§ I turn for a moment to another matter. One of the principal features of the last Budget was the establishment of the Exchange Equalisation Account, a new departure which was very generally approved, although I think a certain amount of alarm was expressed lest very heavy losses should be incurred on the working of the account. I am happy to say that those fears have proved to be unjustified. I think I am entitled to claim to-day that the Exchange Equalisation Account has stood the test of experience, and that during the last year, in spite of some rather severe financial storms, and a great deal of surging to and fro of the waves of capital, the exchange rate has remained comparatively steady. I believe that traders in this country and Governments in other countries whose currencies are either linked with sterling, or closely follow it, appreciate that the Exchange Equalisation Account has played an important part in maintaining that stability.
§ One sometimes hears the view expressed that it would be better to leave sterling to follow what is called its natural course, but the value of a currency which was not anchored to the Gold Standard and was left to follow a natural course, would dis- 45 play very wide fluctuations. That is partly due to seasonal causes. The pound sterling is habitually strong in the Spring and weak in the Autumn. One could leave that circumstance to produce a perfectly unnecessary exchange fluctuation but it is a more reasonable course to collect resources adequate in amount during the Spring in order to pursue a policy of mitigating fluctuations when the real pressure comes in the Autumn. The fluctuations are also brought about by capital movements. It is only in periods when the inflow and the outflow of short-term capital happens to balance out that the exchange, if left free, would be even approximately stable. If you take trade transactions in this country alone, they might give rise to exchange transactions of perhaps £1,000,000 in a day, or even occasionally as much as £2,000,000. But the total exchange dealings are much greater, and we had actual experience last year of foreign capital going out of this country or coming into it up to a level as high as £8,000,000 or even more in a day. If the exchange were left to follow what is described as its natural course on such occasions as that, I am quite sure that there would be an irresistible cry from traders that it was impossible for them to conduct any business at all under such conditions.
§ Speaking then with greater experience of the working of this Fund than I had last year, I say without hesitation that it has proved its value. It has smoothed out the day to day and hour to hour fluctuations to the benefit of everybody concerned. It has never aspired to do anything more, and it is quite certain that even if we attempted to alter the long-term trend of the exchange, we should not succeed. That—with the clear evidence of the balance of trade still against us in this country—is my answer to the critics who are disposed to suggest that the Account has been used to secure an under-valuation of sterling.
§ During the last few months, we have found ourselves in the presence of a new phenomenon distinct either from seasonal fluctuations or from speculative operations, and yet in no way arising from or related to the permanent value of sterling. It has taken the form of a removal of funds from many other countries into this country because it was considered to be the safest place of deposit. 46 Money which comes here in those conditions is obviously bad money, because at any time it may, and at some time, probably the most inconvenient moment, it will, take flight back again whence it came. During these last few months money of this character has been coming here in quite unexpected quantities. Although on the whole we have succeeded in preventing any violent fluctuations in the exchange, the resources of the Fund have at times been severely strained.
§ I have given a good deal of consideration to the position which has thus been created. Every country has its own problems to face and has to solve them in its own way. In our case, since 1925. we have worked with an extraordinarily small gold reserve, notwithstanding the large deposits here of short-term foreign money. In comparison with other great financial countries, we have made but a small demand on the world's stock if gold; but our self-abnegation exposed us to serious anxieties and consequences which were not foreseen. From the moment when we returned to the Gold Standard the accumulation of short-term foreign capital here in excess of our own short-term claims upon foreign countries constantly placed us in a vulnerable position. Over and over again it necessitated the adoption of high money rates and other precautions inconvenient to our internal economy and eventually, at a time of special financial weakness, drove us off gold. We cannot risk the same kind of difficulties again for want of taking reasonable precautions. Accordingly I decided some time ago that it would he necessary to make an addition to the resources of the Exchange Equalisation Fund, and at a later stage I shall propose to ask the Committee to pass a Resolution for that purpose.
§ Before I leave this subject, I must say one word about the action recently taken 135, the United States Government in restoring the embargo on the export of gold. From what I have just said the Committee will realise that there is no connection whatever between the American action and the increase in the Exchange Equalisation Fund, which was decided upon long before we had any conception that the American Government might go off the Gold Standard. But I would like to say further that we recognised from the first that the President's 47 action was in no sense directed to any relations or conversations with other countries, but was prompted by purely internal considerations. We are happy to think that our desire for international cooperation is shared in the United States, and while we cannot disguise from ourselves that the situation as it has developed in recent days has involved some anxieties and requires the closest and most careful consideration, we shall await with the friendliest interest the future measures which the President has no doubt in mind, and which we earnestly hope will promote the establishment of a renewed confidence.