous speakers, or to produce figures. It is only possible to indicate briefly a view on three or four points which have been discussed. The first, on which I fancy there is little disagreement, is that the present deflationary measures are absolutely necessary to protect the position of sterling, and that if they are maintained they should bring about a surplus in the balance of payments in the course of next year. If there is a lesson here from previous sterling crises it is that the restrictive measures have not been maintained sufficiently long, and that understandable pressures have forced Governments to permit expansion more or less prematurely. On this occasion I hope the Government will be able to resist these pressures for long enough—and in saying that I do not, of course, deny the force of the case for short-term constructive measures to which the noble Viscount, Lord Watkinson, has just referred.

The second point which has emerged from recent studies is the extent to which overseas and particularly defence expenditure has been a decisive element in our worsening external position in recent years. In the past I have had plenty of experience of the appalling difficulty of reconciling our obligations with our resources in the face of ever rising costs, and I think successive Governments have been perfectly justified in going to great lengths to carry out their obligations to Commonwealth countries in terms of defence and aid, and to our allies and the United Nations. It was clearly right, for example, to sustain the confrontation in South-East Asia, which seems to have accounted for a high percentage of the recent increase in defence expenditure, and in respect of which a reduction will now presumably be possible. I feel more strongly about the failure to resolve the question of the cost of our forces in Germany, which has for so long been an unacceptable drain. I do no more than mention it, as the Government seem to be pressing this matter as far as they can.

The complexity of the role of sterling in the world and the ramifications of its use are perhaps the greatest deterrent to the adoption of many of the specific proposals which have been made to alleviate its supposed troubles. The freezing or funding of the sterling balances and devaluation are frequently canvassed, but in my opinion their adoption would have effects quite different from those which might be predicted on theoretical grounds. They would shatter the confidence which is the basis of the strength of a reserve or indeed a trading currency and involve action by other countries which cannot be accurately foreseen. Moreover, I think there is some considerable doubt, as regards the sterling balances, whether they have been in recent years such a serious millstone around our necks. Their hard core, the balances held by the overseas sterling area, has changed in composition but has in the main remained remarkably stable in amount. I doubt whether their holders are likely to bring on a crisis by precipitating a run on the bank, and if, as may be the case, they are run down in the course of time by countries diversifying their reserves, I think we are entitled to hope that this will be done at such a rate as not to place an intolerable strain upon us, though of course that danger exists.

The strains which can be imposed by the running down of foreign balances held in London as banking deposits or short-term investments are a rather different matter. But the risk of sudden and massive withdrawals surely does not really exist when we are in surplus and living within our means. Meanwhile, a useful profit arises from those balances. As for devaluation, I only hope that the fact that it is now being more freely discussed means that there is less danger of our having to resort to it.

Turning to the wider field, there is the question of the price of gold and the question of liquidity. As regards the price of gold, there are many theoretical reasons for contemplating the step of raising its value, but there is one decisive practical argument against it, already given by the noble Lord, Lord Harlech—namely, that the United States would not agree. If the dollar were to get into real difficulties, then I believe that the United States might resort to another policy which would not benefit the main gold producers, holders or hoarders in the world, be they governmental or private. But as a matter of fact I do not consider the dollar will get into that kind of difficulty. Indeed, there is some reason to think that at the present time the United States balance of payments may be running near to equilibrium.

There used to be talk about the need for the pound to look the dollar in the face, but it is much more important that the two currencies should go hand-in-hand, as indeed they have been doing in the recent past. They depend on each other to a marked degree, and few things have been more encouraging in our chequered financial experience lately than the effective collaboration and mutual understanding between British and American Treasuries and between the Bank of England and the Federal Reserve Bank.

LORD BOOTHBY

My Lords, if my noble friend will forgive me, one hand has been giving an awful lot of money to the other.

LORD SHERFIELD

Nevertheless, they have been hand-in-hand. This leads me very briefly, because it has already been very fully covered, to the question of liquidity. I accept the view of the noble Lord, Lord Robbins, that there is no shortage of international liquidity at the moment, but this may not remain the case, and the noble Lord, Lord Harlech, put this position much more strongly. The French position that no negotiations or even serious discussions of means of increasing international liquidity are possible until American and British payments are in balance is difficult to follow, for it may then be rather late to decide upon and set up the necessary mechanisms. It would surely be more logical to have an agreed plan ready, no doubt preferably on the lines of the one referred to by the noble Earl, Lord Long ford. The French refusal, like their efforts to encourage funding of the sterling balances or talk about sterling devaluation or both, is a measure of the seeming desire of General de Gaulle to use for political ends such financial weapons as he can lay his hand on to weaken the Anglo-Saxon currencies, though those weapons might be thought to be rather double-edged. As the noble Earl, Lord Longford, indicated, almost any of the plans for improving international liquidity would involve an alteration, and I suppose some might say a diminution, of the position of sterling as a reserve currency. But this can surely be accepted in return for the stability and the scope for increasing world trade which an improved international monetary system would bring with it. Finally, I would certainly agree with what has been said about the need to put our balance of payments right before we can come to terms with the Common Market.

So, I find myself in very broad agreement with the general thesis expounded by the noble Lord, Lord Aldington, the noble Lord, Lord Robbins, and others who have spoken on similar lines. And I am not ashamed of saying "me, too" to those distinguished authorities. Sterling should not be the scapegoat for our present ills. Our balance of payments, especially on invisible account, depends on the maintenance of the value of sterling both as a reserve and as a trading currency. The benefits of the sterling system outweigh the disadvantages, and I suggest that the prime causes of our present difficulties lie elsewhere. To conclude, the measures of restriction now in force should right the balance of payments if they are adhered to long enough. If we can control inflation at home and can limit and then reduce our overseas expenditure we can run a surplus and there is no sterling problem. If we cannot, then I think that any or all of the prescriptions for dealing with the sterling problem, and other ills which will then beset us, will be palliatives insufficient to effect a cure.

5.38 p.m.

LORD FRASER OF LONSDALE

My Lords, we are indebted to the noble Lord, Lord Aldington, for having introduced this important subject, and I myself have benefited much from listening to him and to the noble Earl, Lord Longford. I feel somewhat of a layman amongst great experts, and offer my brief speech with some diffidence. But there are some thoughts which I wish to contribute for what they are worth, and if they are in some sense controversial I hope noble Lords will believe that they are sincerely thought by me and are made, as I believe, in the hope that they will be a contribution to thinking about this very important matter.

The first thought is an ethical one, which arises out of the consideration that it is a very nice question how far you ought to ruin yourself on this earth in order to make sure, if you can, of being in line for a place in Heaven. We are supposed to have a great reputation for being an empirical country, a country that plays the hand the way it should be played; and it has been one of our characteristics and one of our sources of strength that in terms of history we have not been wholly unsuccessful. But there is growing up in this country now an adherence to what are called ideals or ideologies or, as I believe, woolly-headed thoughts, which lead us astray from our best judgment as to what is best for us and what is best for all whom we try to serve in the world. It is a good thing to wish to help the poor in your own country. It is a good thing to wish to help the poor in undeveloped or developing countries. But you cannot help either of them unless you have the strength to do it and we are rapidly losing our strength, not only in a material sense but the strength of our voice as well, because the voice of Britain is as nothing if Britain is known to be in a bad financial position. I am afraid that is what is generally believed of us.

Now I want to make some practical suggestions as to how we can help ourselves and thereby help all the good causes in the world that we want to help. In the course of what I will say, I shall talk about Africa, and more particularly South Africa, not to stray away from the strength of sterling, but rather to make suggestions as to ways in which we can strengthen sterling from parts of the world that I know particularly well and where, as your Lordships know, I have interests which are the reason for my knowing those parts so well.

We refuse to sell aeroplanes to South Africa. Those aeroplanes are primarily coastal defence aeroplanes. Of course it cannot be denied that they could he used for some other purposes, but that is what they are, and were; and they were linked up with the Simonstown Agreement. I will not develop this theme, but merely point out that we lose trade in aeroplanes by refusing to sell those weapons of war to the South Africans. We not only lose trade in aeroplanes, but we also lose trade in motor cars and in every other sphere. We may even lose a footing in Simonstown, which is of vital importance to us if we are to play any role in the Far East, and even any role in the Middle East, as those who served in the war or who were in public affairs, or indeed in military affairs, in the last twenty years will remember.

But in addition to this, we quarrel with Rhodesia in a vain attempt to secure what is, for all practical purposes, an unobtainable ideal. We thereby weaken ourselves and make ourselves less able to help our many friends throughout Africa, and indeed in other places in the world. In the process we ruin one of our best friends, Zambia. It strikes me that we are paying too dearly for the ideal, whatever the ideal may be. It also strikes me that there is a great hypocrisy in all this. Did we not supply arms to Russia? And did not Russia use them to subjugate the Baltic States? Who complains about that? Who takes it to The Hague or to New York, even to be considered? Did we not until recently, and perhaps do even now, supply arms to Cyprus, to Aden, to the three Territories which are part of Southern Africa and are adjacent to South Africa—arms for police purposes and arms for the maintenance of law and order? Do we not do that? I think so. Yet we do not supply them to South Africa.

South Africa says, "We want to be thought of as being part of the West." If there were a war between the West and Communism, South Africa would want to be on the side of the West, and we surely would want that important ally, for strategic reasons as well as for their innate strength and courage. But we do not hesitate to quarrel with them in peace time, and to hope that they will stand by us in war. In my judgment, not only is that crazy and unfaithful to old friends, but it also weakens sterling. What the bill must be for quarrelling with South Africa and Rhodesia, I do not know, but it must be hundreds of millions of pounds, and it must seriously have affected our balance-of-payments position as well.

I will now make three, I hope, positive suggestions whereby we can strengthen sterling. The first is that we sell arms or, if the Front Bench opposite are too squeamish to talk about "selling" arms, shall we say, "deal" in weapons, or perhaps defence equipment. I noticed the other days that the Front Bench speaker ran away from "selling arms "and talked about "defence equipment". Never mind what it is called. I suggest that we sell defence equipment to all nations with whom we are in diplomatic relations, rather than not sell to some of them for reasons that are not sound, not sensible and, as I have already said, in my judgment hypocritical. Thereby, by the sales that we make, we should help sterling. Lord Watkinson made an appeal for every conceivable legitimate and proper export. Is it wrong to sell arms to your friends? Somebody else will if you do not. If you lose all your trade all over the world, in penny numbers here, there and everywhere, you will soon be unable to sell anything to anybody.

My next suggestion is, I fear, going to be rather like a voice crying in the wilderness, perhaps the only voice, except that I did discern in Lord Sherfield's remarks, to which I listened with great interest, that he half, or a quarter, went along with the question of dealing with gold as one means of increasing liquidity. He said that there is one good reason why it should not be done—namely, that the Americans will not have it. I wonder whether that is a good reason. If lie had other reasons he did not give them to us. But let us deal with that one reason, that the Americans will not have it. My suggestion is that we talk to them now about raising the price of gold. If they will not do it, let us do it ourselves. I would put forward the argument, first, that the sterling area has in it more gold than any other part of the world. It therefore must benefit sterling. Secondly, history has shown us that wherever and whenever a new gold field has been found there has been an upsurge in world trade, currencies have become balanced. prosperity has risen and it has lasted for a long period. It is unlikely that a new gold field of any magnitude will now be found, but much gold could be mined if the price was realistic, and that gold would be included in the contribution that gold makes to liquidity.

Almost every speaker has said that the world lacks liquidity. So what are we doing about it? I am bound to say that the noble Earl, Lord Longford, made me wonder whether perhaps they are really getting to something in the I.M.F. and elsewhere now. Let us look at the history of this matter. Ever since Keynes, and probably long before him, the world has been looking for a symbol to take the place of gold, presumably a bit of paper. The importance of this bit of paper will be that everybody believes in it. But the truth is that nobody believes in policians anywhere. Nor do they believe in Treasuries—not even their own, let alone the other fellow's. Nothing is so good as gold; managed money is as distasteful and as suspect as managed news, and the world is becoming more and more full of both kinds. Gold alone commands the respect of all men; and even if a rise in the price of gold and an increase in the amount of gold are not the whole solution they may make some contribution towards solving the problem, and it seems to me to be better than a symbol.

Better still, rather than raise the price of gold, I should like to see the price of gold freed altogether from a fixed price. No doubt the price would rise at the moment, which no doubt would help Russia and also help South Africa. I should like briefly to examine those two propositions. The Americans would not like it if it helped Russia—Heaven knows why not. Nothing would seem to me to be more likely to help to contain Communism, and prevent it from creeping all over the world, than that Russia should prosper. Therefore if a rise in the price of gold would help Russia to prosper, as I think it would, then surely that would be meeting one of America's main aims, that of trying to contain Communism. If it helped South Africa, then South Africa would do more trade with the whole world, and that would bring benefit to Britain, especially to British shipping, insurance, and other British trade in every respect.

I have yet to learn that it is a good policy to cut off your nose to spite your face, and it seems to me that the idea that the price of gold cannot be raised because it would help the Russians or help the South Africans—and many people do not like Russia; and many others do not like South Africa—is one which is utterly selfish and foolish. The advantages of freeing gold, rather than its being fixed at a standard price, would probably result in its price rising now, but it would never again be blocked at a price which puts everything out of equilibrium. There would be automatic and gentle control, and self-adjustment of the strains between the currencies.

When I was a young man and read a little economics, I was told that in a world where trade and behaviour is generally free it is possible to tie up one or two elements of the economy, and that the others which are still free will bring about equilibrium. But we do not live in a world where trade and economic affairs are generally free. We live in a world in which they are tightly controlled; in which prices are controlled, dividends are to be controlled, wages are controlled; a world in which there are tariffs, trade quotas and all the rest of it. In addition, the relationship between the currencies is itself controlled. I was taught that where you try to apply controls to everything, unless you can control man completely, as they have tried to do in Russia (and very possibly some in the Party opposite are thinking about it; there, are signs that they are doing so) you cannot control all man's activities. If you try to do so, something will break. I fear that what will break will be the exchange. I would much rather see Britain take a course in which she tries to manage her affairs by sensibly making use of her enormous assets. There is all this gold in the sterling area which is not to be found elsewhere in the world in anything like that quantity. Thus she should help to make herself even stronger, so that her voice can be heard and so that she can help all those peoples of the world for whom we have a sense of trusteeship, history, and a sense of honour, as well as a great desire to be friends.

5.55 p.m.

LORD HANK EY

My Lords, I should like to join those who have thanked the noble Lord, Lord Aldington, for putting down this Motion on these very important issues. I regret that I have an engagement of many weeks' standing and may not be able to remain until the end of this debate. I warmly agree with what has been said about the importance to this country of sterling and the sterling area. At this time of night I will not try to repeat what has been said on the technical aspects, but I should like to say a few words about the broader and more fundamental aspects of the use of sterling in world trade, and to turn more to the future than to the past.

In 1965 we sent over 35 per cent. of our exports to the sterling area. By comparison we sent only 19 per cent. to the Common Market, and 14 per cent. to EFTA. This is hardly surprising. The Commonwealth contains 25 per cent. of the population of the world and it does 25 per cent. of world trade. We have a long association with the largest and most developed countries in the Commonwealth. If we join the Common Market, as I hope we shall, it is essential that we do not turn our back on the Commonwealth and the sterling area. This is essential not only for ourselves, but also for Europe, and for the Commonwealth. I should like to take these three elements in turn.

First, as regards ourselves, if, by joining the Common Market, we were to disrupt our trade with the sterling area we should certainly lose far more than we gained. The resulting unemployment here would not facilitate our entry into Europe; nor would it increase the popularity of the European idea with our own people. However, if we handle matters right, I see no reason why our entry into Europe should in fact disrupt our trade with the sterling area. The other members of the Common Market have carefully protected themselves against any such disruption in their own trade.

The French do not apply the common external tariff to their trade with former French territories, including Algeria, Morocco and Tunis. The Germans do not apply it to trade with Eastern Germany. The Dutch, the Belgians and the Italians have similar special arrangements. When some Europeans ask us to sign the Treaty of Rome on the dotted line, they expect us to endorse those pro visions; and so we shall, of course. But unless they deliberately want to keep us out, as General de Gaulle did in 1963, they will hardly ask us to do with 30 per cent. of our trade what they avoided doing with a smaller percentage of their own. They must fully realise that our own position requires analogous if not similar arrangements to be made. Let us not be under any illusion but that special arrangements of some sort or other are essential for our entry, if sterling is to maintain its position in the new Europe.

But I do not think this should be too difficult, because our European partners know that a prosperous and expanding United Kingdom economy and balance of payments are essential if we are to repay the enormous sums which they have lent us, and also because the continuance of trade and payments facilities with and for the overseas countries of the sterling area, as of the franc zone, is of great importance to the Common Market and also to EFTA. I should like to develop this point.

Hitler used to say that Germany was Ein Volk ohne Raum—a people without space. I venture to think that Europe without access to these vast overseas areas, with which we are all connected, will just be Viele Völker ohne Raum—a lot of peoples without space. We do not want to shut ourselves in, as the Germans felt shut in before the war. Nor, as a matter of fact, do most of the Europeans. We Europeans, and this goes for the whole of Europe, the Common Market, EFTA and all the rest, need these overseas countries as sources of raw materials, as markets and as areas in which to deploy our abundant European genius. And the less developed countries, both in the sterling area and in the franc zone and all the others, need Europe as a rich and growing market for their products, as a source of capital, machines, investment goods of all sorts, and ideas; and more especially as a source of technical help and friendly advice from countries which know their technical background and understand their ways.

In short, what I am saying is that an inward-looking Europe, without extensive continuing relations with the sterling area and other overseas countries, would not make a great deal of sense as an economic entity. We cannot use fully divide the world into bits. I hope, therefore, that the Common Market will avoid inward-looking tendencies and all philosophies of neo-isolationism. One hopes that the outward-looking trend will be firmly set by a successful Kennedy Round agreement, in spite of the great difficulties and delays which the Kennedy Round has hitherto met with. Meanwhile, it is interesting that some members of the Commonwealth are making, and are able to make, direct arrangements with the Common Market.

This brings me to the overseas sterling area and Commonwealth countries themselves, whose strong interest in the United Kingdom and Europe as a source of capital, technical assistance and ideas, and as a growing market I have already mentioned. The sterling area offers remarkable and highly-valued facilities to the member countries. It provides enormously valued and appreciated facilities for making current trade payments, for capital movements, short and long term, and for all the essential financial facilities on which modern trade and commerce depend. Anyone who does not believe this has only to look at the payments difficulties of many other overseas countries, or for that matter of countries behind the Iron Curtain.

It is a sad fact that the economic weakness or sluggishness of the United Kingdom has begun to undermine the value of the sterling area for the moment. We can no longer maintain our exports of capital to the developed areas like Australia and New Zealand. But this is not a reason for decrying the value of the sterling area system as a whole and when some extremists do so, they render a poor service to this country, to Europe itself and to the overseas countries. But it is true that the United Kingdom alone, even if it were more prosperous, could hardly continue to be an adequate economic base for the Commonwealth in this era of general economic expansion.

I believe that when the dust of Rhodesia settles it will be seen that the Commonwealth, with its new Secretariat in Marlborough House, has begun a new period of development. The amorphous organisation we had before—or the lack of it—was probably all right when there were only five or six Commonwealth countries, though I doubt even that. It is essential, anyhow, to have a proper organisation with the present membership of 28 countries. We have found at O.E.C.D., with 21 member countries, that you cannot get agreement to do any thing at all without long preparation. Whatever is proposed, someone is sure to get up and object, or make conditions, or have to refer home; and time must be taken to clear the objection or find a way round it. It requires much study and application at official levels before proposals can go to Ministers. Therefore, to deal with this, a continuing organisation is essential, and at last we have it. The Common Market also has at Brussels an excellent system of consultation with its associated overseas countries with a very powerful technical secretariat.

It follows from what I have said, I think, that when we join Europe we must preserve in some form or other the essential facilities of the sterling area. That is one of the best contributions we can make to Europe and to the world. The sterling area provides to some degree a system of shared liquidity, of aiding each other with our reserves. But we have to recognise that our own reserves, which have been obstinately stationary for years, are getting increasingly slender or inadequate to finance the growing trade of the sterling area. With the aid of the International Monetary Fund we can no doubt hope to make the grade for some time yet.

It is not, I believe, just a coincidence that, with present convertibility, the two countries with the most highly-developed capital markets—namely, the United Kingdom and the United States—feel the most strain on their balance of payments and on their reserves of gold and foreign exchange. It is very good to hear that the French are considering re-creating their formerly very active capital market. I hope that other developed countries will do the same. There is a growing problem here, because the amount of trade to be financed is increasing continually and so are the amounts of money for transfer or awaiting employment and liable to move at short notice; in particular, the sterling and dollar balances, Euro-dollars and so on. This situation is going to get more awkward and more complicated as trade increases, as the world gets richer, and as this and future Development Decades continue.

To-day we have heard a good deal about the sterling balances. I must say that I have frequently been annoyed when serving abroad in the Foreign Service to hear Continental economists speak as if the sterling and dollar balances were in themselves hopelessly unsound or undesirable. Someone has to perform a banking function for the whole world, and I have not met anyone who mistrusted a bank for receiving large deposits. More often criticism is directed at a bank for giving too large advances at the expense of its liquidity, or for borrowing short and lending long. I entirely agree with what the noble Lord, Lord Robbins, said in this general connection, and that we have no alternative but to rectify our current balance, even if we have to do it the hard way. I think we also have to recognise that in the sterling area—and also outside it—there is probably an optimum relationship between the current level of our own trade, the size of our reserves and the amount of funds, short and long term, that we can safely allow to swing to and fro across the exchanges.

I should like to give an example to illustrate this. The Atlantic and sterling area economy is like a truck driver with a rather "ropey" old truck and a huge tank of liquid behind, The truck bumps and swings across potholes in the bad road, and the windscreen is dirty so that the driver cannot see very much of the road ahead. Consequently, the liquid in his tank swings to and fro and is in danger of upsetting the whole truck. What can be done to make the poor fellow's journey less hazardous? One very old-fashioned French member of the board of the company which owns the truck wants to make the cargo solid; in real terms, to make payments in gold. I think that is a really bothersome solution, and I am surprised that the noble Lord, Lord Fraser of Lonsdale, should favour it.

A better answer has been to put baffle-plates in the tank, for the liquid can then move freely to and fro, though it cannot all move in the same direction at the same moment. These "baffle-plates", in real terms, are the remaining restrictions on capital movements which prevent too much liquidity moving all at once. They are agreed internationally and are contained in the O.E.C.D. Code of Capital Movements. In the United Kingdom we have had to maintain, and even increase, the size of the baffle-plates. In the United States they have had to do the same, but on a voluntary basis.

But, my Lords, we want something better than restrictions. Eventually, I feel sure, there will have to be a better or at least an improved world-wide system for regulating or creating reserves and liquidity, in which the developed and also the underdeveloped countries will all join. It will be sure to affect or include the sterling area. Perhaps our entry into Europe will be the occasion for a meeting of minds over this problem. It cannot for very long be left to chance. I warmly agree with what the noble Lord, Lord Harlech, and also the noble Lord, Lord Sherfield, said in this connection. I am quite sure that the principles of the sterling area will be of inestimable benefit as guidance in this connection, more especially for making the most fertile relationship between the developed and the underdeveloped countries.

I have one final thought on all this. The developed countries in O.E.C.D. are never tired of reminding each other of the duties of surplus and deficit countries towards each other in the state of economic interdependence in which we now find ourselves. We tell each other that the deficit countries must keep their internal economies in order and not create difficulty for the others or export inflationary tendencies to other countries. The surplus countries, on their side, must not by their internal policies make it harder for others to pay them; they must pursue generous and liberal trade policies, and be prepared to help others by lending.

Now Europe as a whole, and O.E.C.D. as a whole, has a large balance-of-payments surplus with the rest of the world. We must apply to the rest of the world the advice which we give to each other. We must be willing to buy their products. And that goes for manufactures as well as raw materials. We must also be willing to lend and to facilitate a solution of their payments problems. In the payments field the sterling area provides the background and mechanisms which are necessary, economically and in equity, to the underdeveloped countries. When we enter the Common Market it is essential that we carry something like the sterling area with us, or that something similar survives, to enable the less developed countries to face their payments problems.

My Lords, I hope that we shall be able to adopt as our motto the old French saying, "Plus ça change, plus c'est la mëme chose." The sterling area is probably going to be more necessary in the future than it ever was before.

6.14 p.m.

LORD BARNBY

My Lords, I am glad that I put my name down to speak to-day because it gives me the opportunity to congratulate my noble friend who has just sat down. Over a period of two decades he had the good fortune to be an observer of an interesting scene, and we appreciate hearing from him. I remember very well his last contribution, which whetted my appetite for what we should hear to-day. We have not been disappointed.

After the notable contributions which have been made this afternoon, it is not my intention to digress from the appeal for short speeches late in the debate. Like everybody else in the House, I am grateful to the noble Lord, Lord Aldington, for initiating this debate. All of us who had the chance to come into contact with him when he was a Minister realised then that in whatever field of activity he worked he would be successful. Now, having had ministerial responsibility, he brings with him great experience in the City and in business which qualifies him to initiate this debate. I thought he made a rather interesting, veiled indictment of the Government when he said that, whatever might be the causes of the weaknesses in sterling, they certainly were not caused by the sterling balances in London. He emphasised the size of these sterling balances and their vulnerability should their holders, because of anxiety, draw them out. He also spoke a great deal about the tidying-up of these balances.

My Lords, I come straight to one of the three points I particularly want to make, which deals with the leads and lags of sterling, to which the noble Lord, Lord Aldington, made reference. If I remember rightly, he said that if in either case the adverse feelings of operators were turned against sterling it would in one week produce a disadvantage to sterling of £110 million. I have just come back from Canada. There, I met a good friend of mine who is a very large importer into Canada. He said, "In the past I have been in the habit of paying for everything I got from Britain within 30 days. To-day, I buy nothing from my suppliers unless it is on a six-month bill". I naturally asked why, and he said, "Because, of course, I have no confidence that sterling will not be devalued within some measurable time." Again I asked why, and he said, "Because of the disregard by the present Government of certain principles which I have—the market price economy, the profit motive—and I am against nationalisation, too." I suppose that man might be representative of a great number of people overseas, and if many thought like him it might have a substantial effect upon sterling.

Like everybody else, I think that stopping inflation at home is the best way to avoid adverse feelings about sterling. Certainly the aggregate of the measures taken by the Government ought to correct things; but my surprise—I cannot resist saying this—is that the aggregate of those measures has not brought about much more effective results by now. I remember 1920 very vividly, and I remember 1931 very vividly. The medicine took effect very much more quickly then than it is doing now, and one might have expected a picture of handsome unemployment by this time. But what hypocrisy there is when aplying measures like these! I am not accusing the Government here, but in other circles there seems to be a ready expression of surprise that there will be great unemployment. I find myself completely unable to understand it.

The problem we are all talking about is the balance of payments, but the interesting thing is that a close examination seems to show that in 1964 the trouble lay not in the private sector but in the public sector. The deficit was undoubtedly due to Government overseas spending because, taking one year with another, the private sector has always more than paid its way. This deficit of £750 million-odd was more than covered by the United Kingdom's drawings from the I.M.F. Had these facts been made clear, and had the Government been able to halt internal inflation, there might have been no cause for the recent crisis.

We certainly had a most impressive contribution to our debate by the noble Lord, Lord Robbins. Incidentally one of the reasons why I want to be brief is that I do not want to stand between the noble Lord, Lord Boothby, and the House, for he always make a contribution which is interesting not only in fact but even more so in presentation. The noble Lord, Lord Robbins, emphasised that the Bretton Woods Agreement was out of date and that there was nothing in its place. Surely at that time the U.S.A. wanted to see the break-up of the Empire, as it then was, the break-up of sterling influence, and so on. Now the U.S.A. is obviously behind the wish to make sterling strong. My noble Deputy Leader, Lord Harlech, made a strong appeal for a new international review. That, surely, is what we want.

Britain, with her wide experience, can surely make a great contribution in solving these matters. The present weakness of sterling appears to arise from the mismanagement of the home economy. The erosion of the purchasing power of the pound is understood to be proceeding at a quicker pace than that of currencies of other countries with which we compete. My Lords, I will conclude with Lord Aldington's remark, that when confidence in the pound wavers the balances are imperilled.

6.24 p.m.

LORD FRANCIS-WILLIAMS

My Lords, I must apologise for the fact that an official meeting that I could not escape kept me from the opening part of this debate. I am extremely sorry to have missed Lord Aldington's opening speech. I always listen with the greatest interest to what he says, and to what other noble Lords say. Therefore if, in what I hope will be rather a brief intervention, I touch on matters which have already been touched upon, I can only apologise.

Some 35 years ago, when I was much younger, slimmer and a great deal more optimistic than I now am, I combined with a friend of mine, a writer on foreign affairs. Mr. W. N. Ewer, in writing a pamphlet called The World Muddle. It seemed to us an appropriate title at that time and, on the whole, it seems more appropriate now. We were much more optimistic than perhaps either of us would be now; and we concluded, writing after the breakdown of the gold standard in 1931 and the world-wide economic crisis, that at least it was probable that out of all this the world had learned, and could be expected to devise an international exchange system that would be more helpful in avoiding future crises. We even optimistically put forward some suggested alternatives which have since become somewhat more respectable than they were then.

But, in fact, although the old gold standard in its impurity has gone from us in this country, all we have done is to retain it at one remove in a gold exchange standard. We do not have gold behind the counter but have it as a brooding presence: not "Gold the father" but "Gold the holy ghost". It is a thought which I leave with your Lordships that if we had found gold instead of gas under the North Sea our exchange crisis would immediately have been over. The guarantee of a plentiful supply of this metal (whose only real value, so far as I am concerned, is that wedding rings can be made from it) would have brought not only every "gnome" in Zurich but every currency speculator right across the world rushing back to the pound. Because so long as it is believed that your currency can be changed for gold at a fixed price or, with a gold exchange standard, into another currency, the dollar, which can, at the last resort, be so exchanged, you are all right; if not, then not.

I do not want to pretend that our balance of payments is not important. Of course it is. We must do, as we are doing, everything we can to get it right. But the plain fact remains that so long as we continue to try to operate an international reserve currency based ultimately on gold, then even the most minimal and temporary imbalance of our international exchange position is capable of magnifying a minor exchange problem into a major economic crisis.

This is not matter of theory; it is a matter of historical record. It happened in the 'twenties; it happened in 1931; it is happening now. Under an inter national monetary system which in my view might have been deliberately designed to make every problem, the cost of maintaining the pound as a reserve currency has repeatedly to be paid for in the standard of living of ordinary people and the common-sense developments of sound business management. This is what always happens; and this, of course, is what is happening again.

When William Jennings Bryan stumped the United States appealing to the people of America not to allow humanity to be crucified on a cross of gold, no doubt he talked a good deal of nonsense. He was the mouthpiece of a silver lobby that would have made things no better, and might even have made them worse. But almost against his judgment, he uttered a profound truth. It is time not only that demagogic politicians but intelligent economists, businessmen and bankers all over the world rallied to that cry—and, to be fair, they are now doing so in increasing numbers. The academic and professional case for replacing the gold exchange standard, by which the pound, along with other reserve currencies, is imprisoned, is so strong that it is now practically impossible to find a reputable witness to defend the present system.

Not only does this gold exchange system make periodic exchange crises in evitable; but we have surely had enough of them to convince us (or to convince anybody but the economically illiterate) that that is so. The system makes it certain that the world will suffer over a period from a congenital lack of monetary liquidity. The noble Lord, Lord Robbins, holds the view that there is no lack of liquidity at the present time. I do not think anybody would agree with him on that; but t think even more—

LORD ROBBINS

My Lords, with respect, I submitted that there had not been a lack of liquidity since the war. I said I could easily conceive a lack of liquidity emerging quite shortly. But my contention was that it is not very relevant to talk about a lack of liquidity in a period of rapidly advancing prices which has been the case in nearly every great country of the world since the conclusion of hostilities.

LORD FRANCIS-WILLIAMS

I must apologise. Unfortunately, I came in during the middle of the noble Lord's speech. Perhaps I did not get the whole of his meaning; but I think it cannot be doubted that this present system makes it practically inevitable that there will be an insufficient volume of credit which is regularly available for developing countries. I am glad to see that this was emphasised in the report of the group of eminent people appointed to examine the matter by the United Nations Conference on Trade and Development, of which the noble Lord, Lord Kahn, was one of the distinguished members.

I believe that we—and by "we" I mean not only this country but the world as a whole—are trying to operate a system of international exchange on a base which is far too small. It is a remarkable fact that the price of gold in dollars, which is the foundation of the international monetary exchange system, has not changed since the 'thirties, although the average price of commodities, which re presents real wealth and genuine supply and demand, has risen two-and-a-half times in that period.

This has already been mentioned; and there are many who argue in the light of this—as the noble Lord, Lord Fraser of Lonsdale, did—that what is needed is simply to raise the price of gold. "Stick with gold", they say in effect, "but let's pretend it has a quite different value". As I say, this, and the objections to it, have been dealt with here by the noble Lord, Lord Harlech, the noble Lord, Lord Sherfield, and others; but so illogical are the procedures by which we govern our monetary affairs at present that an arbitrary rise in the price of gold might well, by raising the value of gold reserves, increase world liquidity, stimulate economic activity, improve world trade, increase the flow of capital and financial aid to under developed countries—and all by putting a different value on every ounce of a useless metal hidden away in vaults in the ground. What a way to run a railroad! But it would also quite arbitrarily devalue currencies and haphazardly present gold holders with capital gains out of all proportion to their deserts or the real needs of world economy.

I suggest—and I am not by any means alone in suggesting this—that even if it were done, even if there were these immediate results, it would offer no permanent solution to the problems of inter national exchange. We should merely confirm ourselves in our monetary in sanity. We should be back again at the same place on the golden roundabout in a few years' time. The time has surely come to move towards a more intelligent system of ensuring that world liquidity—the volume of internationally accept able currency and credit needed to finance world trade and development—shall be regularly adjusted according to a sensible appraisal of the world's needs. I think that Britain, as the guardian of one of the two great reserve currencies of the world, with a knowledge and experience of international banking and investment scarcely equalled and certainly not rivalled anywhere, should take a firm and positive lead in bringing this about.

Practically everyone who has studied the matter at all agrees that such a reform is now needed. So do most political leaders. President Johnson has said so; Mr. Macmillan said so; Mr. Maudling has said so; Mr. Wilson has said so. So, I dare say, has Mr. Heath—although he says so much on so many things that I am not always able to keep up with him. Even President de Gaulle has said so. But nothing practical gets done. Of course there are difficulties, and General de Gaulle is one of them. In this, as in so much else, he thinks primarily of French prestige. He wants to demote the dollar and the pound from their position as the chief international trading currencies, and he will not be happy with anything that does not have this among its prime objectives. But if de Gaulle will not co-operate except on terms unacceptable to everyone else, let us proceed without him, at least in plotting the course we could take in the future.

I know that the International Monetary Fund and the Group of Ten have both been studying this, and that is all to the good. But where is the "head of steam"; where is the real energy behind trying to do something? I believe that this is one of the most vital matters in the world to-day. It is on this that we should be having summit conferences. There are, of course, several alternatives to the present system which are worth some examination. There are the Stamp Plan, the Triffin Plan, the commodity index plan and several others. I do not want to seek to discriminate between them here and now. All I say is that it is time they were brought out from the seclusion of academic lecture halls and turned into the raw material of serious and positive examination at the highest political levels.

So far as Britain is concerned, as I have said, we have manifestly, as the first step, to get our balance-of-payments position right. We cannot go preaching reform, as if we are doing so as part of a rescue operation, from a weak position. We have first to show ourselves strong, and that is what I believe we are now beginning to do, and what we shall show ourselves to be before very long. But we ought to be planning ahead in this matter with a much greater drive and intensity than we seem to be doing; and in the course of it I suggest that we probably ought to be taking a fresh look at the whole structure of many of our traditional City institutions and their place in the modem world. I do not doubt that they have as great a place in the future as they have had in the past, but it may well be, in many ways, in a very different form from that of the past.

I do not doubt that sterling as a currency of international trade, backed by the immense and accumulated experience of the City and industry in these matters, will continue to have a great part to play in the world, whatever addition to, or substitution for, sterling is found in a new international re serve currency. What I do say is that we can no longer continue to pretend that we can operate reserve currency functions alone, or even in conjunction with the United States, any more than we can afford to police the world, either alone or in conjunction with the U.S.A. It is an international job, and we must give a definite lead in making it international, if we do not want to run ourselves into repeated bankruptcy.

As I say—and this is my concluding thought—we may well need to take a fresh look at the institutions of the City, and the relationship of finance and banking internationally in the process of doing so. I think that the City needs to re-examine itself and to be examined, just as much as a great deal of the rest of our economic structure does. I suggest that there is a good case for a new Committee on Finance and Industry like the extremely valuable Macmillan Committee in the 1930s. The Macmillan Committee may not have produced any thing very concrete, but it threw light in a great many dark places, and it started a good deal of thinking about problems. I think that is what we need to do now. I do not think that there is any need for the City to be apprehensive about such a Committee. I belong to a profession, or an industry, that has been the subject of two Royal Commissions in the space of sixteen years since the end of the war. I think that is a record.

LORD ROBBINS

My Lords, may I inquire whether the noble Lord dismisses altogether the value of the labours of the Radcliffe Committee which quite recently did exactly what he is now suggesting?

LORD FRANCIS-WILLIAMS

My Lords, I agree that the work of the Radcliffe Committee was very valuable, but I think that we want something with a much broader base, a Committee which is looking at the whole financial operations of institutions of this country in relationship to their place in what I conceive will be—and in many ways ought to become—a quite different international pattern, and certainly a different inter national exchange pattern. I think that we need intense rethinking upon that. I believe that this question of considering the place of sterling as an exchange currency in the world, and of our place as a nation in the world in regard to the whole of monetary movements of the future, is one of the most urgent that faces us. There is a great deal of thinking about it. What I find lacking is a sense of political urgency on the part of the Government and of political Parties about the need to do it as a first priority of thinking and planning. My Lords, I believe that it must be done as a first priority, and I do not believe that we have a great deal of time to waste.

6.41 p.m.

LORD BOOTHBY

My Lords, a few years ago I attended a concert at which the conductor was an old friend of mine, the late Sir Thomas Beecham. The first part of the concert was devoted exclusively to works of Wagner, and at the end of the interval, as was his custom, Sir Thomas said a few words to the audience. He said, "Ladies and gentle men, this has been pretty heavy slogging. Now let us have some lollipops". I do not think that any noble Lord would suggest that this afternoon has been any thing but pretty heavy slogging; and I only wish that I could give your Lord ships a "lollipop". I will try to brighten it a bit, but I rise without any sense of exhilaration at all. One of the reasons is that I find myself in agreement with almost everything that has been said, and that always depresses me.

I should like to echo the thanks which every noble Lord has expressed to the noble Lord, Lord Aldington, for raising this subject, which, as the noble Lord, Lord Harlech, said, is certainly the most important that now confronts us. But do not let us delude ourselves. It is not a gay subject. There is nothing we can laugh at. I have been playing the record I am about to play again for the last forty years. Few people have ever been anxious to listen to it. It is now very old and scratched, and I can hardly blame those who want to turn it off now forever; but it remains a fine record, true and justified over and over again by the events of those forty years.

Posterity will marvel at our abject failure to deal adequately with monetary problems or to evolve a rational monetary system from the end of the First World War right down to the present day. I am afraid that my uncle the late Lord Cunliffe, who was Governor of the Bank of England during the First World War, started it. By recommending that we should return to the gold standard at the pre-war parity of exchange, he set us on the deflationary course which we pursued relentlessly for ten years and which all but ruined British industry and agriculture and kept between 1½ and 3 million men on the dole. But Lord Cunliffe had not at his disposal the rich fund of knowledge which emerged after his time.

The nearest approach we ever got to a rational currency system and one which would have given us a good start was the Genoa Conference of 1922, which, in a series of currency resolutions—and I am going to read them out because the Treasury may read them to morrow and I do not suppose that they have read them before—recommended, first, a conference of central banks of issue; secondly, the subsequent practice of continuous co-operation between them; thirdly, a monetary convention based on a gold exchange standard; fourthly, restriction of the circulation of gold; fifthly, a redistribution of gold reserves; and, sixthly, the regulation of credit with a view not only to maintaining currencies at par with one another, but also to preventing undue fluctuations in the purchasing power of gold. This was far in advance of anything we have achieved since. I am proud to say that I have in my possession, thanks to my friend, Mr. Siepmann, of the Bank of England, the original draft of the Genoa Resolutions, drafted by the late Sir Basil Blackett.

The Genoa Conference crashed for political reasons. The Conference of the central banks was never held, and the currency resolutions were never put into operation. Rathenau went home to be assassinated, and Lloyd George came home to be overthrown. And the reins of the Bank of England fell into the hands of Montagu Norman, with hot support from the Treasury.

I do not need to tell the noble Lord, Lord Francis-Williams, about Montagu Norman. But he was a far greater sinner than my uncle, because he had at his disposal the theories evolved by the greatest economist of our time—perhaps of all time—John Maynard Keynes. He could not answer him before the Macmillan Committee on currency, but contented himself by saying, with an almost sublime arrogance, "The dogs bark, but the caravan passes on". That was the attitude of the Governor of the Bank of England—in perpetuity, at that time. Keynes was defeated before the war by the Bank of England and the Treasury.

He was defeated again at Bretton Woods in 1945, when he tried to give the International Monetary Fund adequate liquid reserves, and was prevented from doing so by Vinson and Harry Dexter White. I must say to my noble friend Lord Robbins that I think he was a bit smug about Bretton Woods—I am not saying for a moment because he took part in it. I think he made out that it was a very splendid affair, and that it has kept us going during the last twenty years jolly well. That was not the view of Keynes at the time.

LORD ROBBINS

My Lords, would the noble Lord be kind enough to give me the reference to that utterance.

LORD BOOTHBY

My Lords, I think my noble friend said that clearly. He suggested that Bretton Woods had been extremely satisfactory and worked extremely well, and that we are not suffer- ing now from any international illiquidity, though it might happen. I think that the noble Lord will find that he said it.

LORD ROBBINS

My Lords, with the deepest respect, I did say that I did not think the world had suffered from a lack of liquidity in the years since the war, but my thoughts on Bretton Woods are considerably more complicated than the noble Lord is giving your Lordships' House to believe.

LORD BOOTHBY

In that case, I can only say that I am delighted to hear it. The more complex they are, the happier I shall be. We are now suffering from international illiquidity. As the noble Lord, Lord Harlech, said, the danger is going to be much greater if we do not do something about it; but the whole drain on dollars, the whole outflow of dollars and sterling, is caused by lack of international liquidity. Dollars and sterling have had to do what I.M.F. should be doing, and that is causing a great strain. The time is now coming—and I am sure that here I carry the noble Lord with me—when the United States and ourselves are bound to say, "We have had enough of this; we cannot spare any more." Liquidity is drying up. It is not going to dry up—it is drying up now, and we have been able to save it only by placing this tremendous strain on both the dollar and sterling.

I say that we are back to "square one". These days, I date all my letters "B.K."—that is, "Before Keynes". For that is where we are. Interest rates, both here and on the Continent of Europe, are far too high. This in itself throttles back production and productive investment, at home and overseas. Here I should like to say how impressed I was with what the noble Viscount, Lord Watkinson, said about overseas investment. He was right about the way the Government are penalising companies which are earning money overseas. I am not talking about private investment in dollar securities, but about companies which are being grossly penalised; and often their earnings are enormous by comparison with the initial capital outlay. I beg the noble Lord, Lord Shepherd, to make a specific answer to this question and tell us that Her Majesty's Government will examine carefully this question of companies which have invested overseas, not simply to make a capital profit or to speculate, but to earn money overseas, which is brought back to this country and which makes a tremendous difference to our balance of payments.

This is the penalty exacted by the attempt to retain sterling as an international reserve currency, at a fixed rate of exchange, without any cash reserves of our own, and with inadequate inter national liquid reserves. The noble Lord, Lord Robbins, was perfectly right to draw attention to the short-term liabilities of this country, and to remind us that any bank that has enormous short-term liabilities and no cash reserves is liable, sooner or later, to get into trouble. I have known one or two cases of banks getting into trouble for that reason: they lend, and then they cannot pay. That is bad for any bank.

To put it bluntly, we are now heading for a severe deflation by order of the Treasury; and as the noble Lord, Lord Harlech, said, this could turn into a major world recession. Squeezes, freezes, inordinately high taxation on earned incomes and earnings generally, a clampdown on any increase in wages or dividends—these are the only remedies the Treasury can think of to deal with a cost inflation which has risen in the last three years from 2½ per cent. to 6 per cent.

The results stare us in the face. A decline in productive investment, and with it a temporary cessation of economic growth, and very little prospect of the streamlining and modernisation of British industry—which, incidentally, was one of the main planks of the Labour Party at the last Election.

Gone with the wind are the carefully negotiated agreements to relate wages to productivity. The prospect of many more was rosy. Frank Cousins himself was an ardent supporter of this. But for the time being, with the present freeze, nothing can be done to relate wages to productivity, which was one of the most hopeful signs in the British economy six months ago. Have the Treasury, I sometimes ask myself, forgotten Keynes's famous basic theories: that the rate of interest by itself is powerless to equilibrate savings and investment; that savings are governed by total community income; and, perhaps most important, that investment is governed by the expectation of profit? I do not think the Treasury have ever remembered anything that Keynes has said.

I am reminded, when I survey this rather gloomy scene, of a debate in another place in October, 1957. I made a speech. It was, as the noble Lord, Lord Barnby, said, very good indeed. I said: The right honourable Member for Huyton"— that is the present Prime Minister— asked, towards the end of his speech, who was the eminence grise behind the economic policy of the Government. He thought that some strange figure, shrouded in the recesses of the Treasury, or perhaps not in the Treasury at all, might be directing the economic policy of the Government. On the face of it, this is a more plausible argument to-day than it was then. How ever, I pass over that and content myself with saying that I think I was probably right when I went on to say: Let me assure the right honourable gentle man that it is just the dear old Treasury, and nobody else. I hope that the Chancellor of the Exchequer will not take umbrage if I say that sometimes when I lie awake at night, I think what a good Chancellor I would have been myself; and when I do I feel quite sorry for the country. Then I remember something that was told to me by a high Treasury official thirty years ago when I was Parliamentary Private Secretary to the Chancellor of the Exchequer and incidentally, that high Treasury official was the late Sir James Grigg, who was then Principal Private Secretary. He said to me—'There is something which you, as a young, promising politician' — because that is what I once was— ought to know. There is only one man who has ever made the Treasury do what it did not want to do, and that was Lloyd George. And let me tell you something else; there will never be another'. It is all very well for the right honourable Member for Huyton to laugh, but I understand that he has designs on that office. He may well find himself in the same position, and, if so, I will be very interested to see what happens. I am inclined to think it will be the same old story."—[OFFICIAL REPORT, Commons, Vol. 575, col. 263;30/10/57.] Well, my Lords, that was nine years ago. It is still the same old story, and the scratched record still goes on playing, in the somewhat forlorn hope that someone one day will hear it.

What is to be done? I can tell the Government in a few crisp sentences what they should do, and after that I will sit down. First of all, they really must stop the Treasury clobbering industry blindly every time we have a balance-of-payments crisis, which is all they can think of. Mentally they cannot get beyond that. Secondly, I think the Government should tackle what has been called the "structural" deficit in the balance of payments. This can be done in four ways. First of all, it can be done by reducing Government expenditure, particularly on overseas defence. I see the difficulties, especially in the recent "confrontation" between Malaysia and Indonesia: but I agree with those who think that we cannot maintain these forces in Germany against a menace which at the moment is non-existent. Generally, we cannot act any longer as a policeman of the world.

Secondly, I think they can do much more in the way of direct measures to encourage exports, as the noble Viscount, Lord Watkinson, so rightly said. Thirdly, I think there should be a more serious attempt, by means of voluntary agreement, to put an end to restrictive practices, on both sides of industry. And, finally, I feel that we can put a far greater curb on unnecessary imports to this country, which are already running wildly in excess of our requirements. This can be done quite legally by quotas and restrictions. A 10 per cent. general all-round tax on imports was, first of all, against the rules of GATT, and, secondly, has not turned out to be very effective. All this would undoubtedly increase the demand for domestic products, but not at the cost of a further deterioration in our balance of payments. I still maintain that, in the long run, deflation is death. Growth is essential. And this can be attained and retained only by increased production and increased productivity.

Finally, as every speaker this afternoon has said, let the Government tackle the basic illness at its source and not the symptoms to which it gives rise. I still have no doubt in my own mind that it is the lack of adequate liquid reserves to sustain the potential volume of world production and trade, that is at the root of the trouble. I think the noble Lord, Lord Harlech, put his finger right on the spot about this. I agree with every other speaker that unilateral devaluation of the pound is absolutely ruled out. It would do no permanent good. In any case, we cannot do it, because we should be defaulting on the enormous debts that we have incurred. And I think the Government are to be congratulated most sincerely on holding firm against this.

I have just one further point. Two alternatives remain. The first is to in crease the liquid reserves of the Inter national Monetary Fund, turning it at the same time into a Central Bank for central banks, with similar powers of credit creation and contraction, as was recommended by the Radcliffe Committee, and also by various chairmen of banks—Lord Franks, Lord Monckton of Brenchley, and others; and I think probably it is also the considered opinion of the City of London. The second alternative—and it has been raised by the noble Lord, Lord Fraser of Lonsdale—is to increase the price of gold as the best starting point for international liquidity reform. And we ought to bear in mind that this is quite different from unilateral devaluation. There is a growing volume of opinion which is rather turning to the second view, if we do not get any further on the first.

I see the Government's difficulties to the first course—increasing the liquid reserves of the International Monetary Fund. There is great opposition in France, and considerable opposition in Germany and other Western European countries, who have substantial stocks of gold. There is also great opposition in the United States to an increase in the price of gold, as the noble Lords, Lord Harlech and Lord Sherfield, have said. At the moment we are afraid of both France and the United States. I think it is a fear that, in one case or the other, must be overcome. We can say to France: "We are going to try to negotiate, with or without you, an increase in the liquid reserves of the I.M.F., and we hope that if you do not feel able to participate now you will come along later"; or we can say to Washington—and I do not think I should capitulate quite to the extent that the Ambassadors have done: "We are sorry, but we do not seem to be making any headway at all in the International Monetary Fund. We are going to join our Continental neighbours and raise the price of gold."

I prefer the first alternative; but, in default of international agreement to re form the I.M.F. pretty quickly, of which there is at present no sign, I would re value gold, as a short-term rather than a long-term solution. It is significant that when the President of the Board of Trade remarked in Australia the other day that although a theoretical, technical case could certainly be made out for a gold price increase it was ruled out by practical political considerations". He was immediately "slapped down" by the Chancellor of the Exchequer, and he hastened to say that he had not meant it at all.

This is the measure of our fear of the United State of America—the fear, I suppose, of almost anyone who is heavily in debt, as we are to them. But we should bear in mind sometimes that, with out consulting anybody else at all, at the beginning of the 1930s President Roosevelt stopped the greatest world rescession that has ever taken place by revaluing the price of gold just on his own. The New Deal followed—and it was interesting and important and did a lot—but the thing that stopped the recession was the unilateral revaluation of gold by the United States. As a matter of fact, I think that this reluctance to revalue gold by the United States is dictated by political prejudice against the Soviet Union and South Africa, though it is, I believe, trivial in comparison with the issues at stake.

One cannot ignore gold. It remains the only medium of international exchange which commands universal and total trust, and seems likely to go on doing so for centuries to come, just as it has done for centuries past. The noble Lord, Lord Francis-Williams, may not like gold. I take a different view. The more gold I have, the happier I am. Those who talk about the demonetisation of gold are living in "Cloud Cuckoo-land." Nor do I think that a revaluation of gold would lead to increased hoarding. On the contrary, I believe it would lead to considerable dis-hoarding, caused by the desire to take profits and to reinvest them in productive industry which would once again hold out the prospect of profit. At least it would give us all a breathing space for a number of years during which we might be able to work out a better international monetary system, such as the noble Earl, Lord Longford, and the Government desire.

The fact remains that the dollar of 1966 is not the dollar of 1934 (I take that from Sir Frederick Leith-Ross: it is a plagiarism; it is not my own remark but it is a very good remark: and I repeat it), and by seeking to maintain the price of gold at the ludicrous level fixed at Bretton Woods we have greatly reduced the volume of international liquidity. As the noble Lord, Lord Francis-Williams, said, gold is the only commodity in the world which has not risen in price by 2½ per cent.—

SEVERAL NOBLE LORDS

Two and a half times.

LORD BOOTHBY

Yes, 2½ times. I wish to God it was 2½ per cent., but it is 2½ times! My Lords, I have finished on the subject of gold, but I feel quite strongly about it, and I feel that we ought not to chuck it out of the window just because Washington tells us to. We have got to be tough with somebody; it is about time the Government decided whom they are going to be tough with and then be tough.

Your Lordships will not expect me to sit down without saying a word or two about Europe. I am more firmly convinced than ever that our only hope for the future lies in and within Europe. I was absolutely furious when the noble Lord, Lord Aldington, "cribbed" from Hermann Abs the quotation which I was about to make. I have it all pasted in here, and it is so good that I am going to read it again. He said: It is, I believe, apparent from all this that if the United Kingdom joins the E.E.C. sterling will have a chance to preserve, and indeed strengthen, its position in Europe and in World trade. It does not seem appropriate to rely solely on the dollar as the key currency in world trade, and no currency on the European continent stands a chance in the longer run of being a key currency. Therefore I feel it would be in the interest of the Continent if there were such a propitious development for sterling. So I think we have nothing to be afraid of, so far as sterling is concerned, as an international trading currency, if we enter Europe.

Where do the Government stand in all this? Where does the Prime Minister stand? Is he a Brown and Jenkins man, or a Jay and Peart man? That is what I should like to know. We cannot be sure. He blows hot and he blows cold, and he does not seem to have quite made up his mind yet. Perhaps I have made it up for him this evening. I realise the difficulties and the dilemmas confronting the Government, but there are moments when it seems to me that Her Majesty's Government are not sure what they are doing, where they want to go, where in fact they are going, or what the hell they are going to do when they get there. That thought crosses my mind from time to time.

As Leader of the Opposition the Prime Minister demanded, in the House of Commons, an international conference on monetary policy and the international monetary system at the top level. Many of us on both sides of the House supported him, but he has not demanded it since he became Prime Minister. He had better get along, and do what he wanted to do. In his remarkable speech to the Economic Club of New York he said that if we failed to solve this monetary problem we should bring upon our heads the curses of future generations. All I say, my Lords, is let him act in that spirit!

7.5 p.m.

LORD SHEPHERD

My Lords, I am quite sure the House will agree that the noble Lord, Lord Boothby, has ended a fascinating debate in a fascinating way. He and other noble Lords have thanked the noble Lord, Lord Aldington, for introducing this Motion. I do not intend to be a hypocrite; I could not find it in my heart to thank him, at least to-night, in the sense that I have to wind up on what is obviously a difficult, complex and, I think it will be generally recognised. sensitive subject. I have to wind it up in the presence of the noble Lord, Lord Cobbold, for twelve years a very distinguished Governor of the Bank of England; three Ambassadors; the noble Lord, Lord Aldington, a City prince; my noble friend Lord Francis-Williams, a City editor, and, of course, the noble Lord, Lord Boothby.

LORD BOOTHBY

What is the noble Lord going to call me?

LORD SHEPHERD

I think I should need to have notice of that question. The only connection I think there is between the noble Lord, Lord Cobbold, and my self is that we both have the honour to serve in Her Majesty's Household.

It is a very difficult task which con fronts me, but I am reassured to this extent: that over the week-end I have been reading a large number of very interesting tracts and articles on the problems of sterling and economics. Each of them alone is utterly conclusive, and then one lays the articles side by side to see whether the conclusions agree. My Lords, it is true that if there were ten economists in a room there would be nine different answers. We have had an example of that this afternoon with the chit-chat that has been going on between the noble Lord, Lord Boothby—although I am not quite sure whether the noble Lord, Lord Robbins would regard the noble Lord, Lord Boothby as an economist.

LORD BOOTHBY

He would be wrong if he did not.

LORD SHEPHERD

Anyway it is a very difficult subject. But one thing is quite clear, and that is that the question which the noble Lord, Lord Aldington, set out to ask this House, whether it was their view that sterling has an important and overwhelming role in world trade, and whether the United Kingdom itself gains from its position within the sterling area, I think has been answered in the affirmative completely. I have not heard any dissenting voice in this matter. The figures that have been given, of 30 per cent. of the world trade and some £4,000 million held by overseas countries, I think is sufficient evidence.

But, my Lords, I think we should not forget, and there were times when, as a layman, I thought we were forgetting, that currency is not a god. Currency is merely an agency, a sort of oil, through which trade can function. It is not by accident that the City of London has banking. Banking flowed from the establishment in the very early days of the commodity markets, and the Industrial Revolution, in which we ourselves led the world; and as a natural consequence with banking came insurance and shipping. Trade undoubtedly requires a recognised currency, and sterling is certainly one of the major currencies; and it is true that as trade increases so will the need for increased liquidity of the currencies capable of providing an easy flow of trade.

I also thought that this debate overlooked the composition and the development of the sterling area, because although the United Kingdom is a linchpin to the sterling area, the sterling area itself has undergone quite considerable changes since it came into prominence. I suppose its prestige was at its highest prior to 1914 when Australia, New Zealand and South Africa were the independent members within it. The others were mainly colonial or dependent territories. During 1939 to 1945 we saw a considerable change, in the sense that it became a very closely knit organism, and so it was during the post-war years, due to the shortage of dollars, and fairly tight controls were required. Since then colonial territories have become independent countries with a desire for an increased freedom to trade, and one of the most significant figures, if one were to look at one's papers, is the increased trade of the overseas sterling area with the non-sterling area. It is the same way in regard to increased investment. This is due to urgency for industrialisation. We see not only a major increase in non-sterling area capital coming into the overseas sterling area but following that by increased imports.

Countries have also changed in their attitude to reserves. I am thinking in particular of Malaya, which has now decided to hold part of its reserves in gold and dollars. This is a natural consequence. If you are a member of the I.M.F. it is natural that you should wish to hold some of your reserves yourself. I do not think we should criticise here, but recognise that the area is changing. But the basic features of the sterling area remain, and it is extraordinary to remember that the sterling area is not held together by any formal treaty; there is no international agreement. We are held together by common interest. I should have thought those words were enough to indicate the importance of sterling, not only to the sterling area but to the rest of the world, since the sterling area is more and more trading with the outside or non-sterling area.

Therefore, we can agree with the two propositions that the noble Lord, Lord Aldington, put before us. I confirm what my noble friend the Leader of the House said in his own speech about the role of the City of London. They play a very important part in our invisible earnings. The noble Lord, Lord Watkinson, thought that we were being rather foolish in putting restraints upon the City in terms of overseas investment. We had a very long debate many months ago, and if I remember rightly I said to him on that occasion that the Government were not opposed to overseas investment. We recognise that it makes an important contribution, not only to this country and its exports but also overseas. But in the circumstances that faced us and still face us there must be a degree of restraint in overseas investment. A general criterion was laid down, that investment could be made where there was a favourable return, and in particular an early return on income. I personally hope that the time will come, and I hope it will not be too far distant, when we shall be able to recommence, particularly within the sterling area, the free flow of capital.

LORD BOOTHBY

My Lords, will the noble Lord forgive me for one moment? It is the companies that have already invested overseas that are being discriminated against at the moment, and we want to see them taken care of.

LORD SHEPHERD

This is connected with the corporation tax, a subject which the noble Lord, Lord Watkinson, raised. I will not avoid it, but I will come to it in a moment. When one considers the sums that are available for investment, as I am sure the noble Lord, Lord Boothby, will agree with me, one realises that British industry itself at this stage is in urgent need of new monies for new forms of investment, for new machinery from which only productivity can arise. We have this difficult balancing problem: where best will our money help the general economy of this country?

The noble Lord, Lord Robbins, drew our attention to the short-term liabilities as compared with our short-term assets. It is perfectly true that our liabilities, if we think in terms of the sterling balances, are very large, particularly in comparison with the gold and dollar reserves. But I think it is right to say, and I think the noble Lord, Lord Robbins, himself said, that the sterling balances that we had after the war have changed completely. The sterling balances of to-day are of quite a different character. I believe if one were to carry out a major research into our present sterling balances one would find that they were in no way volatile; a very large proportion of them are firmly entrenched within the sterling area economy. When we are thinking of our sterling balances from the point of view of the amount of money that is likely to move very quickly one way across the exchange, the figures, in terms of the overall balances available, are relatively small.

I think it is agreed to-day that the gold and dollar reserves and the international agreements which this Government have been able to negotiate with the I.M.F., through the Basle Agreements and quite a number of others, ensure that there are sufficient reserves, substantial reserves, to deal with any immediate pressures upon the pound. Therefore, I should like, before leaving this point, to deal with the letter which the noble Viscount, Lord Hall, received. I think one thing came out very clearly in this debate: that there was no member who spoke who did not say that devaluation was not only undesirable but was unnecessary. I think this should be said as often as possible. I am not one who is opposed to a discussion of devaluation: it depends how you approach the subject and the information that you have. I often hear of the rumours that float around the City of London, that someone has died or someone has resigned, and shares seem to drop or move merely on rumour. I should have no objection to discussion on devaluation if it were discussed in relation to fact. I believe that the reserves that are available for the short-term pressures are quite substantial and will meet any immediate pressure.

However, the position is that this country is not a debtor nation. There are many who think that we are in debt. Too many politicians talk this way for political advantage. They speak of this country being in debt; yet we are a creditor nation. We have increased our creditor position since the war. From the figures that I have ascertained, we emerged from the war with about £350 million of liabilities, and with about an equivalent amount in long-term assets overseas, to which of course, in addition, we could put the gold and dollar reserves. To-day, from the figures that I have been given, our overall assets represent a figure of some £16,000 million whereas our long term liabilities are some £13,000 million. I believe that this sum includes the figures of our borrowing during the past few years. Therefore, from those figures, if one were to debate this matter, one could see quite clearly that this country was in a position to sustain the pound sterling.

But I agree with the noble Lord, Lord Robbins, that our real problem is that our immediate reserves are too uncomfortable in relation to the types of pressure that occasionally arise. This is why it is of vital importance that we should move into surplus and increase our reserves. I am glad that the noble Lord, Lord Robbins, agreed with the measures taken, although he was not prepared to pat us on the back all the way. In broad principle, he agreed with what we were doing in this matter. It may be of interest to the House to know that the Commonwealth Ministers, meeting in Canada in September, took the view that the whole of the sterling area should be moving into surplus during 1967. This would have a significant effect upon our reserves.

I should like to come to the matter of liquidity which the noble Lord, Lord Harlech, raised. I thought his was one of the best speeches that I have heard him make in this House. He has made many good speeches, but to-day's was one of his best. One of his friends said, "Well, at least I understood it." I think that is a great compliment to him. Not only the noble Lord, Lord Harlech, and the noble Viscount, Lord Watkinson, but I believe the noble Lord, Lord Boothby, spoke with a sense of despondency about world trade, and the shortage of liquidity. It is perfectly true that if the two reserve currencies of the United States and the United Kingdom succeed in correcting their balance of payments, in the long run world trade will feel its consequences. But in the immediate future it does not seem that there is likely to be a drastic curtailment in world trade, provided that the momentum of expansion is maintained in continental Europe.

This is the point that I would make to the noble Lord, Lord Harlech. If the countries which have a substantial reserve, and which have for years been in substantial surplus, were prepared to run their economies in deficit for a period, this would give us a period of adjustment and would provide the necessary liquidity for us to continue our negotiations towards finding a solution or a new asset. But this is not an easy problem. As the noble Lord, Lord Boothby, well knows, there is a dispute between the monetary authorities of Western Europe and the United States with the French. We take the view that liquidity may be shortby 1970. The French take the opposite view, and believe that there is too much liquidity at the moment.

Certainly from what I have read, I believe that there is no immediate likelihood of a depression. I should like to correct the impression that the noble Lord, Lord Harlech, may have given, that we are walking into an immediate depression. If one were to look merely at the expansion in trade between the sterling area and the non-sterling area one would see a quite significant increase in that trade. I do not think we should over-emphasise the difficulty, but we should recognise that steps will have to be taken by 1970 to find a new currency. But I think one can say that, even if you were able to obtain an agreement for a new asset, perhaps attached to the I.M.F., in the early days at least this will not replace the pound or the dollar as a trading currency. It is more likely to be an asset which Governments can move to other Governments or to central banks. Therefore, even if you were able to obtain a new asset, it is quite clear that there will be a continuing need for sterling and the dollar.

I should now like to come to the point made by the noble Lords, Lord Sherfield, Lord Harlech, Lord Fraser of Lonsdale, and others, in regard to the price of gold. Undoubtedly, you would increase liquidity if you were to increase the price of gold. But—and it is no good avoiding it—the United States Government would recognise this, as it would be, as a deflation of the dollar. I well believe—and I do not think I shall be contradicted in this belief—that if the dollar were de valued, so would all the other currencies be devalued. What would be the consequences of that? Those countries which are already strong and rich would gain, and the countries which are weak and poor would suffer. Many of those countries are to be found within the Commonwealth. For that reason, therefore, Her Majesty's Government share the view of the United States Government that the raising of the price of gold is not the right way of going about it.

The noble Lord, Lord Boothby, may be right in what he says because initially it may be of some help, but if we were to agree to this it would stop all forms of negotiation or possible agreement towards finding a new asset. If you had found an increased liquidity all the Governments would say, "Why proceed with this? It is too difficult." The noble Lord, Lord Boothby, has enough experience of many Governments to know that difficult problems are pushed away if there is an excuse for doing so. Therefore, I do not believe that there is anything we should do in regard to the price of gold.

Again, I can hold out no encouragement to my noble friend Lord Hall regarding his suggestion that we should increase the exchange rate margins. It is perfectly true that speculators might get hurt, but so also would responsible traders. They would be just as exposed, perhaps in practice even more exposed, because they would not know all the things that are going on in the market, unlike the racketeers, who might use this new rate for their own advantage.

To the noble Lord, Lord Gladwyn, I would say that the Government do not believe that the role of sterling as a reserve currency or as a trading currency is any bar to our entry into the Common Market. As I understand it, that point was never raised as an issue during the previous negotiations. I would point out to the noble Lord, Lord Boothby, who seems to he rather worried about where exactly my right honourable friend the Prime Minister stands in this matter, that the noble Lord may not have to wait a great deal of time. I think I am authorised to say that a statement will be made fairly shortly and that the noble Lord will be satisfied with that.

LORD BOOTHBY

Thank you very much.

LORD SHEPHERD

The noble Viscount, Lord Watkinson, drew our attention to the importance of exports. No one can speak with greater authority on this subject than the noble Viscount. The Government have already done a considerable amount in regard to incentives. It is difficult to see what more we can do without infringing GATT. We have to consider also EFTA, and the rules and regulations of that Association in regard to export incentives are a good deal tougher.

As to the matter of the selective employment tax, the Government have always recognised that this was a blunt instrument and that in course of time it would be refined. I appreciate that it is the City services, particularly those in the export field, which are affected; but, on the other hand, I think noble Lords will agree that the premiums, the extra sums available to manufacturers, will improve their position in the field of industrial development, and in particular in regard to production for exports. The matter of the selective employment tax will be looked at, as in fact the Chancellor of the Exchequer promised to do after a period has elapsed to see how the tax was working. He also said that consideration would be given to the operation of the corporation tax. The noble Viscount, Lord Watkinson, said that he himself was not opposed to the general principle of the corporation tax. It is a new tax. We have to learn from it, and no doubt it, too, will be refined in course of time.

The noble Lords, Lord Harlech, Lord Robbins and many others, drew our attention to Government expenditure and its effect upon the balance of payments. The first part of Government expenditure which hits one, of course, is defence expenditure. The present Government realised this from the day we took office, and set out to make a big defence review. We were bitterly criticised because we decided to contain defence expenditure within £2,000 million. This meant considerable cuts. It does not lie in the mouth of the noble Lord, Lord Harlech, or his supporters to attack us on this, because I well remember a Wednesday just before the General Election when the noble Lord's friends went into the Division Lobby against the Government for an increased aircraft carrier expenditure. We appreciate the problems involved, but we cannot just unilaterally make cuts. Therefore, a matter of this sort takes time. I repeat that the Government are determined to reduce as speedily as possible overseas expenditure which, in their view, is unnecessary. But we must not do it unilaterally. We must not leave countries exposed until alternative arrangements are made.

I agree with practically every noble Lord who has spoken in the view that we must deal with our balance-of-payments problem. We made considerable progress in 1965, following the mammoth deficit of £761 million in 1964. We did not do quite as well this year because of a number of factors, but at least we had the guts to take unpopular measures. One of the surprising things is that those unpopular measures are not only being accepted by the public but being approved by them. It may be that we shall have to do more in the way of public relations when we move into the next six months or the next twelve months, in relation to increased productivity and new arrangements in production. I would say to the noble Lord, Lord Boothby, that there is nothing during this period which will, or which should, prevent negotiation on productivity agreements. Productivity agreements are not made in a week or in a month. They take a great deal of time and, as we have made quite clear, in future such productivity agreements should be costed so that not only is there a clear advantage to the worker and to management but an advantage to the general public, the consumer. It will take time for that to be done. Therefore I say to Lord Boothby that there is no reason why these negotiations should not start and continue.

To the noble Lord, Lord Barnby, may I say that the "handsome unemployment" he expected has come in some districts. It is not the size we saw in 1960and 1961. This is largely due to the fact that the Government measures were designed to cushion the development areas, quite unlike previous deflationary measures. The immediate impact, of course, is to be seen in the Midlands. We do not wish to see unemployment as such—it is merely wasted assets. Initially, what we want to see, to use a crude phrase of the Prime Minister's, is a "shake-out" We want men to leave industries which most observers would say are overmanned and to move out to those industries which are in growing need of labour. But one cannot move those men just like that; it takes time. Some of them will have to be retrained; some will have to move. The Government recognise this, and we are doing what we can in the Ministry of Labour to speed up the assimilation of these workers, but it will not be easy. Undoubtedly, there will for a time be higher unemployment figures than we in our heart of hearts should like to see. That is the explanation I would give to Lord Barnby in regard to" handsome unemployment".

LORD BARNBY

My Lords, would the noble Lord permit me to say that surely the influence of unemployment under conditions of intentional deflationary measures must extend to every board room in the country. It is the atmosphere of thought which, at least in 1920 and 1931, developed throughout the country as a result of the intentional action of those who imposed the restrictive measures.

LORD SHEPHERD

My Lords, this is not 1931;this is 1966. What we deliberately did—and I hope that we have succeeded: there is every appearance that we have—was to cushion those development areas where we wish to see industrial development in the future.

I should like to conclude by saying this. We must—and I believe we shall, because the climate now exists in this country—stimulate our industries, our management and our workers to a different approach. We can get higher productivity from that, since investment will flow from that stimulus. If we then go out deliberately for exports (and I think it was the noble Viscount, Lord Watkinson, who said that it is not to-day a question of price in the export field; it is a question of delivery, which is very true, as I found from my own experience recently in Canada), and if we have a sense of discipline in the field of imports and try to hold them down, we should then be able to move into surplus. After a period of being consistently in surplus, I do not believe that the pound sterling will then be under threat. But the pound will not, by itself, sustain trade. What we have to find is an agreed basis, from all the major trading and industrial Powers, as to the best method of financing and expanding world trade, not just for the benefit of Europe or America, but for the benefit of the emerging countries of Africa and Asia.

7.42 p.m.

LORD ALDINGTON

My Lords, I should like very briefly to thank the noble Lord who has just sat down for the trouble he has taken in winding-up what I think has been an interesting and useful debate and, certainly for one who sought to start just such a debate, a real reward. I should also like to thank the noble Earl the Leader of the House for the interesting statement which he made almost at the start of the debate, after the noble Lord, Lord Gladwyn, had been good enough to support me and to widen a little the ambit of the debate. I must, if I may, with humility, add a special word of thanks and tribute to my noble friend my Deputy Leader, Lord Harlech, for his speech. I think that those of us who have listened to him in this House have come to expect from him speeches of the highest standard—and this one was even higher than that.

Finally, may I thank the Cross Benches and their leader, my noble friend Lord Robbins, for the contribution which he has made, based on his wisdom and the experience he has gained over the years. I feel extremely flattered that a man whom I regard as the most distinguished economic thinker in the country should have taken the trouble to intervene in this debate. So, in short, I should like to thank all noble Lords who have taken part in the debate, and as my contribution I should now like to withdraw the Motion.

Motion for Papers, by leave, withdrawn.