§ Order for Second Reading read.
§ 3.43 p.m.
§ The Chancellor of the Exchequer (Sir John Simon)
I beg to move, "That the Bill be now read a Second time."
This Bill, as hon. Members will see, is necessarily of a somewhat technical character. It is a Measure which does not easily lend itself to popular exposition and I can hardly hope to treat it, if I may borrow a phrase from Mr. Disraeli, which is also attributed to Lord Stowell, withthe sweet simplicity of the Three per Cents.The Bill is concerned with certain details of our monetary mechanism, but it raises no question of any change of monetary policy. In order to appreciate what these changes in detail are, it is necessary that we should remind ourselves of the general subject-matter and recall some recent events which have made it opportune to introduce the Bill. If hon. Members look at the Title of the Bill they will see that it refers to the Issue Department of the Bank of England and the Exchange Equalisation Account. The reference to the place of payment of Bank of England notes is dealt with in Clause 4 of the Bill, and is a subsidiary matter.
The Exchange Equalisation Account has been considered by the House from time to time in recent years. It will be remembered that it was established by Section 24 of the Finance Act, 1932, after the suspension of the Gold Standard. At first it was provided with a fund of a total of £150,000,000. Since then there have been two successive additions to the total, and the amount now provided for the fund is £550,000,000. Its purpose, as the Statute declared, was, of course, to check undue fluctuations in the exchange value of sterling. The other account, that of the Issue Department of the Bank of England, has a longer history. It has its origin in the Bank Charter Act, 1844, which was one of the most striking and most memorable achievements of Sir Robert Peel. Under that Act, as the House knows, the issue of notes by the Bank of England has to be kept absolutely distinct from the banking business of the Bank, and, therefore, when the 666 Bank publishes its weekly accounts, we see that the Issue Department account and the Banking Department account are stated separately. The sum total of Bank of England notes issued is, as the House knows, always exactly equal to the total value of the assets shown in the Issue Department's account. Those assets are partly gold and partly securities. As regards securities—what is called the fiduciary issue—the law fixes what is the normal size of the fiduciary note issue. At present, under Section 2 of the Currency and Bank Notes Act, 1928, the normal size of the fiduciary issue is £260,000,000. That, however, is subject to the power of the Treasury, on the representation of the Bank of England, from time to time either to increase or to diminish temporarily that normal total of £260,000,000.
I have said so much to remind hon. Members of the general structure of the account of the Issue Department of the Bank of England. There is one other feature of that account which lies at the heart of our present problem. It has always been the case that the gold in the Issue Department of the Bank of England has been valued in that account at 85s. per fine ounce. Of course, as long as we were maintaining the Gold Standard that was necessarily and rightly so, owing to the interchangeability of gold and currency, but after we left the Gold Standard at the end of 1931, the Bank in fact continued to value its gold in the Issue Department account at this old parity of 85s. Indeed, there is statutory authority for that, because if hon. Members look at the Finance Act, 1932, under which the Exchange Equalisation Account was set up, they will find that Section 25 (2, a) validated and preserved this position.
Perhaps hon. Members will allow me to dwell for a moment upon this figure of 85s. I do not think you will find that figure, as a figure, anywhere in the Statute Book, and indeed the Section in the Finance Act of 1932 to which I have just referred mentions a different sum. It mentions £3 17s. 10½d., but that is what is called the Mint price of one ounce of standard gold. It is interesting to recall that the authority long ago that first fixed that figure was no less a person than Sir Isaac Newton. Sir Isaac Newton in the year 1717 was Master of the Mint, and in that year he established the rule that the guinea should be valued at 667 twenty-one shillings. Now one troy pound of standard gold, one pound by troy weight, was coined into 44½ guineas. If an hon. Member desires to amuse himself with a little elementary arithmetic, I think he will find that if he divides 44½ guineas by 12, that being the number of troy ounces to the troy pound he will arrive at this statutory figure of £3 17s. 10½d. But we still have to look for the more familiar 85s., and that is to be got in this way: Standard gold consists of eleven-twelfths of fine gold and one-twelfth of alloy. The figure of 85s. is the figure for an ounce of fine gold, and consequently the figure of £3 17s. 10½d. has to be submitted to a further arithmetical operation and have one-eleventh added to it, and by that means you arrive at a figure which is, I think, just one halfpenny short of 85s. [An HON. MEMBER: "Who gets the halfpenny?"] So much for the story of 85s.
I now wish to remind the House of some of the recent events which make it, I think, opportune to introduce and carry this legislation now. The House will remember that over a long period which ended last Spring the gold stocks in this country were continuously increasing. The total value of gold in the Exchange Equalisation Account and in the Issue Department of the Bank of England put together, at 31st March of last year, and stated for convenience at a common value of £7 an ounce (the usual value for the purpose of such a calculation), was £835,000,000. That very great accretion of gold in this country was due very largely to the deposit in London of short-term capital funds owned by foreigners who preferred the monetary security of London to that of their own country. Funds of that kind are notoriously volatile; they come and go. I believe they are what the City sometimes calls "hot" money; they are refugee money, and they may at times be a nuisance rather than a source of strength to the country which receives them. If you receive them, you have to be ready to hand them back, and that is what happened to a large extent in the ensuing six months. Between the end of March of last year and 30th September of last year there was a very considerable exodus of this refugee capital, with the result that when we came to 30th September our gold holding of six 668 months before had been diminished by a sum of £146,000,000, and we were left with £689,000,000. It is convenient to say that of that £689,000,000, £151,000,000 was in the Exchange Equalisation Account and the rest in the Issue Department of the Bank of England.
§ Sir J. Simon
At £7 an ounce, which is stated in the Return. It is the general character of the movement, I think—
§ Sir J. Simon
In the six months between 31st March and 30th September there was a loss of £146,000,000 of gold valued at £7 an ounce, and what I want to stress, and therefore will repeat, is that the stock left, the very substantial amount of £689,000,000, was for the most part in the Issue Department, and only £151,000,0000 of it was in the Exchange Equalisation Account. That is the last date, as the House knows, for which precise figures are available, but it is the fact—I state it, and I think it is common knowledge—that there had been a continuance of that tendency during the rest of the year. In one or two respects it had its bright features. For example, there is no doubt at all that some of the loss was due to a repatriation of French funds in Paris, and that is an indication which we may look upon with satisfaction as an earnest of the return of internal confidence in the French financial situation. We have every reason to be glad of that and to congratulate the French upon It. There was also another influence at work, not perhaps quite so welcome. There was for a time certainly a growth of some undesirable speculative activities against the £—"bears" who were selling the £ calculating that it would go down—and there is no doubt that that had an influence in causing the gold value of sterling to decline.
In that situation, at the end of the calendar year, at a very early date in January, I had to consider whether some fresh step should be taken. The Exchange Equalisation Account had lost a good deal of its gold, and it was very necessary that that fund should be fortified for the purpose of helping to sustain sterling. There was also this fact to be borne in mind: we wanted more gold for the Exchange Equalisation Account, and the question was, Where should it be got from? Well, the main part of the 669 gold in the Issue Department of the Bank of England, the very large amount to which I have referred, had been transferred there from the Exchange Equalisation Account since the time in 1932 when it was established. It was new gold, and in those circumstances I thought—and I believe that the opinion of those who advised me was supported by other expert opinion—that the right course last month was to retransfer from the Issue Department to the Exchange Equalisation Account this block of new gold; and the Exchange Equalisation Account by that means acquired £350,000,000 of new gold at the current value. It was placed in the Exchange Equalisation Account, where it lies ready for the use for which it w as primarily intended. That was the important operation which was announced on 7th January last.
If I have succeeded in reminding the House of the rather curious feature that gold in the Issue Department is valued at only 85s. and yet the moment it is released from that Department is recognised in other accounts as being of the current value, it will be appreciated that £350,000,000 of gold in round figures for the Exchange Equalisation Account is provided not by taking £350,000,000 from the Issue Department but by taking something like £200,000,000 from the Issue Department, because of the lower value attributed to the gold in that Department. It will also be clear to the House that if one reduces the amount of gold in the Department by £200,000,000, it is necessary contemporaneously to increase the fiduciary issue, unless indeed one is going to alter the total of bank notes issued. It was necessary to increase the amount of the fiduciary issue by the same amount as that by which the gold had been diminished. Therefore at the same time £200,000,000 was added to the fiduciary issue authorised in the Issue Department Account.
I mentioned earlier in my speech that the normal figure of the fiduciary issue was £260,000,000, but in fact owing to a Treasury Minute it had been limited to £200,000,000 for the time being, and therefore the addition of the new £200,000,000 made £400,000,000 as the amount of the fiduciary issue. In that situation it was very necessary to consider what further action it would be right to take. It was perfectly lawful for the Treasury Minute to be made on the representation of the Bank enlarging the 670 fiduciary issue to £400,000,000 as a temporary expedient, but it is a very large increase, and it seemed to me that though the Act of 1928 contemplated the possibility of the fiduciary issue being thus raised by Minute, still this was raising it above its normal statutory level, and in view of the size of the increase and the rather unusual circumstances in which it arose, it seemed to me right that we should come to Parliament and that Parliament should have an opportunity of dealing with the matter. Accordingly at the same time early in January when this great block of gold was moved from the Issue Department to replenish the Exchange Equalisation Account, at the same time as the Minute was made which authorised the fiduciary issue to be raised to £400,000,000, an announcement was made that legislation would be proposed to this House to amend the Act of 1928. This Bill is the Bill which has been prepared in order to carry out that intention.
I think that the plainest and simplest way to regard the matter now is to ask hon. Members, in considering this rather technical matter, to imagine the actual situation of the account of the Issue Department. It is an account which is made once a week, drawn up every Wednesday and published every Thursday, and those interested in these things study it closely in connection with their business. I have the actual account of last week before me. I almost wish that I could have circulated it. Hon. Members will see at once the significance of the figures if I mention three. The Issue Department shows, of course, on the left-hand side, the debit side, the total of notes issued; that is the liability of the Bank; and the total is in round figures £526,000,000, notes of different denominations now issued by the Bank of England. Not all those notes are in circulation. As a matter of fact £471,000,000, or nearly £472,000,000, are in circulation, and £54,000,000 are in the Banking Department, and it could release them if necessary in order to make small adjustments; but the point is that last Thursday, when the weekly account was issued, £526,000,000 was the total of the note issue of the Bank of England.
On the other side of the account are two items. One is the item of gold and the other the item of the fiduciary issue. Those two things have to add up to exactly the sum of £526,000,000, as they 671 do. Owing to the transactions and transfer I have mentioned, the two figures are these: the amount of fiduciary issue, £400,000,000; gold coin and bullion, £126,000,000; and that again adds up to £526,000,000. It seems to me that that is not a satisfactory or really an accurate way of stating the position. You get those figures of a very large fiduciary issue and a comparatively small figure for gold, because we are continuing the practice of valuing the gold in the Issue Department at 85s. and as long as you value it at that low figure, little more than half its current value to-day, the figure for gold appears unduly small and the figure of the fiduciary issue is unnecessarily large.
The object of this Bill is to secure that for the future week by week as the weekly account is put out, the gold that is in the Issue Department shall be valued at its current figure. If hon. Members will turn to Clause 2 of the Bill and look at Subsections (1) and (2) they will see this provision:The assets held in the Issue Department of the Bank of England shall be valued on the day on which this Act comes into operation and thereafter once in each week.For the purpose of every such valuation, the assets shall be valued at such prices as may be certified by the Bank of England to be the current prices of those assets respectively on the day of the valuation.The current price to-day is 148s. 5½d., and the effect therefore of this Bill, as soon as it becomes law, will be that there will be applied to the gold in the Issue Department what is its real current value and not the somewhat antiquated thing which can be traced back through the days when we were on the Gold Standard; and consequently this £126,000,000 would be more properly and correctly stated as about £220,000,000. In present circumstances no one wants for any reason at all merely to increase the number of notes issued. We want to keep the number issued as it is. As soon as you put the proper value on the gold it follows that you no longer want this very large fiduciary issue of £400,000,000. In fact when it is reduced as the normal thing to £300,000,000 it will be adequate for purposes of the account. If hon. Members look at Clause 1 they will see that it provides that the fiduciary note issue shall be fixed at £300,000,000, and in paragraph (b) they will see that 672any Treasury Minute in force at the commencement of this Act under the said Section eight shall cease to have effect.That is to say, the Minute which the Treasury made the other day, the Minute which put the total up to £400,000,000, will cease to operate.
I claim, and I think I am supported by a large body of competent authority, that the change which this Bill would make is appropriate and entirely justified. It makes no sort of difference to the fundamentals of our currency, but it is a change in machinery and a more accurate statement of the present facts, and as such I hope it will commend itself to the House generally. There is one consequential difficulty which, of course, must be dealt with. As soon as you value the gold in the Issue Department at its current value week by week, it follows, of course, that you would have rises and falls according to the course of the price of gold, with the result that week by week you would have to adjust your note issue to correspond, for it must always be exactly equal to the total value of the assets.
Of course, if there were good reason at any time for altering the note issue, it should be and could be altered. For example, just before Christmas there was an increase in the fiduciary issue for the purpose of providing for the necessities of the Christmas trade. That is commonly done shortly before Christmas and the amount sinks shortly afterwards. But you do not want to alter the total number of notes issued merely as a result of fluctuation in the value of gold, and therefore you want to have some other method by which you can secure that the figures on the assets side of the Issue Department will be right and will not require, as an unnecessary consequence, an adjustment of the amount of notes issued.
I have considered carefully how that could be dealt with. It would be a material inconvenience if on each weekly valuation slight alterations in the price of gold were inevitably to produce slight modifications in the total value of the assets and a corresponding modification of the total of notes issued. For that reason I propose in the Bill that a weekly adjustment shall be made between the Issue Department and its sister account the Exchange Equalisation Account to compensate for these small variations. It is a 673 technical and unimportant provision in itself, but it is a convenience for the purpose of accounting and it follows very closely the analogy already provided by Section 25 of the Finance Act, 1932.
Those are the main proposals of the Bill. I think the House will feel that it is justified and that it is an advantage to get rid of this figure of £400,000,000 of fiduciary issue published week by week in the Issue Department Account. It is a fictitious figure. We might suppose it meant that four-fifths of our bank notes had to rely on something other than gold. That is not true. We shall do much better if we do not show ourselves to the world as having something like £400,000,000 of bank notes covered by Government securities when in fact a substantial fraction of them is covered by gold. On the whole, so far as I have observed, these proposals have been very well received by expert opinion outside, but I would like to make this observation in order to remove possible misunderstandings. There is no trace of inflation in the present proposals. Nor is there any trace of deflation. If there were an increased demand for notes owing to more active trade and better prices we should be as well placed to meet it as we are now. The effect of such a demand would be, I suppose, in the first place to reduce the Bank's reserve of notes. If that reserve were thereby reduced to an inconveniently low level, the Treasury are empowered on the representation of the Bank to take steps to increase the fiduciary note issue, or, alternatively, gold could be added to the Issue Department.
That being so, the proposal I have to make should everywhere be regarded, whether good or bad, as being a change in our monetary machinery, for that is really all it is. Let us see how this will work out. One effect of the first revaluation of the gold in the Issue Department will be to set at liberty an amount of approximately £95,000,000. I look at it in these difficult times with anxious eyes ready to welcome any good thing that will come our way, but I am bound to say quite plainly that in any ordinary sense that is not a profit. It is rather in the nature of an unrealised capital appreciation which has been there for a long time past, but has not received statutory recognition or appeared in the accounts. An unrealised capital appreciation of that 674 character is not appropriate for use as if it were revenue and I am not proposing so to use it. My proposal is that this sum, subject to a deduction which I will mention, shall be passed to the Exchange Equalisation Account where it will constitute a capital reserve.
§ Sir John Wardlaw-Milne
Does that mean that Treasury bills will be reduced by that amount and thereby go to the banks holding them to make cash liquid? Is that how it will work? Will this £95,000,000 go to a reduction of floating debt?
§ Sir J. Simon
It will simply increase the assets in the Exchange Equalisation Account. How it is dealt with within the limits my hon. Friend referred to is a matter for consideration. I am only concerned to say that I do not consider that revaluing the gold in the Issue Department provides any increased revenue. The assets that are held by the Issue Department are gold and the cover to the Fiduciary Note Issue. The Issue Department works for the account of the Exchequer and the State receives any profits which the Issue Department earns, less the expenditure of maintaining the note issue. For example, if the Issue Department has securities which increase in value or earn interest, any excess over the total amount which must be maintained in the Issue Department to cover the note issue is available and is passed over to the State. The securities fluctuate in capital value; in some years the profits of the Issue Department have been swollen by appreciation, while in other years they have been insufficient to cover the depreciation. For instance, the profits from the Issue Department in 1932–33 were considerable, and something like £11,500,000 was paid into the Exchequer. In the Budget there is an item known as "miscellaneous receipts," and that is where it goes. At present, after a long period of falling security prices, the depreciation stands at £9,000,000.
As long as we were valuing the gold in the account at the low figure of 85s. an ounce, carrying thereby an enormous concealed reserve, a small depreciation in another part of the account did not amount to anything of much moment. But we are now going to value the gold in the Issue Department account at its proper current value. Accordingly, at 675 the first revaluation of the gold, it will mean a transfer from the Issue Department of some £95,000,000. I propose to make a net transfer of £86,000,000. The difference of £9,000,000 remaining in the Issue Department will then bring up the current market value of its assets to the exact amount of notes in issue. That, I think, is the proper way to deal with the situation. There remains the point of what is to happen in future. The securities in the Issue Department will fluctuate, sometimes producing a surplus which will pass from the Department, and at other times depreciating and leaving a certain gap which ought to be filled. The present situation is not satisfactory because, while the Issue Department has to pay out any appreciation as part of the profit that it makes, there is not a satisfactory arrangement for making good any deficiency.
I think we ought to utilise the Exchange Equalisation Account to receive the profits and also to make good any deficiency on the securities as well as on the gold held by the Issue Department. The Exchange Equalisation Account holds gold and securities, and, like the Issue Department, it operates for the account of the Treasury so that transfers between the two accounts cannot mean any loss to the State. It seems to me that the most convenient and simple solution is to provide that the Exchange Equalisation Account shall receive from the Issue Department any profits of the note issue, including appreciation, and shall make good any depreciation. That is the solution set out in Sub-section (3) of Clause 2 and Sub-section (2) of Clause 3 of the Bill. That will enable us to keep the assets of the issue Department precisely adjusted at current market prices to the note issue.
I will venture a small analogy. I conceive the Issue Department as a tank in which there ought to be maintained a certain head or pressure of liquid—a certain head of value. As long as the note issue remains the same that head should always remain exactly the same and should not get bigger or smaller. We should not keep in the tank anything which is added as a result of accretion and should not leave the tank to suffer if there is any evaporation or drop in the level. The Bill secures that the level or the pressure in the Issue Department tank is kept exactly right.
§ Mr. Bellenger
I notice in Sub-section (2) that in valuing the assets allowance will be made for any premium that may be included in the current market value. Does that mean that only par value will be taken in assessing the value of the assets in the Issue Department?
§ Sir J. Simon
I will discuss that, if I may, on the Clause. I would not like to speak of very difficult matters without full knowledge. I have done my best on a rather difficult subject to make the matter intelligible and, I hope, a little interesting.
There are three points I would wish to emphasise. In the first place, it is most important to bear this in mind. Hon. Members will agree that I spoke justly when I said just now that this Bill is concerned with the details of our monetary mechanism. It would be a great misfortune if the idea got abroad, quite contrary to the facts, that it presages or indicates some change of monetary policy. Secondly, I ought to repeat that neither when the Fiduciary Note Issue was raised a month ago to £400,000,000, nor now, when the House is asked to fix its level at £300,000,000, is any question of inflation or deflation involved. Thirdly, to obviate all possibility of misconception, let me say that this proposal for weekly revaluations of the assets of the Issue Department at the current price is a change of machinery and has no bearing whatever upon the question of the time or the manner of our ultimate stabilisation on gold. We are working an archaic rule in the Issue Department which has led to valuations which were misleading, and we are substituting for those valuations a calculation which is right because it meets the actual facts of the situation.
§ Mr. Benson
What does the right hon. Gentleman mean by "our ultimate stabilisation on gold?" Has he that in mind?
§ Sir J. Simon
I was saying that I hoped nobody would draw any inference on that subject from the contents of this Bill.
§ Sir J. Simon
I think it puts the point very clearly. Since the Bill does not deal with this subject at all, apart from whether it would be in order or not in 677 order I think it would be outside the scope of my remarks to talk on such a subject. It is not what I am thinking of.
§ Mr. Benson
What the right hon. Gentleman said was that this Bill did not in any way influence or control our ultimate stabilisation on gold and my question was, Has he in mind, quite apart from this Bill, or have the Treasury in mind, any ideas as to ultimate stabilisation on a gold basis?
§ Sir J. Simon
I do not think it was put in precisely those words. The observation has not been quite correctly quoted. I wrote it down and here it is. I said,It has no bearing whatever upon the question of the time or manner of our ultimate stabilisation upon gold.That matter of high policy was dealt with in a monetary declaration of the British Commonwealth at the Ottawa Conference, which was in turn reaffirmed by the declaration of the British Commonwealth at the conclusion of the World Monetary and Economic, Conference in 1933. As the House knows, and as the hon. Member will be glad to learn, those declarations continue to stand.
In now asking the House to give a Second Reading to the Bill I do not think it is necessary for me to go through all the Clauses of it. In what I have said I have tried to make their intention plain. There is one Clause, of no particular importance, Clause 4, which deals with a quite different matter. In that Clause we have taken the opportunity to deal with two small matters. Clause 4 provides that Bank of England notes of £5 and upwards may be payable at the head office of the Bank whether issued at the head office or otherwise. That is only a matter of business convenience. It brings the notes of higher denominations into line with the £1 and 10s. notes. Sub-section (2) of the Clause provides for a repeal of the provision, which has been on the Statute Book ever since 1844, requiring the Bank to issue notes in return for gold at the old price of 85s. per ounce. Nobody is in the least likely to come forward to-day to perform that very unremunerative operation, and I think it is about time we took that, as well as other antiquities to which I have referred, off the Statute Book. I commend this Bill to the support of the House. It deals with what is for all of us, no doubt, a highly technical subject, but I do not believe that it is 678 calculated to produce any serious consequences, and if I have succeeded in making plain the scope and the limitations of its purpose I trust that I may have support in all quarters of the House for what I regard as a useful and not a revolutionary Measure.
§ 4.33 p.m.
§ Mr. Dalton
I am sure that the Chancellor of the Exchequer has enjoyed himself in unravelling with his customary lucidity the subject matter of the Bill, and we have all enjoyed listening to yet one more of his expository tours de force. In his last sentence he said that it was not a revolutionary Bill, and on that he and I shall be in agreement as against some comments passed by certain city editors easily frightened by changes, no matter how small. I think that in particular the city editor of the "Times" used this epithet when commenting on the Bill last week. I have wondered whether the proposals in this Bill originated in the Treasury or in the Bank of England, and I am inclined to suspect that it was in the Treasury. I think one sees here evidence of the fresher minds of some of those in the Treasury rather than of the more old-fashioned and stereotyped outlook of the Bank of England, and in particular of its Governor. Broadly it seems to me that these changes are in the right direction, and that this Bill marks a further step, even although a small step, towards an intelligently-managed currency. It is a step away from the old-fashioned automatic, supposedly, though not really, fool-proof currency, such as we enjoyed, or at any rate suffered under, in the old days of the Gold Standard. I was, however, a little disconcerted in that opinion by the phrase which the Chancellor of the Exchequer let fall, and which my hon. Friend the Member for Chesterfield (Mr. Benson) quickly picked up. The Chancellor said that this Bill did not in any way affect—I think I am quoting correctly—the time and manner of our ultimate stabilisation on gold.
§ Mr. Dalton
I was a little disconcerted when the Chancellor let fall those words, and I hoped they meant as little as he seemed to be endeavouring to persuade my hon. Friend that they meant. I hope that this Bill, if it marks any movement 679 at all in relation to the time and the manner of our ultimate stabilisation on gold, postpones that time yet further. I have been encouraged in that belief by the observations of Mr. Norman Crump in the "Sunday Times" when he said that the Bill deliberately refrained from fixing a new price for gold—for that might give the impression that the authority contemplated the stabilisation of the pound at that level in terms of gold and so in terms of the dollar.Well, we will leave it for the moment where it is. I will content myself with saying that my hon. Friends have frequently declared against any return to the Gold Standard and the fixation of the pound in terms of gold, and if we thought—I do not say we do think—that this Bill was moving at all in that direction then certainly we should have to oppose it, but I am sure that is not the case.
The Chancellor has explained that this Bill substitutes a true valuation of gold based upon market valuation in terms of sterling for that fictitious and, indeed, rather ludicrous figure of antiquity, the 85s. per ounce. This appears to me to be a sensible and proper provision. It is thus in some degree a Bill for the "debunking" of gold. It recognises that gold is only a commodity like any other commodity, having, like any other commodity, a sterling price which varies from time to time. Without going outside the Rules of Order perhaps I may be permitted to say this: As part of the process which I call "the debunking of gold," this valuation of the gold stocks in terms of sterling prices variable from day to day, does raise in one's mind this query, particularly when the Chancellor was quoting the enormous figure of £689,000,000 as the value of our gold stocks in September, 1938, even although he says they subsequently diminished. It did raise in my mind the question of whether, having regard to all the requirements of national defence and national economy, it is a sensible plan to retain such an enormous mass of value in the form of gold, and whether it would not be better if some of that gold, at any rate, were transformed into other commodities more useful both in time of peace or war, such as stocks of food and raw materials. Without pursuing that point, which would obviously be out of order except for a passing reference, it 680 did occur to me that, with this enormous quantity of gold valued now as food is valued and as raw materials are valued, according to its sterling price of the moment, it would be well worthy of consideration whether the national finances in the truest sense would not be strengthened if part of these gold stocks were to be transformed into food stocks and stocks of raw materials.
The Chancellor of the Exchequer spoke about the so-called gold profit, and we were interested, I am sure, in what he said, not so much as to the facts, which are fairly well understood by those who study these matters, as in his intention with regard to this sum of £96,000,000 or thereabouts, which is sometimes called the gold profit. But this, as one writer in the Press has properly said, is now merely a disclosed reserve, whereas before it was a hidden reserve, although well known to all persons acquainted with the elements of the situation. The question that interests us, I think, is not so much that the veil has now been drawn aside from this reserve, but what the Chancellor of the Exchequer is going to do with it. If I understand the matter correctly, what has happened has been merely this, that the Exchange Equalisation Account is now going to have, in addition to its borrowing powers amounting to about £575,000,000 as laid down by Statute, which are, in fact, represented by gold, by securities and perhaps by other assets—it is now to have in addition £100,000,000 of further reserves in the form of securities. But, only if the Treasury sold these securities or any part for cash and spent the proceeds currently, would the term "profit" be applicable to the transaction.
What interested the House, I am sure, was to know what the Chancellor's intentions were in this matter, I understand that he is going to take £9,000,000 out of the £96,000,000–10 per cent. of the total—and use it in order to make up for a depreciation which has taken place in the securities held in the Issue Department. That leaves between £80,000,000 and £90,000,000 which he says that he does not propose at this moment—I think I am quoting him correctly—to treat as current revenue. I do not know how long "this moment" is going to stretch. I do not know whether we are getting a definite undertaking to-day that in his next Budget he will not propose to use 681 any of this £80,000,000 or £90,000,000—does the right hon. Gentleman wish to say anything?
§ Mr. Dalton
I was only anxious to know how far ahead this commitment extends not to spend this nest-egg, or what is left of it after providing for the depreciation of the securities.
§ Sir J. Simon
The hon. Member will find that what I said was quite plain. It would be a great pity if false ideas got about and I am sure that he would regret that as much as I should. I thought it my duty to say, and I did say:A capital appreciation of this character is not appropriate for use as if it were revenue and I am not proposing so to use it.I think that is quite definite.
§ Mr. Dalton
That was definite, but a few sentences later the right hon. Gentleman used the phrase "at this moment." I took particular note of it.
§ Sir J. Simon
I had not the slightest intention of qualifying what I had said, which I had better repeat:An unrealised capital appreciation of that character is not appropriate for use as if it were revenue, and I am not proposing so to use it.I went on to say:My proposal is that this sum, subject to a deduction which I will mention, shall be passed to the Exchange Equalisation Account, where it will constitute a capital reserve.I shall be glad to have the hon. Member's co-operation in fixing that quite clearly, as I do not want there to be any doubt about it.
§ Mr. Graham White
I should like to point out that if that profit does accrue to the Exchange Equalisation Account it must wait there till the Account is wound up.
§ Sir J. Simon
What the hon. Member has said is perfectly right. Once it has passed to the Exchange Equalisation Account as a reserve I should have no power to use it in the nefarious ways suggested by the hon. Member.
§ Mr. Dalton
The Chancellor could take power to sell some part of the securities by a Clause in the Finance Bill. That is 682 where the power would come from. I was anxious to establish the meaning of "at this moment" in the Chancellor's intentions and it was not an unreasonable question to ask. He has now made it perfectly plain that he is not going to use any of this money to pay for the Arms Bill or any other current expenditure in his next Budget. We take note of that.
I confess that I am a little in doubt—I do not think anyone need apologise for that, because this is a complicated matter—as to the method according to which the total note issue will be fixed in the future. No doubt as the Debate proceeds either the right hon. Gentleman himself or the Financial Secretary will give some more explanation on that point. Some commentators have said that the provisions of the Bill furnish a new liberty of varying the note issue, and that there will be more elasticity in the future. The point has been put by the "Times" commentator in this way:Whereas hitherto the amount of gold in the Issue Department governed the amount of the note issue, now apparently the amount of the note issue will govern the amount of the gold in the Issue Department.He may have got a wrong impression, but I am anxious to get the point cleared up. Is there or is there not now a greater elasticity with regard to the total note issue? Are the Government, by means of these rather complicated arrangements, which the Chancellor explained very clearly but which are none the less rather complicated, for balancing between the Issue Department and the Exchange Account, thereby acquiring any additional liberty of varying the note issue up and down? That is my question, and I shall be interested to get a reply.
§ Sir J. Simon
It will be very convenient to do so. No, there will be no greater liberty. The note issue can be varied, as the hon. Member well understands, only if there is a corresponding variation in the total assets of the Issue Department. That can be brought about by increasing the amount of gold which the Issue Department holds; it can be brought about by varying the amount of fiduciary issue within the limits of time which are permitted. That has always been so, and it will be so now. 683 There will be no greater latitude than before. All these things will be exactly the same as they were before. The only reason why I introduced this provision by which the Exchange Equalisation Account would still make up any little differences week by week was because if I did not do it there would necessarily have to be the printing of a few more notes or the cancelling of a few more notes and, for mechanical and other reasons, it is much better to keep your note issue constant until a real reason comes along for changing it. When a real reason comes, you can change it in exactly the same way as before.
§ Mr. Dalton
I am very much obliged to the right hon. Gentleman. If a reason comes for changing it, you are still as you were before. When I put the question I should not have quarrelled if the answer had been the other way, if the Chancellor had said that he was getting greater liberty. I may, perhaps, be incurring the censure of the Chair for going beyond the terms of the Bill but I should like to remark that it may be a matter for consideration whether an upward movement in the currency issue would not now be desirable from the point of view of the stimulation of trade without incurring any risk of causing an inflationary rise in prices. This seems to be strictly in order on the Bill, because it prescribes the amount of the fiduciary note issue. It is arguable that it might have been better to place a rather higher figure on the upper limit of the fiduciary issue in future. That would, of course, involve an upward movement in the total of the note issue, corresponding to a given amount of gold held, but that might be desirable as one of the means by which we could aim at getting our resources better into employment and bringing more assistance to backward sections and geographical areas of industry. But I do not Debate that point now.
One matter that must have struck everyone on reading the Bill and listening to the speech in explanation of it is that the Exchange Equalisation Account is gradually extending its functions. I am not complaining of that. I am merely making an observation. It was originally invented merely as a device to iron out short-term fluctuations in the exchange rates between sterling and the franc and the dollar. Now it is going to 684 perform another function, according to the Chancellor's explanation. It is going to be used to iron out not merely fluctuations in the rates of foreign exchange, but also the fluctuations in the total of the note issue. It is becoming a more important instrument of finance and of currency management. Of that I make no complaint. I merely observe that that is so. But this raises a point on which some of my hon. Friends feel rather keenly, and I, therefore, ask a question relating to the publicity which is to be given to the increasingly important operations of this account.
Some of my hon. Friends are concerned to know how much publicity will be given, and how much hon. Members of this House will be told, regarding the operations of the Account and the variations in the composition of the assets in the hands of the Account from time to time. I should be obliged again, but not necessarily now—when it is convenient—if we could be told what arrangements are intended by way of public statement or statements through the Public. Accounts Committee, with regard to these matters. It might plausibly be argued, although I can see the arguments on both sides, that the operations of this account are now getting so large that it is important in the public interest that we should know what is going on. That is an argument for more and more frequent publicity. I imagine that it could also he argued that we do not desire everybody to know what is happening, especially certain characters in other countries.
There was one small point which the Chancellor did not make clear to me, but which is, no doubt, clear enough, under the terms of Clause 3 (2) with regard to the provision:The Treasury shall pay into the Account all sums received by them after the commencement of this Act in respect of the profits of the Department under Section six of the Currency and Bank Notes Act, 1928.Am I right in understanding that hitherto the profits on the currency note account have accrued as miscellaneous revenue, and have been paid into the annual income of the Treasury, but that now they are not going so to accrue, but will be paid into the Account itself, and remain there?
§ Sir J. Simon
The present position is that there is a statutory provision which secures to the Treasury any of the profits 685 of the Department. The Issue Department is, of course, managed by the Bank of England, but it is managed on behalf of the Government. The profit it makes comes to the public purse. Curiously—and this is really a defect in our present arrangements—there is no corresponding provision by which the Issue Department can be fed, if, instead of making a profit, it makes a loss, by securities depreciating. You will observe that under the Bill we stop that hole. We have an arrangement now whereby what I call the level in the reservoir will be kept constant. For reasons I gave, we are doing that through the Exchange Equalisation Account. Consequently you have to pass the present claim of the Treasury to the Exchange Equalisation Account, which will get the profit.
§ Mr. Dalton
Does that mean that whereas certain sums are now paid into the revenue, they will not be paid in future, and that to that extent the Chancellor will be receiving somewhat less revenue?
§ Mr. Dalton
I think I understand the point. At any rate, it can be raised again if it is not clear when we reach it in Committee. I have made some observations and asked certain questions, many of which have already been answered. There are matters which could be more properly dealt with in Committee but I would like to conclude by saying that we do not regard this Measure as revolutionary, but as a rather small measure not of first-class importance, although it is making alterations which we consider are in the right direction. We shall not divide the House on the Second Reading of the Bill, but we reserve our right to raise these and other matters by way of Amendment upon the Committee stage.
§ 4.56 p.m.
§ Mr. White
In his opening sentences the Chancellor of the Exchequer observed that this was not a revolutionary Measure. The hon. Gentleman who has just spoken has concurred in that view. I am inclined to think that they would both agree that at all events the Measure formally marks a complete revolution in practice since the days, of which the right hon. Gentleman reminded the House, when Sir Robert Peel was responsible for passing 686 the Bank Charter Act in 1844, when a particularly rigid school of thought prevailed, fixing the currency in a rigid relationship to gold. Over the intervening period we have passed by a series of changes to a condition which will be formally marked to-day. We have passed to a complete system of managed currency. I believe that the Bill goes somewhat further in that direction than the Chancellor led us to suppose in the course of his most lucid explanation.
The right hon. Gentleman did not dwell particularly on Clause 3, which enables gold to be transferred to or from the Issue Department of the Bank and the Exchange Equalisation Account. I had assumed in reading the Bill that these changes were intended to be purely correctional changes related to slight variations in the price of gold, but they might be used equally to control the currency issue to whatever degree the Government might think desirable at any particular time. My contention would, therefore, be, subject to correction, that the Government have now, under the terms of the Bill and subject to Clause 3, completely in their hands an instrument for managing the currency of this country. I do not complain about that. If I am wrong, I shall be glad to know what limitation there is of the powers which the Government have under the Bill. I make no complaint that that should be the case, because the Bill formally recognises the alignment of all the resources of our country, if not for the control of our currency, for the defence of it.
The hon. Gentleman referred to the increasing importance of the part played by the Equalisation Account. The Chancellor of the Exchequer referred to it as a sister Account, but I am not sure that it is not the dominant partner at the present time in these transactions. I am glad that the right hon. Gentleman has set at rest any speculations that might be made as to the possible future destination of the nest-egg of £95,000,000. I remember that at this time last year, when the Budget was casting an ominous shadow before it, a number of people were speculating as to what rod the Chancellor of the Exchequer would draw from his armoury and lay upon the backs of the taxpayers. Those who were optimistically inclined said that it would be all right, because the Bank's stock of gold would be revalued. They pointed out 687 that that had been done in America, and more than once in France, and they suggested that a kindly Chancellor of the Exchequer would undoubtedly bring forth this nest-egg and smooth away their difficulties. I am glad to find that the Chancellor of the Exchequer does not propose to adopt any such easy device at this time for helping us over any of our difficulties, because nothing could do more to damage the financial confidence in which this country is held than to resort in our budgetary arrangements to dodges and devices and windfalls of that kind. I am somewhat relieved that those speculations have been set at rest, at all events for the present.
With regard to the less important aspects of the Bill, and the advantages that will accrue from it, I entirely agree with the statement made here to-day that it is obvious that the new arrangement for the valuation of the Bank's stock of gold will facilitate the day-to-day transactions, accountancy problems and the like, as between the Equalisation Fund and the Issue Department of the Bank, which must have been a source of annoyance, if not of difficulty, in the past; and in so far as this revaluation will enable observers abroad to see our banking arrangements in a truer light, I certainly agree with the Chancellor of the Exchequer that the new arrangement will be all to the good. In so far as it simplifies the accounts of our national finances as a whole, it is an advantage, because anything which makes for simplicity must make for better and wider understanding. It is remarkable that we should be discussing here a Bill dealing with currency and finance which must affect more or less everybody in the country, but which, nevertheless, requires all the right hon. Gentleman's ability and powers of explanation to make it clear to the House of Commons. What is the fate of the ordinary man in the street, who is going to be affected vitally by this arrangement, whether he knows it or not?
I would put in a plea for greater publicity, if possible, in these matters, and a greater effort to interpret them to the people of the country. The hon. Member for Bishop Auckland (Mr. Dalton) also has made a plea for greater publicity in relation to these matters. In 1929, in a book which the Chancellor of the Exchequer will recollect, entitled "Britain's 688 Industrial Future," we laid particular stress on that aspect of the matter, and urged that the Treasury and the Bank should from time to time issue such explanations as they might feel able to give of the policy which they were endeavouring to achieve by their financial arrangements. It would be a great advantage if that could be done. All sorts of speculations are continually going on in the financial world as to what the Treasury are working for, and it would be of great assistance in financial and other quarters of the country if there could be greater publicity in that respect.
I have been wondering what would happen if I were to mention the words "liberty" and "democracy" in the course of this Debate. I should like, if I may dare to do so, to mention them in this way. If democracy and liberty are to survive, it is one of the conditions of that survival that democrats everywhere, in this and other countries, should be far more aware of what is going on in the world than they are at the present time; and that applies, not only to the forces which may be arrayed against this country, but also to the financial aspect of national affairs. On that account we may welcome this Bill. We recognise that it deploys our resources for the defence of our currency and of our standard of living better than has been done before, and that it gives to the Government far greater powers of manoeuvre and deployment of those resources to meet changing conditions, or attacks like the incoming and exodus of "hot money" to which the Chancellor of the Exchequer referred. We should, however, be misleading ourselves if we thought that these arrangements do not rest, and rest entirely, upon the maintenance of a balance of trade, and, in the final resort, upon our export trade. The whole financial structure which we are considering to-day rests upon the condition of our trade, and we should be making a great mistake, and deceiving ourselves, if we thought that Bills of this kind in any way obviated the necessity for hard work and endeavour to maintain our export trade at the maximum figure that is possible. Therefore, the words "liberty" and "democracy," although they may seem irrelevant, are not so irrelevant as they may seem at first sight.
There is one question which I have seen raised, and with which I should be 689 glad if the Financial Secretary would deal in the course of his reply. It is stated by some people that under this Bill the authorities will no longer have the power to acquire any holding of gold in excess of £10,000 at the rate of 85s. an ounce. Other commentators, with equal confidence, say that that power remains, and it is thought that it may have some bearing upon the activities of gold hoarders and others in the future. It might be as well if that matter could be finally set at rest. This Bill does not seem to us to be a revolutionary Measure, although it marks what may be in effect a revolution which is taking place, as revolutions usually do take place in this country, so gradually that perhaps its effects are not at the moment recognised. We think that the Bill will bring about greater simplicity and greater elasticity in our national accounts, and for that reason we welcome it. At the same time, we feel that an effort should be made to make these matters plainer to ordinary people, because, whether they understand them or not, their lives are going to be considerably altered by the way in which the new arrangements work out.
§ 5.10 p.m.
§ Sir J. Wardlaw-Milne
Like the hon. Member for East Birkenhead (Mr. White), I do not think the word "revolutionary" can be applied to this Bill, but, again, like him, I think that perhaps the House has not appreciated, from the very lucid statement of the Chancellor of the Exchequer, how far-reaching its provisions are. In fact, if I have a complaint at all, it is that my right hon. Friend's explanation was so clear and interesting as to be likely to give the impression that in reality this is a small matter, merely a matter of machinery, and that there is no underlying principle behind it. Actually, as I see it, this Bill—and I welcome it very much from that point of view—is the last nail in the coffin of the old Gold Standard. As I say, I welcome it from that standpoint particularly, and I fancy that that sentiment will find an echo in other parts of the House. But there are many Members still in this House who can recollect a time when, if such a statement had been made, it would almost have been hissed, so startling is the change that has taken place in the course of the last 15 or 20 years. The old Gold Standard, from which trade and industry 690 suffered so much, has, I think and hope, gone for ever.
This Measure, undoubtedly, will improve the machinery of the working of the note issue of the Bank of England, and I think it will simplify the conditions in which the Exchange Equalisation Account is working. But let us be quite clear what it is that we are doing. Really we are entirely reversing the present procedure. Under the present procedure, the amount of gold in the Issue Department governs the note issue; now the note issue is going to govern the amount of gold in the Issue Department. That is really what is happening, and to my mind it is the right method of working. What we want—what we have always wanted—is that the amount of currency available as issued by the Bank shall be such as the trade and industry of this country require, and such as will provide for what we all hope will be our growing prosperity. The supply of currency for national needs should not be governed by the amount of gold which the Bank may happen to hold.
While, however, I very strongly welcome the Bill and the principle underlying it, there are one or two points with which the Chancellor of the Exchequer, at this stage, has not perhaps fully dealt. One is as to what is to be the future position of the Exchange Equalisation Account itself. The Account is to make up any deficiency in the Issue Department, and, alternatively, it will take up any surplus from that Department. As was said by the hon. Member for Bishop Auckland (Mr. Dalton), the Exchange Equalisation Account was originally intended for the purpose of "ironing out" excessive fluctuations in connection with international exchange. I think, if I remember correctly, that the phrase used, at the time when the Bill setting up the Account was introduced, was that it was not intended to stem a tide, but merely to iron out temporary fluctuations. The Account is now really to control the supply of currency, and, therefore, we have left an Exchange Equalisation Account, and have come to an Exchange and Currency Equalisation Account. I have no objection to make to that, but I think it raises, in connection with the future of the Account, one or two questions which will require some further consideration.
I should like in the first place to repeat in more detail, and with some 691 apology for the rather crude form in which I put it in the middle of the Chancellor's speech, the question I put to him as to how this nominal profit of £95,000,000 is going to be dealt with—or rather, £86,000,000, after adjustment has been made. I quite appreciate—and it has been repeated by the right hon. Gentleman in reply to a further question, since he spoke, that he has no intention of taking that profit as a windfall into revenue. I should not have expected for one moment that would have been the intention, and I cannot see the necessity for his being asked to emphasise it so clearly. But there is no harm in his having done so. Still, there is a nominal profit of £90,000,000 or thereabouts, and if we are going to make the position clear it is as well to let the public know what is to be done with this sum. I agree, of course, that it is a book entry, and does not affect money in any way; but is it going to reduce the floating debt and release Treasury bills?
There is another and larger point, which I think naturally rises in one's mind when considering this Bill. The Exchange Equalisation Account is now to be—I borrow the phrase from the right hon. Gentleman opposite, and I gladly credit him with the authorship, for it is a good phrase—the dominant partner in the future procedure. The Exchange Equalisation Account, therefore, should have sufficient gold to satisfy all demands. It may have, as it has had in the past, demands made upon it for that gold. Between 1932 and 1937 this country saw a great influx of money—whether or not it was "hot" money or other forms of fugitive money, a great deal came into the country—but, as has been explained to-day, a great deal went out last year, and the Exchange Equalisation Fund has to be ready to meet such an exodus of money at any time. I do not know of any way in which we could be sure of always having the money to meet a drain of that sort except by stopping the export of capital. That may or may not be a suitable method, but obviously one cannot go into it now. Suppose that there had been no drain upon us, and that as between 1932 and 1937, money had continued to pour into this country, the Exchange Equalisation Account would have had to go on buying gold. I agree 692 that such a position does not arise to-day, but it might some day be extremely inconvenient to buy all gold offered.
The gold output of the world went up by 85 per cent. between 1929 and 1936. Suppose the output of gold goes on increasing at that rate. Are the Exchange Equalisation Account in this country and the authorities in America going to be able to purchase all this gold at the present high price? These are questions that are bound to arise in one's mind. It is not an impossible picture of what might happen if we had years in which there was no demand on us for gold and we were asked to buy very large quantities. It is not a very profitable arrangement to pay people to bring out gold from the ground to bury it in the vaults of the Bank of England or in underground strongrooms in Kentucky, however valuable gold may be as a war reserve or insurance. If the output of gold grows at the rate at which it has been increasing of recent years, the position may become embarrassing. It is easy to say that the position could be rectified by curing the present maldistribution of gold, but it is very difficult to do that. As far as I can see that maldistribution can be corrected only when we get back to a free flow of trade. Another alternative, perhaps, is to make it not so profitable to produce gold. That could be done, assuming that it is not possible by international agreement to fix a lower price, by raising the price level in our own country. There is, to my mind, nothing that is more urgently needed.
My right hon. Friend referred to the declarations made at the end of the Ottawa Conference and after the International Economic Conference. One of the points then urged was the necessity of raising our price level. There has been no sign of our being able to do it. Our price level to-day is a long way below 1929 and still further below 1900. If we could only raise our price level it might have a very great effect upon our industrial prosperity. That could be done only by co-operation with the United States of America, as their problems of unemployment and low price levels are the same as ours. Such an increase, by adding to costs, would make it less profitable to produce gold, and would possibly put some of the low-grade producers out of business. A drop in the price of gold should only come about very gradually, 693 and nobody wants to upset an enterprising and valuable industry.
Apart from the issues I have raised, I may sum up in three or four sentences all I want to say further upon this Bill. It is a Measure that I welcome. I believe it is an important step forward, even if it is not revolutionary. It sounds the death knell at last of the myth which so long existed, that gold is really necessary as the basis of our currency. The actions taken by the Government since 1931 have brought us gradually to the position we have reached to-day of being able to free our currency. These measures have helped our trade, expanded our industry, and, to some considerable extent reduced unemployment. I believe this Bill will help still further to make our industries prosperous. At any rate, we can say that there is nothing now in our currency arrangements and nothing in our money system which prevents us putting all our people in employment and achieving real prosperity.
§ 5.21 p.m.
§ Mr. Bellenger
There was one part of the interesting speech just delivered by the hon. Gentleman opposite with which I did not quite agree. That was the part in which he said that our currency is no longer based on a gold backing. He might qualify that statement on reflection, because, although our currency is not based on gold to the extent that it used to be, it is nevertheless quite evident, from the figures that the Chancellor gave us to-day, that there still is a belief in the gold backing to currency, not only in this country but in others as well. The Chancellor told us that to-day—or, I think he said on 30th September, 1938—there was £689,000,000 of gold in the Exchange Equalisation Account and the Issue Department of the Bank of England, even after considerable withdrawals had taken place. That indicates that there is still a substantial gold backing for our currency.
§ Sir J. Wardlaw-Milne
I quite appreciate that. The point is that we are not bound by gold as we were. If the hon. Member will allow me to direct his attention to the Clause in the Bill, he will see that adjustments are to be made. Sub-section 3 of Clause 2 says:if, as the result of any such valuation, the value of the assets then held in the Department differs from the total amount of the Bank of England notes then outstanding, 694 there shall be paid to the Department from the Exchange Equalisation Account (in this Act referred to as 'the Account') or to the Account from the Department such sum as will counteract that difference…
§ Mr. Bellenger
I think there is not a great deal of difference between the hon. Member and myself. What he means to say, and what I accept, is that we are not so rigidly bound by the Gold Standard as we used to be. But I should imagine that the Exchange Equalisation Account will continue to buy gold, and I expect that some of that gold will eventually find its way into the Issue Department of the Bank of England by virtue of that Sub-section to which the hon. Member referred.
§ Mr. Bellenger
No doubt. But if we assume that the variable value fluctuations are considerable, may it not be possible that not only will assets be transferred to the Issue Department, but considerable quantities of gold itself?
§ Mr. Loftus
Surely the amount of gold is regulated under this Bill by the note issue, instead of, as under the old system, the note issue being regulated by the amount of gold in the Bank of England?
§ Mr. Bellenger
That may be so, but the currency of this country to-day has still a considerable gold backing. That is the only point that I mentioned in disagreeing with the hon. Member's speech.
§ Mr. Bellenger
Perhaps it was my fault that I did not quite get the impression that the hon. Member wished to convey. Not the least interesting part of the speech which the Chancellor of the Exchequer delivered was that historical survey in which he was able to tell us the reason for 77s. 10½being the price for an ounce of gold. I confess that I never knew before how that mystical figure was arrived at, but I am not in the least surprised to hear that it goes back to the days of Sir Isaac Newton.
§ Mr. Bellenger
At any rate, it is Chancellorian historical research. It was interesting to listen to the Chancellor of 695 the Exchequer giving some of the elementary facts relating to the accountancy manner in which the housekeeping or the financial affairs of the nation are carried on. The right hon. Gentleman in his somewhat disarming speech led the House to believe that this was merely a minor matter and something affecting the nation's book-keeping; that he was merely introducing into the nation's bookkeeping, modern methods such as modern businesses introduced into their own affairs from time to time. I naturally accept the explanation of the Chancellor of the Exchequer, but I am wondering why it has been left to the Chancellor to find out these defects in our banking system so late in the day. I am inclined to think that possibly more serious events than domestic accountancy in the Bank of England or in the Treasury have led the Chancellor of the Exchequer to introduce the Currency and Bank Notes Bill which is now before us. As the right hon. Gentleman rightly told us, the Bank Charter Act, 1844, introduced rigidity into our currency and financial system, but he probably knows that that Act was circumvented by various methods during the last century, principally by the cheque system of dealing with money transactions. When we went off the Gold Standard in 1931 it further alleviated the fixity which was brought into effect by the Bank Charter Act, 1844.
In certain quarters the step which the Chancellor of the Exchequer is proposing to take has been described as revolutionary. My hon. Friend the Member for Bishop Auckland (Mr. Dalton) and other speakers have told us that they are not inclined to agree with that aspect given to the Bill by certain commentators outside. I should be inclined to call it one more step in the process of the "inevitability of gradualness." It would be out of order to discuss it on this Bill, but perhaps there may come a time when the Chancellor of the Exchequer will complete his researches and even ask the House to amalgamate the Issue Department of the Bank of England with the Treasury itself, thereby putting into effect something which we on these benches have advocated for a very long time. When we are considering book-keeping methods, whether they be the accounts with which we are only personally concerned or the nation's accounts, surely, we as Members of the 696 House of Commons should understand that book-keeping. The House of Commons is supposed to be the assembly which keeps a complete control over the finances of the country. In trying to understand this Bill as far as I can from reading it and listening to the right hon. Gentleman's lucid and able speech this afternoon, I am inclined to think that with the methods which the Chancellor of the Exchequer is introducing, the House of Commons will not get a complete picture of the nation's finances to which it is entitled if it is to exercise proper control over them.
We are now told that the Issue Department of the Bank of England and the Exchange Equalisation Account will more or less act together. The Exchange Equalisation Account deals with a very large sum of money, and it seems possible, as has already appeared in the American Press, that this Exchange Equalisation Account, indeed other accounts of a similar nature in other countries, can be utilised to hide from the legislature certain acts which may lead in themselves to inflation. The Chancellor of the Exchequer has told us this afternoon that this Bill does not mean that there will be either inflation or any deflation, but those of us who tried to find a reason for the large increase in the fiduciary issue a little while ago were inclined to believe that we had embarked, to a certain extent at any rate, on a policy of inflation.
Inflation causes fear in the minds of the people to-day, because we have seen the effects of inflation in a modern country like Germany. Many of us have seen it at first-hand, and, therefore, if there is in our minds or in the minds of the public outside an idea that any Bill of this nature means, in any considerable degree, inflation, we are quite right in expressing our anxiety and asking that the finances of the country should not be allowed to sink to the level that prevailed in Germany some years ago. Rather precipitately I asked the right hon. Gentleman a question on Clause 2 during the time that he was making his speech. I apologise for hurling that question at him at the end of his speech. Obviously, it is one which he would have to consider. Nevertheless, I hope that the right hon. Gentleman, who I understand is to reply, will give me an answer to it, and in case he may not have 697 heard it, I will repeat it. It relates to the second paragraph of Clause 2 (2) where it says:Provided that adjustments may, if the Treasury so direct, be made in respect of interest affecting the current price of any securities and, in the case of securities standing at a premium, in respect of that premium.I understand that the valuation that will take place weekly will take into account the current market value of the assets in the Issue Department of the Bank of England, and I presume that, if the market value of those assets is below par, the difference between the valuation and parity will be made up by a transfer from the Exchange Equalisation Account, but if, according to the Bill, those securities stand above par and thereby include a premium such premium will not be taken into account in the valuation. In other words, there will be a hidden reserve fund in the Issue Department as far as their assets are concerned. I hope that the right hon. Gentleman has understood my point and that he will be able to give me an answer later on. I am stimulated to these remarks by certain words which the hon. Member for Kidderminster (Sir J. Wardlaw-Milne) uttered when he mentioned the question of gold. In Germany, a country of immense power and with immense labour resources, currency is not attached to gold except to a very minute degree. Nevertheless, that country is able to carry on at a terrific pace and to produce enormous quantities of goods; unfortunately things which we consider are not an asset to any country. May it not be that when we are considering the assets of our own country and the relation between our currency and gold even we might learn from the central banking system of Germany. They seem somehow or other to have been able to keep their internal prices more or less static—certainly they have not risen to any large extent—and they have been able to do that with only a very small quantity of gold in their central bank.
There is not the slightest doubt that, although we say quite easily that our currency is no longer attached substantially to gold, in the minds of those who are responsible for our central banking system there is belief in the solidity and the substance of gold. Should it not be that even though we have proceeded far towards the position of a 698 managed currency, we might even proceed a little further, and not place, as we do to-day, so much reliance on the power of gold and its power of production. If we do, we must be reminded of the fact that there are certain gold producing countries in the world and that England is not one of them. Certainly one of our Dominions is probably the largest producer of gold but if we want to acquire large quantities of the metal for any purpose whatever—and we appear to want to do so because we are buying large quantities of it—we must go to the country producing it. How can we get that gold? How can we import that commodity or any other commodity unless we can produce here? Therefore, is it so necessary, in order that we should produce the commodities which we have to exchange for this sterile asset, gold, to have such a large amount of gold-backing to our currency.
I welcome this change. I am not so sure that it is so small as the right hon. Gentleman made out, but as my hon. Friend the Member for Bishop Auckland said, it is a step in the right direction and I hope that one of these days the present Chancellor of the Exchequer or some other Chancellor will proceed further upon the path which we have advocated on these benches for so long; and not only modernise bookkeeping methods but our central banking institution as well.
§ 5.42 p.m.
§ Mr. Hammersley
I would like to say a few words in support of this Measure. There was a time when questions of currency and credit were more or less closed books to the average politician. They were hidden mysteries which we were not expected to understand. Now the wheel has turned the whole circle, and there are many who allege that if we understood these problems a little more clearly we might be able to use the instrument of monetary policy to solve many of our present difficulties. What the ultimate truth of that monetary conception is, I do not know, but I do know that the commercial community as a whole is now very largely interested in these problems.
It is as a member of the commercial community that I would like to add one or two words to what has already been said in support of this Bill. The important duty of any Government is to provide for its people a currency which is ade- 699 quate in amount for the purposes of trade and is reasonably stable in value. It is against the background of these primary and elementary considerations that we must judge this particular Bill. In 1928 the duty of the Government in this respect was handed over to an independent central institution—the Bank of England. That was in order that the duty of providing an adequate supply of currency of considerable value should be free from political interference. It was done subject to general rules which Parliament then laid down. One of those rules was that there should be some fixed relationship between paper currency and gold reserve. The amount of the note issue which is not covered pound for pound by gold was laid down by Parliament and was approved at a figure of £260,000,000.
Since that time events in the world, as the Chancellor of the Exchequer so aptly explained, has caused the House to approve proposals that the fiduciary issue should be increased from £260,000,000 to £400,000,000. During that same period the value of gold has gone up very considerably, and the remaining part of the backing instead of being backed pound for pound as was the original intention has been backed more than on the pound for pound basis. Gold which has really a value of something like £7 8s, per ounce has been only valued in the terms of the issuing department at £4 5s., and it is desirable that this unreal and fictitious situation should be abolished.
That is what the Bill proposes to do. It puts the valuation of gold by the Issuing Department of the Bank on the really solid basis of to-day's value, and the consequence is an increase of gold cover by something like £100,000,000. At the same time that this is done, the intentions of the Government are to decrease the fiduciary issue by approximately the same amount. I do not know whether it is really quite wise to adjust the two writings up and writings down so carefully. I should have thought that with the necessity of financing rearmament, and in view of the fact that there are a large number of unemployed who should have work and wages, there might be less writing down of the fiduciary issue than the writing up of the value of the gold. But instead of having a little swing of the balance in that direction we have the swing slightly the other way. We have a 700 decrease, so far as I can see, of something like £5,000,000 in cash in the Issuing Department of the Bank of England.
When the Financial Secretary to the Treasury replies, he might say whether or not the effect of the Bill will be to reduce the reserve of notes in the Banking Department of the Bank of England by some £5,000,000. That is the way I look at it. At any rate, the main effect is to economise in the use of gold. We are going to have a greater proportion of our gold resources used either internally to increase the basis of credit or, externally, to assist the Exchange Equalisation Fund in ironing out fluctuations in the rate of exchange. The increased mobility thus given to the gold reserves is all to the good. It may be argued that the Bill does not go far enough, but it certainly goes in the right direction. When the gold resources come into this country they should be either mobilised in the Banking Department to increase the available amount of currency, or, alternatively, they should be sterilised in the account. We are now immune from that automatic restriction of credit which an abnormal drain of gold may cause in the commercial community. In these respects I am certain the commercial community as well as the financial community will welcome the Bill and give it their hearty support.
§ 5.50 p.m.
§ Mr. Lewis
The Chancellor of the Exchequer gave us what we have come to expect from him, namely, a very clear exposition in very simple language of matters which are in themselves technical and difficult to understand. I hope that it will not be thought that I have failed to profit by that exposition if I suggest that the real purpose of the Bill may be summed up in a sentence. It seems to me that its purpose is to improve the appearance of sterling in the foreign exchange markets of the world. When I say "improve the appearance," I do not use that expression in any sinister way. I do not mean that it is for the purpose of making sterling appear more valuable than it is. The purpose seems to be to let the true value of sterling be apparent. Obviously, that is a useful purpose to pursue. It is desirable that people should appreciate the strength of the currency. They should think that it is strong and not likely to be subject to extreme fluctuations. But there is something much 701 more important than that, and that is that not merely should people think or believe that the currency is strong, but that the currency is in fact strong. There is a very great distinction there.
The Chancellor of the Exchequer referred to the operations of the bears. He did not pursue the subject at length. I thought he rather left the impression, whether designedly or not I cannot say; that the bear was somebody who in certain circumstances might be able to damage even a sound currency. I believe that is not really correct. I believe that the only people who can actually damage a sound currency are the Government of any country. If the Government pursue a sound financial policy and a sound trade policy, their currency will remain sound and stable. If they pursue an unwise financial and trade policy, their currency may become weak and consequently unstable. Bears are people who sell something which at the moment they do not possess, in the confident belief that later on they will be able to buy it back for less than they sold it for. They operate only under one of two conditions, either that they consider that something which they propose to operate is at the moment over-valued in the market and they are of opinion that in a short time its true value will be apparent or, alternatively, they are of opinion that something that is truly valued in the market will in a short time, for some reason, actually be worth less. It does not seem to me that those conditions can possibly exist where currency is in fact strong and therefore not liable to extreme fluctuations.
§ Mr. Loftus
Surely scares about war might depreciate currency, however sound the policy of the Government might be.
§ Mr. Lewis
No, I do not think so. If the currency is actually sound, a bear on that currency would be too dangerous. It seems to me a positive consideration that the policy pursued by the Government should be such that the currency itself is sound.
The Chancellor of the Exchequer referred to the profit arising, on paper, from the writing up of this amount of gold. He gave us to understand that when he looked at it his mouth watered, but he resisted the temptation. It is very difficult for us to come to any reliable opinion 702 as to whether he was justified in resisting temptation or not, for the simple reason that we have not sufficient facts before us about the working of the Exchange Equalisation Fund to enable us to form an opinion of any value as to the size of the reserve that the fund needs. The fund has worked for seven years, If, taking the day to day losses or profits the fund has shown at the end of each year a working profit, and if in the most expert opinion available that condition of affairs is likely to continue, then the fund does not require a very big reserve, but if on the other hand the fund has made considerable profit some years and substantial loss other years, and if it be the opinion of those who conduct it that there is grave risk that losses may be made in the future, then, clearly, a very large reserve would be advisable for the protection of the fund. That is a matter on which the Chancellor of the Exchequer has the advantage over us, because he knows the figures, and we do not.
My only object in referring to the matter is to suggest to him that that is a possible way of regarding it when he considers these things in connection with the Budget. The real test is what is the amount of reserves in the fund at the moment and what relation does that bear to the losses that have been incurred in the past, or the foreseeable or probable losses of the future? If the reserve tested in that way is clearly excessive, then it seems to me that the Chancellor of the Exchequer might very well use that excess proportion either in the reduction of debt or for some other purpose. So far as the Bill as a whole is concerned, in common with other hon. Members who have spoken I shall certainly support the Second Reading.
§ 5.57 p.m.
§ Sir Cyril Entwistle
The Bill has met with general support, and so far as I am concerned it meets with my support. I think the chief alteration, or the most important alteration, is contained in Clause 4 (2) which says that:Section four of the Bank Charter Act, 1844 (which requires the Department to issue notes in return for gold), shall cease to have effect.That is a provision which ought to receive the approval of every hon. Member. If there is one thing that is antiquated now and unjustifiable it is the provision in the Bank Charter Act that 703 as soon as the Issue Department of the Bank of England obtain more gold they must automatically issue currency notes to the exact equivalent of the gold required by the Issue Department; still more so when one realises that the value of the gold against which the notes have to be issued is the artificial value of 85s. an ounce. It is time that artificial figure was got rid of, because it bears no relation to reality. Its only purpose, apparently, is to cause periodically a Stock Exchange scare in regard to gold shares. As soon as people get a little bit nervous and the bears want to operate, we have rumours and scares that gold may go back to the old figure of 85s. per ounce. The only influence that determines the price of gold to-day is the United States of America, because they are the only country in the world with a fixed price for gold. Our own price of gold depends entirely on the dollar exchange between this country and America.
Therefore, it is obviously ridiculous for the Treasury or the Bank of England to cling to the old figure of 85s. Its only relevancy is that if we went back to the Gold Standard on the old basis, which nobody suggests, there might be a temptation to go back to it at the old parity level. That was so disastrous when we attempted it in 1925 that I do not think anyone would dare to attempt it to-day, and the sooner we remove that temptation the better for all concerned. I have referred to the provision that there ought to be an automatic alteration in the note issue according to the gold holdings of the Issue Department of the Bank of England at any given point, but it is a mistake to think that the amount of notes in issue is in itself either inflationary or defilationary in effect. One thing we have learned in experiments in monetary management, and that is that the price level and trade cannot be altered directly by an alteration in the mere amount of the note issue. It is not the number of notes which the Bank of England are entitled to issue which is of importance to trade and to price levels; what matters is the number of notes in circulation which are actually being used for the purchase of goods.
The way in which inflation can take place is not only by an increase in the note issue or the general volume of credit; you have to put that credit into circula- 704 tion by Government expenditure. We all know that social credit adherents have a very simple way of putting increased credit into circulation, and that is by giving everyone a certain amount of money per annum. That has its attractions, no doubt, to its advocates, but we all know that the reactions and repercussions of any proposals of that kind would soon destroy the whole basis on which the prosperity of this country has been built up. I am very pleased that the Debate has at last laid the bogy of the fetish of the Gold Standard. I remember the Debates on this subject some years ago, in which hon. Members thought that if they maligned gold sufficiently we should get an enormous advantage to the general welfare of the country. Experience has shown that there is nothing more absurd, just as there were the strongest arguments against going back to the Gold Standard at the old parity level of 85s., there are the strongest arguments to-day against thinking that by trying to get rid of gold you are thereby going to improve our trade or bring the millennium nearer.
The position of gold does not depend on this country or on any one country. It happens to be the only medium of exchange which inspires the general confidence of the nations of the world, and if we have to indulge in such things as war, which God forbid, gold will have its value notwithstanding all the monetary cranks in the world. It is very necessary to have the solid backing of gold in the Bank of England for purposes of trade and to meet exceptional conditions which arise when we have a run on short loans due to scares in the international markets. What we all desire is a stable price level, but that is not to be obtained by attacking gold as gold, nor is it to be obtained by means of this Bill or by trying to fix an arbitrary price of gold. A price for gold has already been fixed within certain limits in the United States of America and if we want a stable price level and all the advantages to be derived therefrom the way in which to seek it is by getting stabilisation between the various exchanges of the world.
An attempt was made to do this by the Tripartite Agreement between the Governments of this country, France and the United States, and we know how difficult it is to bring about this very desirable stabilisation when we remember the history of that agreement. It has had to be 705 modified with regard to France on two occasions, and that stabilisation has been achieved only under very distinct limitations and subject to many qualifications. But it is a most desirable thing from the point of view of trade. What the trader wants to know is the amount he gets in his own currency when he sells his goods in a foreign country, and that can be obtained only by measures to bring about stabilised exchanges. That is effected by the Bill. In so far as it goes in removing the artificial price of gold, and in not making it obligatory to make automatic increases in the note issue merely because the Issue Department of the Bank of England obtains an additional quantity of gold, the Bill is in the right direction and should have the commendation of the House.
§ 6.8 p.m.
§ Mr. Benson
The reception in the financial Press of this Bill was, to my mind, somewhat amusing. One half of the financial journals decided that the Bill was the final step in the direction of a managed currency and the other half that it was the first step in the direction of a re-monetisation of gold. In other words, they decided that the Bill meant that the Government were proceeding in two diametrically opposite directions. After further consideration they came to the conclusion that the Bill, as the Chancellor of the Exchequer has said, means little or nothing. We on this side of the House give it our blessing, but we do not regard it as of very great importance. We certainly see no harm in it. The hon. Member for East Birkenhead (Mr. White) said that it marked a revolution from the days of the Bank Charter Act of 1844. As a matter of fact, it marks a much more recent revolution than that. It marks a revolution since 1931. I remember that at the General Election of 1931 members of the Liberal party came to me and asked me to pledge myself to oppose any attempt to nationalise the Bank of England. I gave a point-blank refusal, and they went in a body and voted for my opponent. I am not sure that they backed the right horse. It is perfectly true that the National Government have not nationalised the Bank of England, but they have nationalised all the important functions of the Bank of England.
This Bill is a notification to the world that the currency policy of this country 706 is finally, completely and absolutely under the control of the Treasury, and that the Bank of England is nothing more than the office boy so far as currency and financial policy are concerned. We have not the slightest objection to that. The Bill itself is really a very small Measure. I have tried to find out what changes it makes in actual practice. So far as I can see the only real change is that in future the profits of the Issue Department of the Bank of England will go to the Exchange Equalisation Account instead of to the Treasury Account. Apart from that it merely makes changes in name and in theoretical figures but no change in actual practice. Some hon. Members have raised the question as to whether the Bill increases the power of the Government. It does not for the simple reason that it could not. The power of the Treasury, before the Bill is passed over currency matters, is absolute. The Chancellor of the Exchequer pointed out that on the 6th January the Treasury took £350,000,000 of gold out of the Department of the Bank of England and at the same time doubled the fiduciary issue. If they have power to do that then, quite obviously, the power of the Treasury requires no augmentation; it is absolute and complete.
One of the arguments used by the Chancellor of the Exchequer was that it would give our note issue a better showing to the world, and the hon. Member for Colchester (Mr. Lewis) thought it would improve the appearance of sterling. Does it do either of these things? One effect on the note issue is that it reduces the theoretical backing by 20 per cent. It takes something like £90,000,000 of gold out of the assets of the Issue Department of the Bank of England, without replacement though admittedly it is little more than a change without any difference. Nowadays a Bank of England note is in effect a Government note and it has all the backing that the Government wishes to give it. It is called a Bank of England note simply for the sake of convenience; in reality it is a Government note and stands just how and where the Government wish it to stand.
In the enormous sums of gold in the Exchange Equalisation Account, which is primarily to defend British currency and which stands behind the Bank of England note, we have all the resources we require. There are only two things 707 which can affect our currency: first there is the secular effect of adverse or favourable trade balance, and, secondly, the policy of the Government. If the Government wish to be inflationary they can be inflationary, subject of course to the consent of this House. If they wish to follow a deflationary policy they can do so. There is nothing in the Bill which prevents it or which facilitates it. It is purely a question of Government policy subject to the consent of this House. The position of the £ can be controlled if the Government wish. The only thing the Government cannot control is the secular effect of the trade balance, and that of course no one can control. The Bill is merely changing of name, and not changing of actuality. The actuality is that complete and absolute control of all currency rests with the Treasury, and this Bill neither increases nor decreases that control.
§ 6.15 p.m.
§ The Financial Secretary to the Treasury (Captain Euan Wallace)
I think the House will agree that the Chancellor of the Exchequer has every reason to be satisfied with the reception which this extremely complicated and technical Measure has had this afternoon. Hon. Members will probably agree also that this reception is in some considerable degree due to the clarity of the explanation which my right hon. Friend gave to the House, and I am sure that they will sympathise with me in having to speak after such a chief. My right hon. Friend has explained the Bill so clearly as to leave no necessity for the final Government spokesman to do more than reply to those comparatively detailed points which have been very properly raised in various parts of the House.
I will begin with the speech of the hon. Member for Bishop Auckland (Mr. Dalton), who opened the Debate from the Front Opposition Bench. The hon. Gentleman suggested that an excess of gold is not an unmixed blessing, and he asked why we should not change some of that gold into stocks of food or raw materials. As the hon. Gentleman said that, I noticed that he kept one eye on the Chair, and I am certain from the way he said it that he would not expect me to answer a question which appears to be well outside the scope of this Bill. He went on to refer to the gold "profit," 708 the £95,000,000, minus £9,000,000 approximately, which is going into the Exchange Equalisation Account, and he was perturbed at what he understood was a nuance in my right hon. Friend's speech in laying some emphasis on the words "at this moment." I do not think it is necessary for me to do more than reiterate the very definite and categorical pledge which my right hon. Friend immediately gave, that he had no intention whatever of using this profit as a subvention to revenue.
The next point in the hon. Gentleman's speech with which I wish to deal is his query as to how the note issue is to be fixed in future. Here again, I would simply like to repeat, for purposes of record, what the Chancellor said—namely, that the procedure will be precisely the same as before and that the note issue will be exactly equal to the gold held in the Issue Department of the Bank of England at its current value, plus the Fiduciary Note Issue. The Bill certainly does not give any greater or less elasticity to the Treasury and the Bank in this respect. The hon. Member for Bishop Auckland went on to say that he thought some inflation would be desirable and this pious hope was echoed by an hon. Friend on this side of the House; but whether or not that is the case, this is emphatically not the moment to discuss it or to decide it, upon what is in its essence a purely machinery Bill.
The last point in the hon. Member's speech to which I wish to refer—here again, the point was taken up by other hon. Members—is the question of greater publicity in regard to the operations of the Exchange Equalisation Account. I do not think I can do more than reiterate what my right hon. Friend said in this House on 28th June, 1937, that he was ready to agree that the state of the annual account as at 31st March should not only be available to the Comptroller and Auditor-General, but should also be confidentially communicated to the Public Accounts Committee by the following 31st January. I am certain that, while hon. Gentlemen would very naturally like to feel that we in this House, who after all do control the currency as we do every other policy of this country, should have as much information as is consistent with the public welfare, they will appreciate that information given to Members of this House might also become available to 709 persons and organisations who would not use it in the best interests of this country. The last question which the hon. Member asked was whether the profits of the Issue Department of the Bank of England, which at the present moment accrue to the Treasury—as some of those very pleasant Miscellaneous Receipts which occasionally help a Chancellor round awkward corners—would in future go to the Exchequer Equalisation Account. That is so.
The hon. Member for East Birkenhead (Mr. White), who I was glad to hear gave the Bill a welcome, asked whether it gave to the Chancellor any powers he did not possess at present. My answer is that it does not. It is purely a machinery Bill. I was glad to hear the hon. Gentleman express his pleasure that this Chancellor had refused the temptation to use this hidden profit for any revenue purpose and had rejected what the hon. Member called any easy device. Of course, it is only in line with the honesty and austerity of my right hon. Friend's Budget for the current year that he should, I will not say contemptuously, but very definitely, reject a temptation of this kind. The hon. Member for East Birkenhead asked another question to which he probably would like to have an answer now. He asked whether the authorities can still require that up to £10,000 in gold should be surrendered at the old Mint value of 85s. per fine ounce. Yes, they can. It is not proposed to alter that Statutory provision, which is contained in Section II (2) of the Currency and Bank Notes Act, 1928, the object of which is simply to prevent gold hoarding, and which I do not think anybody would like to see done away with.
My hon. Friend the Member for Kidderminster (Sir J. Wardlaw-Milne), who also gave the Bill a welcome, asked a specific question with which I would like to deal. He wanted to know whether the transfer of £86,000,000 to the Exchange Equalisation Account would increase the amount of Treasury Bills available on the market. The answer is that it will not. This surplus will be transferred in securities, and in so far as Treasury Bills are transferred from the Issue Department to the Exchange Equalisation Account, they will continue to be held by the Exchange Equalisation Account until they are required to be realised for any purpose of that Account.
710 Therefore, the total amount of Treasury Bills held by the Issue Department and the Exchange Equalisation Account together will not be affected by this transfer; nor, therefore, will the market holdings be affected.
§ Sir J. Wardlaw-Milne
They are not to be a reserve of the Exchange Equalisation Account, but are to be available for its ordinary purposes?
§ Captain Wallace
They will simply be an addition to the resources of the Exchange Equalisation Account. I imagine that once they are transferred they will become absorbed in the account, and will be indistinguishable from its other resources. I pass now to the speech of the hon. Member for Bassetlaw (Mr. Bellenger), who emphasised the importance of the House understanding as much as it could of the national book-keeping. Here I am sure we shall all cordially agree with the hon. Member in theory, but recognise some of the difficulties in practice to which I have alluded just now in referring to the Exchange Equalisation Account. I can assure the hon. Member that the House will get just as good a picture of the currency and financial affairs of the country if and when it passes this Bill as it did before, and as far as I can see—and as far as the Chancellor can see, which is very much further—this Bill cannot possibly be used to hide secret inflation. The hon. Member went on, with a frankness and naivete which I have often admired on other occasions, to say that he and some of his friends, when the announcement was made on 6th January that the Fiduciary Issue was to be temporarily increased under powers possessed by the Treasury, immediately started to harbour dark and dangerous suspicions about what the Government were going to do. The hon. Member will be just as glad as I am to know that he was profoundly mistaken.
He asked me a specific question which, if I had wished to evade it I might have left to the Committee stage, but to which I hope to be able to give an answer now, because I think it is an important point. It is in regard to the proviso to Sub-section (2) of Clause 2. The reference in that paragraph to securities standing at a premium does not mean that such securities will be valued at par. It merely allows the Treasury and the Bank of England to make provision out of 711 income rather than out of capital for the inevitable decrease in price which must occur as a security purchased at a premium approaches the date of its redemption. It might of course be maintained that if that was done it should, as a logical corollary, be arranged that the income on stocks bought below par should be written up each year to allow for the inevitable appreciation by the redemption date. This is very rarely done, and in fact it has never been done for the securities in the Issue Department of the Bank of England, because general policy requires that we should assess income on conservative lines and that income should never be inflated to take account of eventual capital appreciation, however inevitable it is, which has not in fact been actually realised. I trust that the hon. Gentleman, who always represents the more conservative and austere financial point of view in the party opposite, will agree with that sentiment.
§ Mr. Bellenger
While thanking the right hon. and gallant Gentleman for his answer, which I have followed with close attention, may I ask him whether I am right in assuming that all the assets held by the Issue Department are redeemable assets?
§ Captain Wallace
I would not like to commit myself on that at the moment, but, subject to correction, I believe that to be so. The hon. Gentleman will, however, appreciate that these are matters of great complexity, and one hesitates to give an answer which one cannot check and recheck with the people responsible.
I hope I have now dealt with most of the specific questions which have been asked, and I only wish in conclusion to make clear one important point. As the Chancellor has already told the House, the Bill involves no fundamental change in the arrangements for controlling the amount of notes which the Bank of England can issue. That is a point which seems to have been at the back of the minds of certain hon. Members this evening. I wish to be quite categorical about it. The Bill deals entirely with matters of machinery and, in particular, there is neither more flexibility nor less under the new arrangement with regard to the ability of the Bank to issue notes. When, for instance, public demand arises for an additional £1,000,000 worth of notes the Bank 712 meets that demand in the first place by drawing on the reserve of notes in the Banking Department.
Assuming that the Bank wishes to maintain this reserve in the Banking Department at its former figure, the Bank will make it good by the issue of £1,000,000 worth of notes from the Issue Department to the Banking Department. To cover the resulting increase in the note issue from the Issue Department, two courses are open to the Bank. Either it can ask the Treasury to increase the fiduciary note issue by £1,000,000, under the powers which it already has and which are at this moment in operation under a Treasury Minute, or it can acquire sufficient gold to cover the additional £1,000,000 worth of notes. Both courses are open to the Bank at this moment and will remain open under the Bill, which has no effect on these matters except with regard to one point of detail involved in the second of these two courses. That is a point which can very well be explained on a later occasion and I think I should best serve the convenience of the House now, if I invited it to give the Bill a Second Reading without further ado and allow Members on all sides time to read the very lucid, detailed and comprehensive explanation of the Chancellor, which I feel sure will give them any ammunition that is to be obtained for putting down Amendments or raising points during the Committee stage. I know that my right hon. Friend is grateful to the House for the reception which the Bill has had, and I hope that it will now receive a Second Reading.
§ Question, "That the Bill be now read a Second time," put, and agreed to.
§ Bill read a Second time.
§ Bill committed to a Committee of the Whole House, for To-morrow—[Major Herbert.]