§ Before I deal with the matter of that prospective deficit, I want to describe to the Committee certain proposals which will appear in the Finance Bill. During recent weeks the exchange position of this country has been one of considerable difficulty. There has been a great loss of confidence abroad and that loss of confidence has led to large accumulations of liquid capital which can very easily be moved from one financial centre to another and can, therefore, materially assist the operations of speculators. The effect of the transfer of this liquid capital is to exercise a very disturbing influence upon the exchanges—particularly upon sterling exchange, which is no longer linked to gold.
§ Since we were so successful in repaying the credits which were raised abroad last year and in balancing the national accounts the tide of liquid capital has been setting very strongly in towards these shores. That is flattering to our vanity, but at the same time it is sometimes a serious embarrassment to our trade, and, moreover, in so far as it does not represent a genuine and permanent improvement in the balance of trade it is apt to give rise to dangerous development. In such circumstances nobody can say with certainty that the ebb may not set in presently. Therefore, I have been driven by the force of events to this conclusion, that, if we are to avoid violent and perilous fluctuations in our currency, especially those which are due to these speculative operations, if we are to enable this country to function effectively as the main international centre of the world, then it is essential for us to hold adequate reserves of gold and foreign exchanges, in order that we may meet any sudden withdrawal of short-dated capital and check and repel these speculative movements.1426
§ I will try to describe to the Committee the proposals which I have in mind, and I must ask for their indulgence if part of this matter appears to be somewhat technical in character. I propose to wind up the old Exchange Account and to use the assets as the nucleus of a new account to be called the Exchange Equalisation Account. I propose to ask the Committee to give me powers to borrow up to £150,000,000 for this account. The details of assets in the account will not be published, but they may take various forms, either gold, or sterling securities, or foreign exchange. That will give us a very large and extended power of purchasing exchange. The new powers, combined with the powers already possessed by the Bank, upon which, of course, the main responsibility for the management must continue to rest, will enable us to deal far more effectively than we could otherwise have done either with an unwanted inflow of capital or, if the alternative should again arise, with an outflow of capital from this country.
§ 4.30 p.m.
§ There are certain other purposes for which this Exchange Equalisation Account can be used conveniently. First of all, there is an accounting question connected with the weekly returns of the Bank of England. Hon. Members know that there are two departments in the Bank—the Issue Department and the Banking Department. The Issue Department is liable for the note issue amounting to some £400,000,000, against which it has assets in gold and securities. The Banking Department, on the other side, is the one in which the purely banking business is carried on. The management of the Issue Department is by law entrusted to the Bank, but its profits can concern only the Exchequer, because the Exchequer is entitled to any interest earned or any profits made in the Issue Department. On the other hand, the profits of the Banking Department are for the account of the Bank. My proposals only affect the Issue 4.30 p.m. Department, and I have given this preliminary description in order to show that they do not confer upon the Bank any new privilege or any new profit. The Bank will continue to bear itself any risks which may be involved in foreign exchange operations carried on in the 1427 Banking Department. That arrangement is made at the Bank's own desire, and I am sure it is one which will be approved by the Committee.
§ With the pound divorced from gold the accounting arrangements of the Issue Department present some difficulty. Its liabilities for the Note Issue are in sterling. Those of its assets which may consist of foreign currencies fluctuate in terms of sterling; but so far as its assets consist of gold—including any gold that may hereafter be acquired—the law requires the gold to be valued at the old par. Thus, the Issue Department cannot, with the exchange at $3.80 add £100 to its gold holding without showing an apparent loss of £28; and, in the same way, it cannot sell £100 of its gold holding without showing an apparent profit of £28, while its holdings of foreign exchange fluctuate in value every week. Our currency authorities ought to be free to hold such amounts of gold and foreign exchange in the Issue Department as may be required without being hampered by technicalities of this kind. On the other hand, we must be very careful to keep full cover against the Note Issue. I consider that in order that at all times and in all conditions the assets of the Issue Department—that is to say, the backing of our currency—should be consistently and conservatively valued, the gold in each return should be valued at the old par, and all the foreign exchange assets should be valued at the current rate of exchange irrespective of their purchase price.
§ In order that the account may at all times precisely balance on this basis, my proposals provide that at any time when a valuation on this basis shows a deficiency resources to the corresponding amount shall be passed from the Exchange Equalisation Account to the Issue Department of the Bank, and that when a surplus is shown that the converse operation shall take place. I ask the Committee to observe that both of these accounts are worked for the credit of the Exchequer, for the use of the Exchequer, and for the account of the Exchequer. Therefore, it does not very much matter whether any particular asset is for the moment in one account or the other, both are for the account of the Exchequer.1428
§ There is another point. In connection with the credits which were raised by the Bank of England last year from the Banque de France and the Federal Reserve Bank the undertaking was given at the time, and Parliament was so informed, that any loss arising from the transaction would be made good to the Bank. The Finance Bill, accordingly, will contain a provision charging £8,000,000, which is the outstanding loss on that transaction, to the Exchange Equalisation Account.
§ I may be asked: Suppose that these powers are given to the Government, will that be the final end to the fluctuations in the exchange; will it mean that the exchange will be kept at a fixed point, or at any rate that it will be maintained within a fixed range of values? I am not going to give any such assurance. When you consider the economic disturbances which are still occurring in the world, and of which we probably have not even now felt the worst, it is perfectly useless to pretend that we can hold our exchange position exactly as we please independent of anything which is going on around us. On the other hand, we can say this, that those who are charged with the conduct of our currency will be much better equipped in the future with these powers to maintain that currency steady than they have been in the past; and that to that extent we should see a great improvement.
§ There is another question: Will these transactions involve the Exchequer in any loss or in any considerable loss. I think the answer to that question must be that that is a very conceivable possibility. We do not know what is going to be the future of gold prices. We do not know what settlement will be reached as regards Reparations and War Debts, and other matters, which are now disturbing the world. These uncertainties rule out any possibility of our being able to return to gold immediately. We do not know when or in what circumstances we may return to gold, or at what level. If in the long run we were to return to gold in such a way that the pound stood at a higher gold value than the average level At which purchases of exchange had been made, the transactions would inevitably show a loss. This is a possibility, but it is not one which should deter us. If we are merely seeking safety from an 1429 accounting point of view, we can proceed as we did in the earlier period of the suspension of the Gold Standard between the years 1919 and 1925. The pound would be allowed, substantially, to take its own course, liable to fluctuations with every seasonal movement of trade or every outburst of speculation, or change of sentiment caused by developments abroad. The problems of the present time are in many ways altogether different from those which faced us immediately after the War. In my judgment, the risks entailed by the uncontrolled fluctuations of the currency today outweigh the possible loss on the transactions which I have mentioned.