CURRENCY (DEFENCE) BILL. (Hansard, 1 September 1939)

§ Sir J. Simon
I beg to move, "That the Bill be now read a Second time."
The Currency (Defence) Bill, which is an absolutely essential Emergency Bill, is necessarily of a technical character. It deals with three separate financial measures which are stated in the first, second and third Clauses of the Bill. As regards the first Clause, it was necessary 144 25 years ago, at the beginning of the War, to set up an Exchange Account, which was financed by a Vote of Credit, but now we have already an Exchange Account—the Exchange Equalisation Account. Therefore, the first Clause of the Bill provides that that shall be used for necessary purposes that arise in war—I am referring to page 1, line 12— in such manner as they (the Treasury) think expedient for securing the defence of the realm and the efficient prosecution of any war. As the House knows, at present the Equalisation Account has certain definite functions, and this enlarges the purposes for which the Fund may be used. Subsection (2) of Clause I removes the limit which had been set by legislation to the amount which might be issued to the Exchange Account. The present limit is £550,000,000 and this removes that limit. Sub-section (3) provides for dealing with an excess of sterling assets in the Account. That is the first matter.
The second matter is very plain, if one reads Clause 2. We believe that we have made adequate provision to provide sufficient supplies of legal tender in spite of the difficulties which may develop in the course of the emergency. If it turned out that there was a shortage, Clause 2 will provide that there might be a temporary use as currency of postal orders. As some hon. Members will remember, that was done 25 years ago. We think we have made adequate arrangements this time for a sufficient supply of ordinary currency.
The third matter is dealt with in Clause 3, which deals with security for certain special war advances. Arrangements have been made for advances by the Bank of England but out of Government funds, first, to approved banks in order to enable them to meet demands from their customers for currency, and secondly, to approved acceptors whose bills are normally discounted on the London market. These advances and interest thereon will be a floating charge in favour of the bank which will rank prior to all other floating charges on the assets of the borrower. It is not expected that any large amount of advances under the first head will be necessary. Such as there are ought to be repaid quite quickly. As regards the advances under the second head, that is, advances to approved acceptors, they will be required 145 to repay whatever they collect upon the bills, but the balance will not be repayable earlier than six months after the end of the emergency. I think that the House can be assured that the technical arrangements in these Clauses are justified and need not be further explained. They have, of course, been carefully planned beforehand.

§ Mr. Pethick-Lawrence
This Bill is certainly a very wide Measure, and I would remind the House that it does not arise by way of a repetition of what was done in 1914, when the financial situation was entirely different. At the outbreak of war in 1914 we were still handling gold coin, and it was necessary to have a bank moratorium to close the banks—I think it was for three days—during which pound notes were hastily printed, and the public were told that they would be accepted as legal tender. We are already on a paper currency and therefore there is no danger of a depletion of the gold reserves in consequence of a run on currency for currency purposes. Therefore, we are now breaking new ground in this particular proposal, and it is necessary for the House to envisage a little of what is being done. As far as the first Subsection of Clause 1 is concerned, the object, as I understand it, is more theoretical than practical. It is merely to allow the Exchange Equalisation Account to be used for certain objects for which it is not entitled to be used at the present time.
As far as the practice of working the Fund is concerned, I gather that there is no essential difference contemplated. In Sub-section (2) we are faced with a very grave change. Until now the House of Commons has kept control of the total amount of the Fund. The Government are here asking, not only to substitute a higher limit, but to sweep all limits away. It is a very large power, and before this Measure is passed we must extract from the Chancellor of the Exchequer some undertaking as to the manner and extent to which this very wide power is to be used. As I see the proposal, if it were thought desirable to make some loan in effect to some foreign country, the Government, by means of the Exchange Equalisation Account, could make such a loan to an absolutely unlimited extent by buying the foreign currency and sub- 146 stituting it for the sterling in the fund. It is essential that the House should have some undertaking from the Chancellor of the Exchequer as to the form in which he proposes to use it, and to what extent he really intends to use it. I do not want him to give details which it is not desirable to give, but it is a very large power, and we must have some understanding as to how the Chancellor of the Exchequer and the Government propose to use it.
As to Clause 2, it seems rather an extraordinary proposal to make postal orders legal tender. I should have thought that there were very grave disadvantages in that proposal. As I understand the Clause, the Government do not necessarily propose to do it, but to take powers to do it, if necessary, by Order in Council. We should again get from the Chancellor of the Exchequer some assurance that, in the ordinary course of events, the Government are not very likely to put that Order into effect, and that, if it is done, it will probably be of a temporary character.
I have only this to say with regard to Clause 3. During the last War, there is not the least doubt, by the methods of finance adopted by the Government of that time the banks of this country were able to make enormous sums by which they held people of this country to ransom when the War was over. It may be only a very small action that the Government are taking at this time, but it is in accord with what happened then, namely, that the banks were able greatly to increase their lending power by credit which was not their own, but which was provided by the Government, and therefore, by the country as a whole. Hon. Friends sitting behind me on these Benches will desire to watch with the very greatest care the action taken by the Government at the present time which in any way corresponds to the action taken during the last War and which resulted in the consequences to which I have referred.

§ Sir J. Simon
The right hon. Gentleman has asked me a question, and, with the permission of the House, I will answer it. He asked me, as regards Clause 1, whether there were limits on what might be done under it. Of course, there are none. I could not have made entirely plain to the House the real nature of Clause 1. In the last War we had to 147 create a special account for the Exchange Account. It was out of that Account that purchases of various kinds were made in the course of war—purchases of gold or of securities and other things. There is no point in making a separate account of this kind, because we have the Exchange Equalisation Account, but we must enlarge the powers and purposes for which the Exchange Equalisation Account can be used. Sub-section (I) really has this effect, and I will put it as simply as I can. Instead of the Exchange Equalisation Account remaining an account which can be used only for purposes of checking undue fluctuations in exchange—which is the aim of the existing Act—it could be used, for example, for purposes of buying gold or securities for war purposes. I could not give an assurance as to the limits to be set on the uses of the account. The point is that we are asking the House to give us this authority to use the Exchange Equalisation Account on wider terms than before. As regards postal orders we do not expect to have to use them, but, as in the last War, we have made arrangements to do so if necessary. It is clearly a power which might have to be used, and in the circumstances I hope the House will give us this authority.

§ Mr. Pethick-Lawrence
Does the right hon. Gentleman contemplate transactions running into tens, hundreds or thousands of millions? The money under Clause I (2) might increase the Exchange Equalisation Account to astronomical dimensions which might be used for purposes which the House would not approve?

§ Mr. Graham White
With regard to the proposal in Clause 2 to make postal orders legal tender may I ask the Chancellor of the Exchequer whether it is intended to issue the orders for this purpose free of the usual poundage. The proposal seems practical and might be useful.

§ Mr. Henderson Stewart
Sub-section (2) says that bank notes issued by a bank having power to issue such notes in Scotland shall be legal tender for the pay ment of any amount in Scotland. I have forgotten my banking law and I cannot recollect the present position I think there is some limit to the amount which may be paid in Scotland in the form of Scottish bank notes. Will my right hon. Friend point out what exactly is the change proposed?

§ Sir J. Simon
Like my hon. Friend, I should not like to commit myself precisely on a question of Scottish banking law. There is, however, a limit, and the object of this sub-section is to remove that limit. In reply to the point raised by the hon. Member for East Birkenhead (Mr. White), I have made inquiries. Suppose the occasion arises when postal orders might be used, the poundage on them would not be charged, but the postal order would be stamped in such a way as to show that for the time being it was used as currency.