EUROPEAN MONETARY AGREEMENT BILL

HC Deb 28 January 1959 vol 598 cc1078-209

Order for Second Reading read.

3.46 p.m.

The Chancellor of the Exchequer (Mr. Derick Heathcoat Amory)

I beg to move. That the Bill be now read a Second time.

In this Bill the Government are seeking powers to enable the United Kingdom to play their part in carrying out the European Monetary Agreement. This Agreement, as right hon. and hon. Gentlemen know, came into operation as a result of certain steps in the exchange field which a number of European countries, including ourselves, decided to take at the end of December.

I understand that it is the wish of the House to have a general debate, of course within the rules of order as they relate to the passing of legislation, about this move in the exchange field which we have recently made in relation to sterling. This is a proper matter for discussion. It is also one which, I am sure, we should all be sorry to see unduly entangled in party politics. I shall, therefore, try to expound this matter, and to deal with the criticisms as they have appeared, in no spirit of controversy.

On some aspects there is, of course, plenty of room for different views. Even the experts do not agree about all of them. The subject that we are to discuss today is in some ways a rather complicated, technical one, and I hope that the House will treat me during the next half hour or so with as much patience as it can muster.

The step which we have taken, as the House knows, has been to abolish the distinction between American accounts and transferable accounts. Both have now become a single external account, the sterling of which is now freely transferable between non-residents. The position of security sterling, that is to say, sterling arising from the purchase and sale of sterling securities, remains unchanged by this move.

This move is, of course—and this is the first thing that I really want to emphasise—a perfectly logical step in the continuing development of the United Kingdom's external economic policy since the war, as agreed by all parties. I am sure that there will be no dispute that the aim of all parties since the war has been to secure the greatest possible freedom of trade and payments; and the two, of course, must go together. Payments are the means of settling for trade, and our policy on payments is based on our broad commercial interests.

May I give one or two quotations from official sources? An objective of the Bretton Woods Conference, whose recommendations were accepted, of course, by all member Governments, was that Governments should, in the words of the final Act, reach agreement as soon as possible on ways and means whereby they may best reduce obstacles to international trade and in other ways promote mutually advantageous international commercial relations. And the Preamble to the General Agreement on Tariffs and Trade recognises the desires of the contracting parties to enter into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce. Those objectives, therefore, have been the aim of all Governments in this country since the war.

For example, the Bretton Woods legislation was enacted by right hon. Gentlemen opposite, and the G.A.T.T. was entered into by them. I do not quarrel with those decisions, but they show the extent to which all parties share the views to which I have just referred.

There is one more example, in the letter to the Secretary of the United States Treasury, sent on 20th August, 1947, and subsequently laid before the House, by the right hon. Member for Bishop Auckland (Mr. Dalton), then Chancellor of the Exchequer. After referring to the action—that is, the suspension of convertibility—which had been taken as being of an emergency and temporary nature, the right hon. Gentleman went on to say: The restrictions now contemplated should not be interpreted as in any degree indicating a modification of Her Majesty's Government's oft expressed view as to the desirability of maintaining full and free convertibility of sterling. As a long-run objective such convertibility is an indispensable aim in British financial policy. The steps presently being taken"— that is, then— are to be regarded as purely emergency in character. Therefore, on all this there should be no disagreement. There is, of course, room for argument about the means of attaining the objective and the timing of the steps towards it, but none between the parties as to the objective itself.

It might be perhaps worth the while of the House to consider briefly why all Governments since the war should have had these objectives. It is surely simply because this country more than almost any other depends upon international trade to maintain and increase its standard of living. Our economic boundaries extend far beyond our geographic boundaries. I need not amplify the reasons for that being so. They are very well known to all hon. Gentlemen. But it means that in Britain we simply cannot have a closed economy even if we wanted it. Therefore, to a country in the position of ours the minimum of restrictions on trade must be a predominant interest.

This is so that we can get our exports out into the world to earn the means of paying for our necessary imports. But if we want to see a world with the minimum impediments to trade then we must ourselves impose the minimum impediments to other people's trade. That is why Governments of both parties have entered into international obligations which severely limit the right to restrict trade. I refer, of course, to the G.A.T.T. again here; and that is why we have taken vigorous steps readily to reduce our restrictions. But it is no good removing the quotas and other restrictions if we do not have an acceptable and freely usable means of settling commercial transactions. With the maximum freedom of trade must go the maximum freedom of payments if we are to achieve our aim.

If I may, I should like to quote once more, and this will be the last but one of my quotations. This time it is from Lord Keynes who, speaking for the Coalition Government, in 1944, said: …we can look forward to trading in a world of national currencies which are interconvertible. For a great commercial nation like ourselves this is indispensable for full prosperity. Sterling is the currency most widely used in international trade. That is a fundamentally important fact, it seems to me. If sterling ceased to be a desirable store of value, as the economists say, and an acceptable means of payment, trade would be bound to suffer. It is, therefore, in the interests not only of the United Kingdom, but also of most other countries, that sterling should be even more convenient and even more usable than it has been recently.

At Bretton Woods the first positive steps were taken to reduce the risks of alternating booms and slumps by international co-operation in the economic field. I think that we should all agree, in view of all the difficulties, that the progress that has been achieved since then is very encouraging. During the early post-war years, of course, there were obvious difficulties about making any rapid advance towards the Bretton Woods objectives.

Nevertheless, the Government of right hon. Gentlemen opposite were able to begin to move in the direction of greater freedom. They signed the G.A.T.T. and took part in two rounds of negotiations for general tariff reductions under that Agreement. They made a start, of which we were glad at the time, with reopening the commodity markets. They also played what I acknowledge as a very effective part in the move to bring about in Europe greater freedom of trade. I refer here to the Code of Liberalisation of O.E.E.C. for progressive reduction in quotas, and the setting up of the European Payments Union, which was itself a substantial step forward on the payments side.

If we cast our minds back, before the E.P.U. was set up sterling earned by individual countries in Europe was held bilaterally by them. It could not be spent outside the sterling area, or at least not without special arrangements being made. Under E.P.U. that sterling became transferable among the members. Therefore, the E.P.U. was itself a step in the same direction in which we are now taking another step, extending the same principle in a wider field.

Then, with the return to office of a Conservative Government, in 1951, though there were changes of method and practice, these broad accepted objectives were maintained. At the Commonwealth Economic Conference, in 1952, again there was general agreement among Commonwealth countries that the best interests of the Commonwealth would be served by a policy of freer trade and payments. Subsequently, since 1952, we have made various moves, both on the trade side and on the payments side, to try to keep our progress in the two directions in step.

In 1953–54, for instance, a wide range of basic foodstuffs and raw materials were freed from import control and further progress was made in reopening the main London commodity markets. Since then, on the trade side, we have made further advances and by the end of last year virtually all the "tools of trade"—raw materials, basic foodstuffs, and so on—were free of import restrictions.

On the payments side, for a time after 1947, bilateral payment arrangements had to be made with almost all countries outside the sterling area, but, of course, those countries could not be expected to continue indefinitely readily to take sterling and to hold it unless they could have increasing freedom to use it.

As I have mentioned, the E.P.U. dealt with that problem largely among members of the O.E.E.C, and over a wider area administrative arrangements were made, as far as they could be, to facilitate transfers from one country to another, though not to the dollar area. By 1954, this administrative transferability was almost automatic, and in that year most forms of bilateral sterling were amalgamated and made freely transferable, except, again, to the dollar area. So, by then, we had reached a stage where there were in the main only two different forms of sterling, the official and the transferable accounts.

A market for turning transferable sterling into dollars had gradually grown up in centres overseas. As transferable sterling was freely convertible only within a circumscribed area, it was dealt in at a discount on the sterling that was officially convertible into dollars. When this discount became at all significant, operations known as commodity shunting—I think that the right hon. Gentleman the Member for Huyton (Mr. H. Wilson) will be familiar with that process, which is a very difficult one—became profitable, and these operations led to a loss of the foreign exchange earnings of the sterling area and also damage to our traders.

Accordingly, as explained in the House in February, 1955, the Government decided to authorise the Exchange Equalisation Account authorities to intervene at their discretion in these markets—that is, the transferable markets. This has had the effect that de facto, over the last four years, it has been possible for non-residents to convert sterling into dollars at only a small discount on the official rate.

Some have argued, I know, that under this system we had freedom to allow the discount to widen in times of strain, thus taking the strain on the rate rather than on the reserves, but, in practice, that freedom has simply not been there. This is not only because a widening of the discount would have restored the profitability of commodity shunting; it is also because falls in the transferable rate—and this is very important—would have advertised a weakness in sterling, and,., by affecting confidence in sterling they would have increased the burden of maintaining the official rate within a margin of 1 per cent, on either side of our declared parity of 2.80 dollars to the £. To do that, to keep it within those limits, has been a firm international obligation since the days of Bretton Woods.

I mention this in some detail, because it shows that over the last four years we have been carrying the burden of convertibility without securing the advantages of it; both the general advantages I have been describing and the particular advantage of being able to manage our own rate of exchange in our own market. So, over this period, we have had the experience of managing our affairs with the transferable £ convertible for nonresidents into the dollar at only a very small discount below the official rate.

The steps we have now taken to make this convertibility formal are significant and important as a milestone on the course that all parties have agreed we ought to proceed on, but they do not add, in practice, to the strains which might be put upon us.

Mr. Roy Jenkins (Birmingham, Stechford)

I wonder whether the right hon. Gentleman could explain to the House why, if this makes no practical difference but brings considerable advantages, he has waited four years to do it?

Mr. Amory

If I may, I will refer to that question in a moment. It is a reasonable one. The hon. Gentleman will not have to wait more than another two minutes.

The point I am making now is that the events of the years since the war have clearly proved that we must in all conditions in our country have sound economic policies at home in order to maintain a satisfactory balance of payments and pay our way. If that is our object, as I trust it always will be, then it is a sheer illusion to suppose that our domestic policies need to be any more rigorous as a result of the unification of the rates than they would have had to be had the rates remained apart.

The point I want to emphasise is that the freedom which some have suggested we have to let the transferable rate go in times of crisis has been illusory. The move of 29th December will not, in practice, place a greater strain on our reserves, nor shall we be under any greater need to keep the economy free of inflation than we should have been in any event if confidence in sterling is to be maintained. In both these respects the change we have made is not a significant one.

I have referred to the nature of the change which has been made. I would like at this point to emphasise three things before I pass to my next point. First, it is not intended in any way to change the declared parity of the £ with the dollar or the margins for the £ against the dollar, which will continue to be 2.78 to 2.82 dollars. Secondly, we have not changed our control over capital transfers outside the sterling area. Exchange control remains and will be operated as our interests and requirements may from time to time dictate. Thirdly, the move which we have made on the payments side does not mean any change in our current policy on the removal of discriminatory quota restrictions against the dollar area.

Our policy on the trade side will continue to be as it was announced at Montreal, when we said that we intended to proceed with the removal of controls of imports from the dollar area as circumstances permitted, and that, all being well, we hoped to make a start in 1959 with as wide a range of consumer goods and foodstuffs as possible. It is our intention to see a programme for the removal of such discriminations as remain well launched before we make the move from the post-war transitional provisions of the International Monetary Fund—that is Article 14—to the permanent provisions of Article 8. That move would make our currency de jure convertible in the full sense of the International Monetary Fund.

Coming now to the actual move, it was surely satisfactory that this was made in circumstances in which we acted in concert with a number of other European countries. One consequence was to bring into effect new arrangements for monetary co-operation in Europe. It has long been accepted by all members of O.E.E.C. that in these circumstances O.E.E.C. should move immediately from the E.P.U. to the European Monetary Agreement, which was negotiated in 1955 against exactly this eventuality.

The move was necessary because the E.P.U. arrangements were inappropriate, for a series of technical reasons, after a number of member countries had made their currencies convertible. Under the European Monetary Agreement a system of interim finance and multilateral settlements is continued for use by countries which desire to make use of them, though I think that in current circumstances most settlements will probably be made in the normal way through the market.

What is perhaps more important is that the European Fund, as it is called, is set up under which O.E.E.C, as a result of collective decision, can give member countries credit on those occasions when they need it and on terms and conditions considered appropriate collectively by O.E.E.C. That is no weakening of European co-operation. It would certainly have been entirely wrong if E.P.U. had been brought to an end without putting something satisfactory in its place, because the achievements of E.P.U. have been very considerable. It played an essential part in the recovery of Europe in the early days after the war and in the strengthening of Europe's relations with the outside world. So I have no stones to throw at E.P.U. It was a great success during that period of its work.

It is, however, by no means the case—this is the impression one gets from the way I have heard some critics speak—that the E.P.U. could provide unlimited amounts of credit. Several countries, and, in particular, France, had virtually exhausted all their credit, and E.P.U. could continue to function satisfactorily only if the creditor countries, and especially Germany, were prepared to provide further credit on a massive scale, but even then in several cases ad hoc arrangements outside E.P.U. proved necessary. So a change in this respect was becoming due in any case.

The change to the European Monetary Agreement is in a way a further development in a direction that was already increasingly being followed. I ought to say that the arrangements for the European Fund provide countries which, get into difficulties with a prospect of help on a scale comparable to that available under the general and the ad hoc arrangements of the E.P.U., though not automatically. The credit and the settlement arrangements of the Monetary Agreement are also designed to support and encourages the liberalisation of trade in Europe. Credit will also, of course, be available in appropriate cases through the International Monetary Fund, whose resources, I am glad to say, are now to be increased.

The European Fund will provide this new credit in part out of the residual assets of the E.P.U., assets which in the main were originally made available through the generosity of the United States Government, and in part from contributions by member Governments on the basis of quotas agreed in 1955. It has been accepted, however, that circumstances have changed a good deal since 1955, and the right relationships of quotas to each other are now to be further examined. So much for the new machinery.

I accept, of course, that the timing of a move of this kind must always be a matter of judgment, and the Commonwealth accepted, both at Montreal and at previous conferences, that the final judgment must be made by the United Kingdom. There have, of course, been other times during the past few years when we might have made this move, but if we had, for one thing we should not have had the practical experience, to which I have already referred, of handling sterling over a period of four years when it was de facto convertible at only a small discount on the official rate. I think that it was a sensible and practical intermediate position to adopt. As a result of that experience we have now felt able to move on. Also, to have moved earlier would have meant taking this step on the payments side before we had carried our policy on the trade side as far as we have been able to do.

But to have delayed longer would, in my judgment, have been wholly wrong and, unjustifiable. If it was right, as I believe it was, in the days of the Government of right hon. Gentlemen opposite to reduce discrimination between European countries and to fortify these arrangements by arrangements which allowed for the free transferability of currencies in Europe, surely now, when we are stronger, it is right to extend the same advantages over a wide area. I believe that we have reached a point in time now when these freer payments arrangements have become very important indeed if trade is to continue to expand. So I am confident that the timing will prove to have been well chosen.

The advantage that the unification of the rates brings with it of restoring London to its position as the main exchange market for sterling is of practical importance. Today, our reserves stand at £1,100 million, and we have a standby with the International Monetary Fund of about £265 million. Against this we have potentially short-term obligations to the International Monetary Fund of £260 million. That includes about £60 million which will represent our new increased quota, and £200 million in repayments to be made over the next three years. When we make these repayments, incidentally, they will entitle us to substantially increased drawing rights in the Fund, which will, therefore, increase what we might call our second line of reserve. In the rather longer term we are due to repay 250 million dollars to the Export-Import Bank between 1960 and 1965.

Mr. J. Grimond (Orkney and Shetland)

The right hon. Gentleman spoke of £60 million as owing to the I.M.F. for our increased quota. Is that the total, or is it the gold that we have to provide?

Mr. Amory

That is the gold. The total is very much larger. The advantages that we get in increased drawings are enormously greater than the payments that we should have to make.

The sterling balances now amount to under £3,300 million, much of which is invested long-term or held here for development plans and is not likely to be spent quickly. Of that total, only about £700 million is today held outside the sterling area. That shows a much better relationship between our reserves and our liabilities than at any time since the end of the war.

Mr. David Price (Eastleigh)

Does my right hon. Friend include in our reserves the Government's holding of dollar securities, which, I understand, amounts to about 900 million dollars? That does not seem to have been made clear, but it adds to the strength of sterling.

Mr. Amory

I agree with my hon. Friend that we must bear those securities in mind, but I have not included them in the financial picture which I have presented. They are something additional. Some of them were taken up from me during the war, and I feel that I have a sort of joint proprietorial interest in them.

Mr. Harold Wilson (Huyton)

Will the right hon. Gentleman tell the House how much holdings have been run down by sales by the present Government since 1951?

Mr. Amory

I am not in a position to give any information of that kind today.

Other circumstances also were particularly favourable to a move at the present time. Successive steps taken by the Government have brought inflation under control. Over the last year prices have been more stable, and as increases in money incomes have been a good deal less than in recent years, costs, too, are more stable today. The recession in the United States has now turned the corner, and there are signs that economic expansion is about to be resumed in other countries as well as here. All this provides a sound basis for a resumption in expansion of world trade.

Important, too, is the way in which this change has been carried out. Shortly before Christmas, the French had under consideration certain economic measures and we, on our part, had this step in our minds as one to take at a moment that would be convenient for ourselves and our friends in other countries, but we had taken no decision on timing.

At last month's meeting of O.E.E.C. I had talks in Paris with the French and German Ministers of Finance and we all thought that the time was ripe to coordinate such a move. The undertaking and successful execution of a practical piece of co-operation of this kind in the economic field seems to me particularly encouraging and promising at this stage in European affairs.

The judgment of the rest of the world seems certainly to have endorsed our view that the time was, in fact, right. Before we merged the rates, the transferable account £ stood at about 2.79½ dollars, and American account at about 2.80½dollars. External sterling today stands at almost 2.81 dollars. This is the combination of both these rates and accounts. Sterling has also improved its position against almost all the main currencies of Europe as well. That, I think, is tangible evidence, at any rate, of general agreement that the move was healthy and timely, and has been generally welcomed.

The right hon. Gentleman the Member for Huyton said last April that the strength of sterling, and all that depends on it, must take priority over all other considerations. If, as I hope, that is Labour policy, then right hon. Gentlemen opposite need not fear the results of this unification of rates.

I need not say much about the actual provisions of the Bill. The House will wish just to know what financial liabilities we have under the Agreement. First, there is, our contribution to the European Fund. The total capital of the. Fund provided for in the Agreement amounts to 600 million dollars of which rather more than half is to come from members' contributions. The Fund already has access to over 100 million dollars transferred from E.P.U. Contributions from member countries will be called up as they are required to maintain a reasonable working balance and to meet any special needs.

The United Kingdom's total contribution was fixed in the Agreement at just under £31 million. As I mentioned, these quotas on which the contributions were based are at present under review. Secondly, I ought perhaps just to draw the attention of hon. Members to the arrangements agreed by O.E.E.C. for dealing with any case where a member defaults in one of the monthly settlements.

Article 12 of the Monetary Agreement lays down, in effect, that the European Fund should not bear more than a total of 50 million dollars of default and that the burden over that figure should be transferred to members with bilateral claims against the defaulting member in the accounting period concerned. This means that circumstances might arise in which we have to make a payment in dollars to the Fund to help to cover another member's default, receiving in exchange a claim for repayment by the Fund when the defaulter has paid. This provision is prudent, but in more than eight years' experience of E.P.U. we have not any reason to expect any country to default in its monthly settlements.

Because of the importance of providing a stable long-term basis for monetary co-operation, the Agreement was deliberately designed so that it could remain in force for an indefinite period. However, the working of the Agreement is to be reviewed before the end of the third year of working and the system of settlements is to be reviewed before the end of the first year, in fact, before 27th September next.

There are also provisions enabling members to withdraw, if they wish to do so, when they would get their contributions back, and allowing the Agreement to be terminated if and when certain conditions are fulfilled. The annex to the Agreement sets out the arrangements for liquidating the European Fund. The Clauses in the Bill, I think, are adequately covered in the Explanatory Memorandum.

I ought just to say that Clause 1 deals solely with the Exchange Equalisation Account. Our dealings with the European Fund are to take place through this Account. This Clause gives the statutory authority which we think it desirable to seek for the Account to be used specifically for the purposes of the European monetary Agreement.

Clause 2 makes provision for the necessary payments to be made from the Consolidated Fund, for the Treasury to borrow as required and for any moneys paid back to us as a result of the Agreement to be taken into the Exchequer and appropriately applied. This Clause, in subsection (2), also sets a limit to our total contribution in terms of the sum at present laid down in the Agreement but subject to increase by order of the Treasury.

Clause 3 provides a further element of control of which, I think, the House generally likes to be reminded. It stipulates that any Treasury order to increase what can be paid out of the Consolidated Fund under Clause 2 must have been, approved by an affirmative Resolution of the House. It also enables the Bill to apply not only to the European Monetary Agreement as at present drawn upland signed, but to that Agreement as it may subsequently be amended in the future. Finally, it takes the opportunity to tidy up the Statute Book by repealing those parts of two previous Acts dealing with European payments which are now obsolete and no longer required.

These are the broad lines of the rather technical Measure which is required to enable us to continue to play our full part—as we certainly wish to do—in monetary and economic co-operation in Europe.

I apologise for being rather long and thank the House for its extreme patience with me. I should like to say, in conclusion, that I am confident that most hon. Members when they think this over will conclude, as I do, that the measures I have described this afternoon are fully in accord with the external economic policies agreed and operated by all parties in this country since the war, and will welcome them as a sound and very practical contribution by the United Kingdom to the cause of expanding world trade. I commend the Bill to the House.

4:29 p.m.

Mr. Hugh Gaitskell (Leeds, South)

I beg to move, to leave out from "That" to the end of the Question and to add instead thereof: this House declines to give a Second Reading to a Bill designed to implement policies which, through the ending of the European Payments Union and the acceptance by the Bank of England of an obligation to supply gold or dollars on demand to all foreign holders of sterling at a fixed rate of exchange, makes more difficult the achievement and maintenance in Great Britain and Western Europe of industrial expansion and full employment This Amendment is drafted in the terms that I have read out because it appears to us to be the only way open, under our rules of procedure, by which we on this side of the House can register our disagreement with the measures associated with the Bill.

We recognise, of course, that once the European Payments Union came to end, then, automatically, by decisions taken in 1955, the European Monetary Agreement was bound to come into force. But, as I shall try to explain, we do not agree with the Government that it was inevitable that the European Payments Union should come to an end and we have some serious criticisms to make on the decision about convertibility.

Our opposition to this measure should not come as a great surprise to the House, because on several occasions here we have criticised earlier steps taken by the Government in this direction and described by the Chancellor this afternoon. That does not mean that we have abandoned or modified our support for the long-term, ultimate objectives to which the Chancellor referred. It simply means that we have disagreed with the moves made by the Government on a number of occasions, and that we believe that the recent decisions, like the earlier ones, are premature and even dangerous to our economy.

Our opposition to the measures announced at Christmas is also in part due to our belief in the possibility of the Government taking further steps which will make the exchange situation even more risky. I will later try to explain why we think that that is likely to happen, and why we oppose those things.

We can all agree with one thing which the Chancellor said, at any rate, that this is a highly complex and technical subject. It is not easy to be absolutely sure of one's ground in this field, and it is even more difficult to carry the attention of the House. Like the Chancellor, I will endeavour to do that by keeping my criticisms as factual as I can make them, since if one did not do that vague generalisations would be of little value.

There is something else which we must note at the start. It is necessary to speak on this subject with care. What we say here can have an effect upon opinion in the country and the world, and misunderstandings can easily occur. I shall endeavour to speak with care, but, at the same time, I cannot accept the view which has been put forward in some quarters, that, whatever our views on what we believe to be a vital issue, the Opposition should remain dumb and not give voice to our genuine misgivings on this subject.

This afternoon, we are discussing two measures, the ending of the European Payments Union, on the one side, and, on the other, the decision to make the £ convertible—and hon. Members will appreciate that in using that phrase I am simply accepting it in the sense described by the Chancellor. The two measures are connected, but not identical. As the Chancellor said, it is quite true that the introduction of convertibility would certainly mean the ending of the European Payments Union, since if currencies were automatically convertible on a cash basis no one would go through the credit process which is implicit in the European Payments Union. On the other hand, it is not true that the ending of the European Payments Union necessarily involves convertibility. I shall begin by making a few brief remarks about the European Payments Union.

The Chancellor mentioned a kind of sentimental interest which he had in American securities. I must declare a kind of sentimental interest in the European Payments Union, because I was very much concerned with the negotiations which filed up to its establishment. I think that there is general agreement about the remarkable achievements which have resulted from that Agreement. But I want to underline why I believe that the European Payments Union was so successful. It was partly because it provided a clearing system under which multilateral payments became possible, so that if Denmark, for instance, was earning a surplus in its trade with France it could use that surplus for meeting a deficit with the United Kingdom.

But, there was another reason to which I have always attached even more importance. It was that woven into the system were automatic credits whereby, if a country incurred a deficit over a given period with the other members of the European community, it automatically received a certain amount of credit. Equally, a country which found itself in surplus with other members of the agreement was obliged to grant credits to the Union. As a matter of fact, the system was directly based on an idea of the late Lord Keynes which was worked out in a famous paper called "The Clearing Union". It was far more in line with Lord Keynes's ideas than the International Monetary Fund which emerged from Bretton Woods.

The principle enshrined in the European Payments Union was that not only debtors but also creditors should be expected to make adjustments to bring their balance of payments into equilibrium again. There was thus far less incentive to countries to try to achieve a trade surplus against each other, because, if a surplus was earned, to a certain extent it had automatically to be loaned. I believe that to be a principle of immense importance. I am sorry that it was not possible to negotiate its wider acceptance at Bretton Woods, but at least we upheld it in Europe. In consequence, it was very much easier to get the agreement of various countries to the measures of liberalisation which accompanied the introduction of the E.P.U., because they did not have the same fear, which they would otherwise have had, of getting into trouble through having a deficit and having to meet it immediately with a gold payment.

When that principle of obliging creditors to adjust themselves is abandoned, and when the disincentive against earning a surplus is removed, it is unavoidable that there should be a generally deflationary influence let loose. Each country will now be more frightened of getting into a balance-of-payments deficit. To that extent, it will be more frightened of expansion; to that extent it will be more inclined to adopt restrictive monetary policies and even, as may well be the case, to reintroduce direct restrictive measures on trade.

The answer which the Chancellor gave to all this, even if he concedes the points of principle which I have been trying to establish—and I do not know whether he does—is that the E.P.U. was dead already and that all we were doing was to bury it. I admit that when the British Government agreed to the increase in the proportion of cash or gold payments, first in 1954 and then in 1956, increasing them from 40 per cent, to 50 per cent., and then from 50 per cent, to 75 per cent., that reduced the amount of automatic credit available. To that extent, they undermined the very purposes which the E.P.U. set out to achieve. But why, after all, did the British Government agree to those changes? We certainly criticised them often enough from these benches; and from such knowledge as I have of our standing in O.E.E.C., I cannot accept that changes of that kind could possibly have been made over the heads and against the will of the British Government.

I admit, too, that as the Union finally stood Germany had become a very large creditor and France had run through her quota of credit. However, I do not accept that everybody else was out of line. I have been through the figures and, so far as I remember, the Belgians and the Dutch had a substantial surplus, the Italians a moderate deficit, while we had run through about half our quota. However, apart from France and Germany, I do not accept that an alarming situation had developed.

In any event, there were surely two alternatives which should have been considered. It might have been possible to try to negotiate a fresh agreement, funding the debts already incurred. Our own was funded a year or two back. There is no reason why the French debt could not have been funded, too. They have had to do it now, and it could have been done without breaking up the European Payments Union. Even if that had been impossible, my view is that it was a pity that we simply scrapped the Union in that way—I admit that the decision was taken, in a way, in 1955—without making an attempt to introduce the principle of automatic credit, in at least a limited degree, in a wider international monetary association.

The new association to which the Bill refers is essentially different in character, because the credits which will be available—and there is a fund for the purpose—are in no sense automatic, and are to be granted only when O.E.E.C. decides. Here we come to a rather important point. O.E.E.C. is one of those international organisations where the right of veto prevails; that is to say, unanimous decisions have to be reached, as the Ministers there know very well. I do not know what the position will be. Does it mean that before a single dollar or pound of this credit can be issued to anybody there has to be unanimity on the Council of O.E.E.C. If so, it is extremely unlikely that much will be done in the granting of credits.

I can only express my very real conviction that the effect of all this—the substantial repayments which have to be made over the years, the absence of automatic credits and the dropping of the principle that there is an obligation upon the creditor countries to put right their balance of payments—is bound to hold back expansion in Europe and check recovery there. That is our main criticism of this decision.

I turn next to the question of convertibility. What is the case for it? There are three separate arguments which, in varying degrees, have been put forward this afternoon and in the Press to defend these decisions. It has been said—and to some extent it was repeated by the Chancellor today—that in any event this was something which, in a way, was forced upon us; something which the rest of Europe wanted, and that we could not very well have kept out of.

I accept what the Chancellor said, that, strange as it may appear, the immediate initiative for this came from the French, but inquiries that I made recently in Paris yielded an account of the matter which puts a rather different complexion upon it. I was informed that the Governor of the Bank of England told the Governor of the Bank of France that it was the decision of Her Majesty's Government to introduce convertibility at some time between the early weeks of December—when this conversation took place—and the end of January, but that we did not mind when, within that period, it was done.

Mr. Amory

rose—

Mr. Gaitskell

Before the Chancellor intervenes, I must tell him that I obtained this information from a very well-informed source.

Mr. Amory

I mentioned just now that we had this question very much in mind, and were feeling that the circumstances were, in general, favourable for a move, but I repeat that we had taken no decision on timing.

Mr. Gaitskell

Is the right hon. Gentleman quite certain that nothing was said to the Bank of France about the desire of Her Majesty's Government to do this before the end of January?

Mr. Amory

That is quite a different thing from saying that a decision— [HON. MEMBERS: "Oh."] I said in my speech that it was our desire to make this move as soon as circumstances were propitious, but no decision had been taken whether or not to do it, because we did not know whether circumstances would be propitious.

Mr. Gaitskell

I am concerned simply with trying to unravel exactly from where the initiative for this change came.

Viscount Hinchingbrooke (Dorset, South)

Why should it not have been made?

Mr. Gaitskell

The noble Lord asks why not? That is a different issue. For the moment I am trying to clear up the question whether the Government claim the credit for it—if they think that is what they are entitled to. My impression is that there was an initiative of the kind that I have suggested.

The second argument put forward in support of the decision is the rather strange one, repeated by the Chancellor, that it really makes no difference except to bring a little additional foreign exchange business to London. The third argument is again implicit in what the Chancellor said. It is that the dollar problem is really solved now; that we need not worry any more about a shortage of dollars and, therefore, there is no case any longer for discriminating against the dollar.

I accept straight away that the introduction of convertibility will mean some additional business for the foreign exchange dealers in London which has hitherto been going to the bankers in Zurich, but it has been estimated that the total amount of business likely to come to them does not exceed about £125,000 a year, which is certainly not significant in our balance of payments. But we ask this question: if the Chancellor is really saying that there is no essentia] difference, why was not the change made earlier?

Mr. Amory

I have given two reasons for that. The first is that at that time we preferred to move more cautiously, by the intermediate stage to which I have referred, which we have had for four years, and the second is that we have today moved much further in the removal of trade discrimination than we had earlier.

Mr. Gaitskell

But if there is no additional strain upon the exchanges what does it matter if the situation is more propitious? What is the point in talking about the most favourable moment? It cannot have any significance whatever if no greater strain is imposed.

Shortly after the Lord Privy Seal announced that we were to support the market for transferable sterling, in reply to a Question which I asked on 1st March, 1955, when I said: Does not the right hon. Gentleman realise that the intervention of the Exchange Equalisation Account…really amounts to convertibility of the £ by the back door? the Minister replied: No, Sir. It is not as simple as that. In answer to the right hon. Gentleman's point…the position is that this practice does not alter or increase the rights of a foreign holder of sterling. The authorities will refrain or intervene as they think fit, but I do not think that we have quite reached the situation which the right hon. Gentleman has described."— [OFFICIAL REPORT, 1st March, 1955: Vol. 537, c. 1866.] It is thus clear that at that time it was not regarded as convertibility and, therefore, that it looked as though convertibility would make some difference.

Personally I think that it is better that the Government should rest their case on its making a difference rather than upon its making no difference at all. I would say, at any rate, that in my opinion it does make a difference, for four substantial reasons. The first is that so long as we were merely supporting the transferable rate it was possible to allow that rate to change if we so desired. The decision announced in 1955, in the Lord Privy Seal's words, confirmed that it was simply an administrative act, but did not involve any continued commitment to hold the rate to a particular level. Therefore, if it had seemed sensible to do so we could, in the case of the transferable rate, have allowed the £ to float—to use a technical phrase.

I know that the Chancellor says that we could not have done that because commodity shunting would then have taken place. This is not an easy subject to discuss across the Table of the House of Commons. But the question whether or not we lose more gold when we allow commodity shunting or when we support the exchange rate is certainly not a clear one. It is a matter upon which very different opinions are held. I have never seen any convincing evidence brought by the Bank of England or anybody else to show that allowing the exchange rate to decline would mean a greater loss of gold, whereas there is certainly no question but that the support of the transferable rate involved us in a very heavy loss of gold in 1957. The figures have been quoted in the House.

But it may be asked, what would be the point of having this flexibility in the exchange rates? I am speaking, of course, only of the transferable rate. The answer is simple. It is that it is far the best way to catch out the speculator. The great difficulty that we are always up against if we have a fixed rate and there is any pressure on the exchange at all (which depends on the level of the reserves and other matters to which I will come to in a moment) is that the speculator against the £ can never lose. There is no danger of his being caught out. The great advantage of flexibility in the rates is that you can, if you will, play the market and catch him out.

There is nothing very discreditable about this idea. When the Government were contemplating going back to convertibility in 1955, all the talk was of a floating rate, for the reason I have given. Even today the Canadian rate of exchange is completely free, and moves up and down. Do not let us get too worried about this being in principal something that should never be contemplated at all. Therefore, the decision to introduce convertibility in this sense deprives us of one possible weapon—I am putting it very moderately—against speculation in time of trouble.

The second reason why I believe it makes a difference is that some nonresident holders of sterling who perhaps would not have wished, being friends of our country, to take their sterling and sell it in the grey market in Zurich, will feel no compunction at all now. Why should they? It has become completely respectable.

The third argument is one to which the Chancellor made no reference, but which I think he will have to consider. We are the central bank for the sterling area. We have a number of partners and over the years they have been extremely helpful and co-operative in restricting their demands for dollars when they thought it was in any way necessary to do so. I wonder whether, now that we encourage non-resident or foreign holders of sterling to believe that it is all perfectly above board, we shall have quite the same restraint as we have had from members of the sterling area in the past. I think that it is only too likely, in the circumstances, that the central banks of the sterling area will say, "Why should all this advantage go to foreigners and be withheld from us?"

The fourth reason why I believe this makes a change is that it is certainly expected to be followed by other changes which will increase the risk of vulnerability of sterling in adverse conditions. What do I mean by that? There is the question of dollar imports. I notice that the Chancellor said that for the moment no change was contemplated, but everybody is pointing out that if we give to foreign countries again the legitimate right to convert from sterling into dollars and to use those dollars to buy whatever they like, it is not logical or easy to withhold the same right from British citizens abroad and other residents in the sterling area. Everybody is expecting that in a short time there will be a complete removal of quota restrictions from dollar imports on balance-of-payments grounds. Some may be maintained quite separately on specific protective grounds, but we are not concerned with that, because it would not be discriminatory. I should have thought, as The Times suggested, that it would be very much better to allow the strain of additional dollar imports to take place before we took the much wider step of introducing convertibility.

The second reason why I think that this Act will be followed by other changes is that, certainly in the City of London, it has been taken as symbolic, and as a clear index—I do not think that the Chancellor said anything in any way inconsistent with this—of further steps towards complete freedom.

What measures? Two measures in particular: first, freedom for nonresident capital, which is still covered by controls, to a certain extent anyway; secondly, and more important, complete freedom for the export of British capital. I will return in a moment to these dangers, as I conceive them to be, because we cannot ignore them in this debate.

This decision means that to secure—I concede that it will do this—some additional international business for the City of London we shall increase the risk of and the scope for speculation against the £ in time of trouble, while, at the same time, throwing away, removing from our grasp, one possible weapon to be used against that speculation.

What of the third argument, that there is no need to worry, that the dollar problem is solved and that the reserves are now so substantial that, together with the other things on which we rely, like the I.M.F., we can stand any kind of strain? Let me say here what I have said already in public. Of course, if there were very large reserves, our attitude would be greatly affected. I was frequently asked by the Americans in 1950, when our reserves were rising rapidly, to say in what circumstances and at what level I thought convertibility would be possible.

I said, on the advice of the Treasury officials, that it was quite out of the question, when the reserves stood at the same level as they do today of 3 billion dollars, which was far too low, and that we might begin to think about it when they got to 5 billion and that probably 6 billion or 7 billion would be the figure. If that were the case today one could take a different view, but it is not the case. Let us have a look at the level of reserves as they really are.

The reserves stand today at £1,096 million. There has been an increase; nobody denies that. But against this, we have to remember the amount that has been borrowed and has to be repaid, because some of it has contributed to this result. It is worth adding the amounts up. First, the Export-Import Bank loan of about £89 million. Then there is the I.M.F. loan, mentioned by the Chancellor, of £200 million, of which £70 million has to be repaid next year. There is the deferment of the interest on the United States loan in 1956 of £37 million and the deferment of the interest and capital in the following year, 1957, of £64 million. There is, finally, what is colloquially called "Adenauer aid", the transfer in a lump sum of £75 million in repayment of the German debt to us. These figures amount in all to £466 million, leaving only £630 million as the net reserve.

That is a very different picture from £1,096 million. Even then, we must remember that the reserves were only built up to their present level with the aid of certain other things as well, of which the most notable was the sale of the Trinidad oil investment, bringing in £177 million. If one compares this with the liabilities—the figures have been given and I do not want to go on quoting them—they are still pretty substantial.

The Chancellor can say that there is no danger of the sterling area balances being run down; is he quite so sure about that? Are there not very useful balances accumulated by some of our former colonies, like Ghana and Malaya, which they may well wish to run down? Again the Chancellor speaks of the change in the situation, but in the last year the latest figures, available in September, include an increase of £100 million due to the O.E.E.C. group, which is certainly very hot money indeed.

When we consider just what the net reserve is and what the liabilities are there is no doubt that these are in an extraordinarily unsatisfactory proportion. It is the same if we measure assets against the amount of trade. Our gold reserves—this is after taking off the various amounts that I have listed—show that there is still a proportion of only one to twelve of reserves against turnover, in sterling trade. Frankly, I cannot see how, in these circumstances, one can take quite such an optimistic view of riding out any possible trouble that may occur because of the size of the reserves.

I agree that there has been an improvement both in the reserves and in the reserve-liability picture over the last year, but, when we take into account the reasons for that improvement—which the right hon. Gentleman will agree, largely centre round the fortuitous but very fortunate improvement in the terms of trade, which more than explains the improvement in our balance of paymens—and the decline in stocks, which appears to have taken place in the course of 1958, I do not think that one can feel quite so satisfied that this change from what, after all, as the House will remember, was a situation of major crisis fifteen months ago, can possibly justify such a step as introducing convertibility.

That brings me to the question: what about the world dollar situation? There is a lot of talk to the effect that the dollar problem is solved. It is true that in the past year there has been a very remarkable flow of gold from the United States to the rest of the world, amounting to 2,000 million dollars, but is this the kind of thing we can usually expect? Is it not much more likely that this was a quite exceptional situation? Is it not very much more likely that in the course of 1959 interest rates in the United States will go up? That is what is being prophesied now because they are already getting frightened of inflation. Is it not then going to face us with the difficulty that while our bankers and, I think, many people are saying, quite rightly, that we want lower interest rates here for industrial expansion, we shall face the dilemma of having lower interest rates and seeing the gold go back, or of not having the low interest rates at all?

Finally, let us bear in mind, when we look at the American situation that if gold losses go on occurring from America we would be very rash to assume that American public opinion will sit by quietly and let that go on happening. They have been remarkably quiescent so far, but it would be extremely rash to assume that there will not be some reaction on the part of the United States institutions and citizens.

If we look at the United States balance of payments today we see there is one very striking thing about it. That is the ever-growing increase in the amount of United States investment abroad, and therefore, in the amount of dividend and interest payments which have to be transmitted, which are transferred, back to America. The figures are really quite remarkable. The total of American foreign investment today stands at 54 billion dollars—a huge sum—and it is increasing every year. In a sense, we want it to increase.

Mr. Cyril Osborne (Louth)

Of course we do.

Mr. Gaitskell

Yes, the earnings are piling up, but not all are being transferred there and we shall get into a difficult position if, at some point, there is a desire to repatriate some of this money, or indeed, to repay a certain amount of the accumulated profits which have been reinvested here.

Mr. Osborne

Surely the earnings cannot be repatriated to the dollar owners until the economy has been so stepped up that there are the earnings to transfer.

Mr. Gaitskell

There can be no doubt at all that if we remove and continue to remove all restrictions of the kind we have talked about there will be nothing to prevent American companies transferring larger amounts of dividends year by year. They are already doing that. All I am saying is that I think that this is bound to put a strain on the exchange position between America and the rest of the world.

If we consider now the United Kingdom balance of payments prospect—I do not think that there is much disagreement in the House about this—we find that we have had a very favourable first half-year in 1958, but we all know perfectly well that that was simply due to the terms of trade. The Board of Trade itself is already giving warning that it cannot go on and that in the second half we shall be generally back in the same position as we were in the second half of 1957.

Perhaps the most striking commentary on all this came in a very interesting address by Mr. Tuke, Chairman of Barclays Bank, who went out of his way to emphasise that virtually the whole of our favourable circumstances were due to this. I have no doubt that the Chancellor of the Exchequer will have noted that he even dismissed the Bank Rate as having had very much to do with it and, in effect, ascribed our astonishingly favourable balance of payments in the first half of 1958 and the continued strength of sterling during the second half to this remarkable change in commodity and import prices which has been so much to our benefit.

Another factor that we have to take into account in judging our position is that some decline, according to the latest information available, took place in stocks this year. If there was one thing that I should have thought we should all have learned by now it is the extraordinary difference to our balance of payments which can be made by variations in stocks from year to year.

Taking all this into account and taking into account, above all, the fact that this situation at home has been accompanied by unemployment and slack in our economy—three years' stagnation followed by decline—we really cannot assume that if the Government really intend to carry out expansionist policies, they will have quite such a favourable balance of payments situation in the next year or two. I do not suppose they themselves would make that claim, but, if they do not, they are saying, "Because there is a favourable moment now, after this half year, we are going to take this step, even though we know that the storm may be going to break a little later on."

For all these reasons, I cannot accept the idea that the dollar problem is solved and that there is no problem for the future. The Chancellor may ask, "What is it that you are really worried about? What is it that you think will happen concerning the exchanges?" I want to make plain that, despite my preceding remarks, our opposition to what the Government have done is not based on the assumption that we think that under any Government this country will get hopelessly out of line with the rest of the world, that our price level will be miles above that of everybody else, that we shall price ourselves out of markets and have huge balance of payments deficits or anything of that kind.

I am not saying that that is what I am contemplating and that, for that reason, I am worried about convertibility. Frankly, the only circumstances in which I can envisage that situation developing would be, perhaps, in the event of world depression, when, indeed, we should have to consider whether we were wise to continue with the same exchange rate as we had before; but that, happily, is a purely academic question at the moment and not one with which I am concerned at all.

Our case is based on the danger of speculation based on rumours and personal judgments, often ill-informed, about long-term prospects here. The fact is that we cannot simply say either, "Everything is all right. There is no danger of inflation. We have a very strong position and everyone knows it," or, "Everything is all wrong and everyone knows it." There is room for a great deal of disagreement here. The best way that we can appreciate that is to consider what has happened in the four major crises we have had since the war.

First of all the 1949 crisis. I personally believe that at that time the price level here, owing to the changes since pre-war days, was out of line with the United States. But nevertheless, it is the fact that in 1949, when we were forced to devalue, we had a surplus—a small surplus but still it was a surplus—in our balance of payments. It was not a bad balance of payments year. It is, secondly, true—as I well remember—that the whole trouble started because of rumours in Washington. And thirdly, it is true that another contributing factor was a quite slight American recession which put down the commodity prices of sterling area goods. There may have been an underlying cause, but the immediate cause of the trouble was, frankly, rumours leading to speculation.

In 1951, on the other hand, the balance of payments, as I well remember, was in very heavy deficit. But the cause of this was not a lasting cause. The right hon. Gentleman knows perfectly well that the two reasons for that large deficit were, first, an astonishing change in the terms of trade against us, because of the Korean war, costing £500 million—these are the official figures—and secondly, a very substantial increase in stocks. But it came right as soon as commodity prices turned and prices fell. We had a great improvement in the terms of trade and no longer had to increase our stocks. So once again, there was no underlying long-term weakness here, but there was a very big speculative movement based on the factors which I have mentioned.

If we turn to the 1955 crisis, there was a balance of payments deficit, but it was not very large—about 150 million. But again, the crisis was immensely aggravated by nothing but speculation.

But the most extreme case, one from which I should have thought that right hon. and hon. Gentlemen opposite might really take some comfort, was the 1957 crisis. In 1957, we had a large surplus in our balance of payments. In that year, there was no question of a great "boom" and a "bust". Our industry had already been stagnant for a couple of years. The cause of this crisis, as indeed the then Chancellor freely admitted, was speculative. It was initially started by a flight to the mark, and it was continued because of the view taken—in my opinion a completely fallacious view—that we were in danger of some vast inflation. This view was taken despite the fact that anyone who studied the figures would know that the terms of trade were moving heavily in our favour and there was a commodity price recession which was almost bound to assist the United Kingdom.

It is undeniable that an expansionist policy at home is quite likely to lead to similar speculative moves which may be of a very big scale indeed. I admit that some speculation was inevitable—indeed what I have said shows it—in the pre-convertibility era. It is no part of my case to say that we can stop it altogether. But we contend that what is being done now will inevitably make it much worse than before.

Here I want to draw a distinction which I hope goes to the heart of the whole trouble. If we were a country, similar to most other countries in the world, and concerned only with our own balance of payments; if there were no sterling area and we were not a great centre of finance, I could well understand that, looking ahead at the United Kingdom prospects and with our reserves—if we had the same reserves as we have now—this might be quite a sound move to make. I would even say that if we were thinking not only in terms of the United Kingdom, but of the United Kingdom as also a reserve banker for the sterling area—holding the reserves of other members of the Commonwealth—were that so, I think possibly it might be said that there was no undue risk.

But we are not only that. What we are as well, and what we are emphasising by this step that we are determined to be even more—and I dare say that when hon. Members think first about this they might think it a splendid thing—is a world finance centre. We want to be that even more. We are always talking about sterling as a world currency. That is all very fine, but let us not underestimate the enormous additional strains which a decision of that kind places on us. The whole basis of the doctrine of convertibility is, of course, to build up and to give as much freedom as possible because on that basis we can get the most business to the City.

That brings me to the point I mentioned earlier, that I thought convertibility was dangerous, significant, because it was being taken as a signal for further relaxations. One has only to look at the financial Press to see that.

For instance, on 30th December—as early as that—the Financial Times contained a long and interesting article about this very point; about what the City would be demanding in the way of relaxations. It was entitled, "But they want still more." What they were asking for was freedom to lend abroad which had been stopped during the 1957 crisis, and freedom to lend to finance trade between other countries as well as between this country and its trading partners. There can be no doubt that the City view of convertibility is that it is the thing to bring foreign deposits. That sounds all very well, but let us be clear that this is "hot money". It can be, and will be, withdrawn if there is any danger whatever.

As I have said, already there is a demand for lending abroad more freely and I have no doubt that there will be a demand for greater freedom for the convertibility of foreign-owned securities as well. The Chancellor says that we are not making any changes, that resident sterling is still fully controlled. But the controls, even now, are not adequate. There are holes in the sterling area system. There are the famous ones at Kuwait and Hong Kong. Although I know that some steps have been taken to put that right, I am also told on good authority that it is not in the least difficult to get round them. It is possible to form an investment trust in Kuwait and transfer money to that trust which would apparently be completely free to buy dollar securities as it liked.

The same thing appears to be the case with Hong Kong. We are all familiar with the Hong Kong issue because of a certain letter which was written some time ago. I wish to emphasise to my hon. Friends as well as to hon. Members opposite that I am not making a personal attack. I am simply saying that here are our fellow citizens who are carrying on a perfectly legitimate business. But in the process of doing so, it is quite possible that they may be doing things which seriously damage our economy. I have some sympathy with Mr. Keswick when he wrote that letter in which he said: Again, this is anti-British and derogatory to sterling, but on balance, if one is free to do so, it makes sense to me. He had an obligation to his shareholders. He had to think of that. The real blame, in my view, does not rest on him or on people like him. It rests on the Government for allowing these things to happen; and we say that under present circumstances, instead of talking of relaxing still further, it would be a very good thing if the Government tried to tighten it up. But we can be sure that all the time the pressure will be to relax still further and in due course to allow complete freedom of capital export as well.

It is not only that the speculative pressure in a difficult situation will be greater as a result of this decision. There is something else with which we are much concerned. It is that because of this, and in order to prevent what might be a run on the £, we shall be told that our internal policies have to be adjusted. We know very well what that means. We shall be told that we must cut back; that we are trying to do too much; that there is overfull employment. We shall be warned that we must delay expansion; not because of anything that is done, but because of what might be thought by speculators.

Some idea of what is implied in this came out very clearly in an article in the Economist of 17th January. As it happens, it was not directly about expansionist policy, but about what sort of Budget the Chancellor should have. I am sure that the right hon. Gentleman will have read it. It advised him to take certain action and to choose certain taxation remissions rather than others, in particular, a reduction in the standard rate of Income Tax. Everybody likes a reduction in the standard rate of Income Tax, but that is not the point. Supposing the Chancellor thought that in the interests of the country it would be better to give relief to industry in the form of increased investment allowances, supposing he thought it a good thing to give relief to the consumer and housewife in reducing Purchase Tax? No. According to the Economist the right hon. Gentleman has to think of foreign opinion, of speculative opinion. This is what it says: Many foreigners…envisage the English as a people whose sense of initiative and responsibility is hopelessly downtrodden by some of the highest marginal rates of Income Tax in the world;

Hon. Members

Hear, hear.

Mr. Gaitskell

I know that hon. Members opposite may think this, too, despite their Government. they also believe that if a substantial reduction in Income Tax rates were made now, any incoming Labour Government would find it politically difficult to raise rates quite back to their old level, so that this would remove one of the main weapons through which a Labour Government might carry on a form of administration which foreign holders of our currency particularly dislike. I will only say that we on this side of the House regard that kind of attitude as quite intolerable and the policies which put us in that position as unworthy of any Government who claim to be a democratic Government.

I will give one other quotation, if I may, which I think puts the matter very well indeed. It is by the Economic Editor of the Observer. He, as the House knows, was opposed to what the Government had done. He said: At the same time, the Government could have used the opportunity presented in 1958 to make a start on reducing our international commitments—the present unlimited liability of sterling, which makes us so nervous about economic expansion at home. But instead, the decision has now been made to go forward with a policy of dismantling our defences and increasing our risks. With a gold reserve as small as ours, and the normal hazards of international speculative movements, it is not a prospect which I find enlivening. But it is the political implication of the policy of abolishing exchange control altogether which urgently requires discussion. If it goes through it will restore the power enjoyed by a minority of rich men in the past to vote with their bank balances. I have given reasons why we believe these decisions to be wrong and dangerous. I do not propose to reply to the childish jeer of the Prime Minister, that anybody who gives warnings must be called "Calamity this or that". I am surprised, indeed, that the Prime Minister, who at one time liked to be associated with the right hon. Member for Woodford (Sir W. Churchill)—who gave the gravest warnings of this century—should be against those who think it necessary to give them today.

I must make it plain, as I did on an earlier occasion, that much as we disagree with this decision, since the decision has been made we should have to do our best to work it. But, at the same time, I declare that precisely because of the greater vulnerability which springs from what has already been done we are absolutely opposed to any further measure of decontrol in this field. We shall take the strongest measures open to us against any British citizens who, in pursuit of their business interests, choose to try to evade control and speculate against the £, for, important as may be the international business of the City, we do not intend to allow it to jeopardise the jobs and livelihood of the British people and the steady expansion of our industry.

5.26 p.m.

Sir Toby Low (Blackpool, North)

The House has just listened to the Leader of the Opposition enjoying himself and pleasing his supporters. In fact, he pleased them so much that it is rather difficult for me to be heard at the moment.

I will come, if I may, to the right hon. Gentleman's points in the course of my speech, but I wish, first, to say to my right hon. Friend the Chancellor of the Exchequer that we on this side of the House, and I think all hon. Members of the House, are extremely grateful to him for the very lucid way in which he explained not only the Bill but the policies that have led to it.

As my right hon. Friend sat down, I wondered what the right hon. Gentleman the Leader of the Opposition was going to be able to say in support of his Amendment. When the right hon. Gentleman sat down I really could not see that he had spoken strictly to his Amendment. I expected him to explain to us exactly how the Bill and the policies behind it made more difficult the achievement and maintenance in Great Britain and Western Europe of industrial expansion and full employment. That is the great point of it. [HON. MEMBERS: "Hear, hear."] Hon. Members opposite may have views about this matter and we on this side of the House would like to debate those views with them, but so far right hon. Gentlemen on the Opposition Front Bench have not explained them.

It is quite true that the right hon. Gentleman explained why it was that he regretted the demise of E.P.U. We are all aware of the reasons for his sentimental attachment to this child which, I think, at the time when he helped to give birth to it was supposed to have a life of two years. It has enjoyed a life of eight and a half years. It seemed on that point that the right hon. Gentleman was particularly bothered and worried. I think this was a valid point on his part, that insufficient credit would be available to keep trade in Europe going at the maximum and to lead to further expansion of that trade.

The right hon. Gentleman expressed a strong affection for the automatic credit provisions in agreements such as this. It seems to me that in the absence of this agreement everything depends on the general availability of international credit and the general readiness of creditor countries to give credit. If we have not got that E.P.U. agreement, I do not see that we need at once assume that there will be too little credit available in the world.

I have a few more later points to make about the international credit position. I now turn to the right hon. Gentleman's strictures on the decision to go more convertible than we have been in the past.

It seems that these strictures were founded on the right hon. Gentleman's fear of the future. He spent a great deal of his time explaining to the House and the world that our position was much worse than it looks and that we had much less chance than we thought of riding out any storms which might occur in the world. He seemed to me to display a great lack of confidence not only in the people of this country but in his ability to govern the country if ever he had to do so.

There are many technical and detailed arguments which can be adduced in reply to the points which he made, and I imagine that my right hon. Friend the Paymaster-General will deal with them in reply to the debate. If I attempted to do so I should try hard the patience of the House. Hon. Members have listened to two rather lengthy speeches—I do not charge anyone with that—and when the House has heard two long speeches, it certainly does not want a third. I am very conscious of that.

There are three main points which I should like to make, and the first concerns the attitude of the Opposition not only here but in the country to the problem of sterling and trade. The right hon. Gentleman said that he accepts this decision and will work it, but his attitude has been that it would have been much better if it had not been made, because then we could keep the transferable rate separate in Zurich; and he contemplated conditions arising in which we should withdraw support from that rate, let in commodity shunting and permit to follow all the bad results of the loss of confidence in sterling which must inevitably arise from such an occurrence as that.

That is a remarkable statement to make at any time, but to make it after the Chancellor had described our experience in managing this transferable rate in the last two or three years seemed to be flying in the fact of the facts. The whole basis of the right hon. Gentleman's argument is a curious commentary by a responsible member of the Opposition on the merits of their own economic policy. I think the explanation is to be found in the "sixpenny glossy" published by the Labour Party, which I think we ought always to have in mind when dealing with statements by Opposition leaders on economic and other policies in the House, because they sometimes make one statement in the House and a slightly different statement to the people in the country.

Mr. Walter Monslow (Barrow-in-Furness)

"Mend the hole in your purse".

Sir T. Low

I am referring to the sixpenny document produced by the Labour Party. Under the heading "Expansion," I read that there are three important things which matter in our economic life. First, We shall end Tory restrictions on production. I understand that that is to be done by controlled expansion; we end restriction by control. I speak on the authority of letters written to the Economist by the right hon. Member for Huyton (Mr. H. Wilson).

Mr. H. Wilson

Would the hon. Member tell me when I have ever said that we should end restrictions by controls?

Sir T. Low

This document says, We shall end Tory restrictions on production. In writing to the Economist and other newspapers the right hon. Gentleman recently has explained that his whole policy of expansion depends upon controls. I can only put two and two together, because I have always assumed that the right hon. Gentleman had something to do with writing this document.

The second statement is, We shall launch a plan for capital investment… They have to get the savings to finance it, of course, but that is their second point. The third point—and it should be borne in mind that it is the third—is, Labour is pledged to maintain the value of the £ —that is number three in the list of priorities, but it continues, significantly— and to keep Britain the financial centre of the Commonwealth and the sterling area. Today, far from keeping Britain the financial centre of the Commonwealth and the sterling area, they are complaining that the transactions of the transferable rate have been brought from Zurich to Britain. It may seem a small point but it is to me just one example of the many inconsistencies which there are between the arguments produced from the Opposition Front Bench in debate, when they are open to counter-argument and question in the House, and the arguments which they deploy in the country to people whom they think are unsuspecting and not capable of plumbing the depths of their nonsense.

The second point I want to make concerns the gains to be derived from this move. I agree with the Chancellor that it is only a small move and that in fact it makes no significant difference at all. That is the line I take.

I quite see, as the right hon. Gentleman said, that one could reasonably take another line, but as a result of experience in handling the transferable rate, I consider that this move is far more symbolic than important in the changes which it makes in the risks which we run. It brings to London from Zurich the handling of these transactions. More important, I think, is that it was a move taken in concert with the leading Western European nations and a move taken at a time when there were differences on trade matters, particularly on the Free Trade Area. That is a positive gain.

There is another gain, too. At the time when this move of convertibility was taken, the mark, the franc and other currencies also went convertible, and that is surely a great advantage. Lastly— and this comes from my experience at the Board of Trade as well as my experience in industry and banking—I think that any move taken at any time along the path to a wider and freer system of trade and payments is a good move, particularly if it is taken in concert with our European friends.

It is those definite, positive gains which make the move attractive to me. I regard them as greatly outweighing any increase of risk. In an article which the right hon. Gentleman did not quote, the Economist called this "An act of bravery". I regard it much more as an act of faith in the expansion of our economy on a sound basis without inflation. The trouble about the right hon. Gentleman the Leader of the Opposition is that he has not this faith.

There is no doubt that the position last Christmas was very different from that which the right hon. Member for Bishop Auckland (Mr. Dalton) faced when he made his ill-starred move to convertibility in 1947. It is also different from the position at any time, except for a very short time, in the interim period. I do not think that the difference depends so much on the improvement in the relations of our reserves to our liabilities, although there has been that improvement, as the Chancellor said, nor is there any great improvement in the relation of our reserves to trade, as the Leader of the Opposition said, but I think the House is wise to take account of the whole position and not just the position of our reserves.

First, the balance of trade has been going much better, and one must not dismiss as wholly irrelevant the fact that in the last seven years we have earned overseas over £1,500 million more than we have spent. That is a very remarkable achievement which has enabled us to invest more, particularly in the Commonwealth. That has immeasurably strengthened our position in a way which is not reflected directly in the reserves.

That, of course—and I must make this comment, although hon. Members opposite will not like it—is a very different position from that reigning in the years between 1946 and 1951, when, far from earning more than we spent, we spent £800 million more than we earned. There were reasons for it. [HON. MEMBERS: "Ah."] I have never denied that there were some reasons for it, but I ask hon. Members opposite to admit that that is a great difference between those two positions and to give credit to the country and to the Government who have been responsible, at least in part, for that difference

Mr. Austen Albu (Edmonton)

If that was the case and in view of the fact that we had a substantial balance also in 1957, why did not the rest of the world, and particularly the rest of the world's bankers, recognise it, and why was there a run on sterling in 1957?

Sir T. Low

I wish that the hon. Member would be a little more patient with me. He and I worked together in many things. I was coming to that, the second great difference.

The world now thinks that we have checked inflation and are continuing to check it. I regret to say that even in the days when I was a member of the Government, the world was not of that opinion throughout that period. This is an important change. I beseech the Leader of the Opposition and hon. Members opposite not to make the mistake' of accusing other countries of being solely responsible for the crisis of 1957. That is a misreading of the position. It is true that there was a flight to the mark, but previously there had been near-flight from gilt-edged in London. There was a great weakening of gilt-edged and it was known that there was an overstrain upon our resources. One of the indicators of that is the number of vacancies compared with the number of unemployed. There were other indicators too. Do not, however, let us think that it was somebody else's fault. If whenever we get into difficulties in economic affairs we go on thinking that it is the other man's fault, we will never be able to get a sound expansion. That is a mistake into which the Leader of the Opposition fell today.

My last point is to take up the phrase of my right hon. Friend the Chancellor of the Exchequer about the closed economy. I had expected the Leader of the Opposition to use the argument that any greater freedom in currency and payments generally, however small, would deprive us of the power to take unsound, uneconomic measures at home temporarily to boost production or employment. I had expected that he would use those arguments, for that, I believe, is what a great many of his supporters think.

It would be very nice if it were possible for any Government in this country to get away with that, even for a short time—at least, it would seem to be nice, perhaps, for those who might be handling our affairs. Surely, however, experience has proved, particularly on a great many occasions since the war, that that simply is not true.

Whether for defence reasons, as the Leader of the Opposition had to deal with in 1951, or for general economic reasons, if we allow too great a strain on our resources to grow here we get into trouble very quickly. The right hon. Gentleman knows perfectly well how quickly we got into trouble in 1951. We got into trouble on earlier occasions even than that and there have been other occasions subsequently.

We live by overseas trade. We might sometimes remember that although we have to sell in order to pay for what we buy, in the process of production we have to buy the raw materials first before we make to sell. For that reason, it is important that our money which we pay to the producers of raw materials should be money widely acceptable throughout the world. That is an important point which sometimes is overlooked.

If, however, I am right in saying that the overseas position governs us because we have to sell overseas, surely it is clear that we are to some extent limited in our rate of expansion by the rate of expansion of world trade or that part of it which we can capture overseas. That is a fact. What happened in 1954 and 1955 was an example of how that works upon us. If we do not expand our exports as we expand our production at home we get into trouble.

Now, we have a different situation. World trade has come down; we hope that it will begin to come up generally everywhere. I am glad that in all their measures the Government have wisely given the first priority to getting world trade going again and helping our exporters. That is the sensible way to do these things. My only comment on that—and I regard it as a fair one—is that measures like the increase in the contributions to the International Monetary Fund, very important in themselves, seem to have taken many months to mature. I have not yet seen signs of the effect of an increase of international credit in increased world trade. I am not accusing anybody here of having gone slow over this, because I know the urgency that my right hon. Friend the Chancellor of the Exchequer and his colleagues have put into this matter. Surely, however, the lessons of previous occasions like this and of the past few months are that all measures to try to get trade going again take longer to work than one thinks. I hope that there will be great urgency in the injection of credit into the international trade system.

Those are the three points I wanted to make. I attach the most importance to the phrase by my right hon. Friend the Chancellor that we cannot consider our economy as a closed economy. Everything depends on what is happening outside. It may be a nasty thing to have to admit that the other man's view about us matters, but if we live by selling and by buying his goods, I am afraid that it is true.

5.47 p.m.

Mr. Harold Lever (Manchester, Cheetham)

It is a relief that the right hon. Member for Blackpool, North (Sir T. Low) has narrowed down somewhat the criticism of my right hon. Friend the Leader of the Opposition. Apparently, my right hon. Friend's guilt is an evangelical deficiency or a lack of faith, as the right hon. Member put it. That puts me in mind of the story, which I have related before, of the gentleman who had the misfortune to come home and discover his wife in the very act of adultery. When he rebuked her she turned upon him and said, "Ah, I see you do not love me any more. You prefer the evidence of your own eyes to my assurances." My right hon. Friend is probably guilty of the same offence in that he prefers to look at the facts rather than to be persuaded by the emotional appeal of the right hon. Member for Blackpool, North.

The case made by my right hon. Friend the Leader of the Opposition against the actions in recent years in dealing with sterling meets with my overwhelming agreement, but I have certain views supplemental to it which I would like to link with what my right hon. Friend has said. In the first place, I feel that there has been a tendency during the years I have been in this House for the House to abdicate some of its judgment in favour of experts on financial subjects and that as a result the theoretical economists, without political or practical experience, and the bankers have been allowed, under the shield of a technical jargon not understood by most people, to put over ideas which have proved costly to the country.

It is when the House insists upon examining these things in the ordinary light of commonsense and plain English that we have a chance of a wider range of informed opinion than that of the experts being brought to bear upon these vital problems. It is for this reason that I make no apology that my speech will contain few statistics and a great deal of plain English and readily comprehensible argument. I must say that it is rather swimming against the tide, because, as I pointed out to the House before, British people always believe that when a policy involves some considerable discomfort it is bound to be to their enduring benefit, and when it is couched in language that they cannot understand they naturally take it to be the product of great learning. The combination of the disagreeable and the incomprehensible has almost overwhelming attractions for the great majority of the British people. This fact explains why the economists and the bankers have been able to have such a field day at our expense in recent years, and it is in the interests of focussing the commonsense of the House and of informed opinion outside that I intervene in this debate.

The first question that hon. Members ought to ask is whether, other things being equal, convertibility in itself is a desirable objective for this country. In plain English, sterling balances and our currency in general, wherever it is held, are nothing more or less than the I.O.U., the note of hand, of this country, or the marker, as I understand gamblers call it. Hon. Members who saw "Guys and Dolls" will remember that when a man's marker was accepted as absolutely unquestionably good, all sorts of desirable results were liable to flow from this fact. The hero was able to persuade Miss Simmons to pass an agreeable weekend in America because his marker was accepted as good.

In the case of a great trading and investing nation like our own, with worldwide interests, it is obvious that for our I.O.U. to be open to question is a very damaging matter. For it to be accepted unquestionably in all the markets and trading centres in the world must, other things being equal, be an immense advantage politically and economically to this country. So it follows that we would all wish that our I.O.U.s, or £ notes, or sterling balances, or sterling bonds, should circulate freely and should be accepted everywhere as being worth the amount stated upon them. We would much prefer that state of affairs to having them marketed at a discount in Zurich or Kuwait or in other financial centres which have never been highly regarded by contrast with the City of London.

Mr. C. R. Hobson (Keighley)

Profiteers in two world wars.

Mr. Lever

All other things being equal, we would welcome free convertibility of our currency in the hands of foreigners. That is why my right hon. Friend emphasised again that that is a target at which we on this side of the He-use aim.

There are quite respectable, ingenious and highly educated gentlemen who urge upon us that we ought to think in terms of the floating £. I am bound to say that there are many objections to the idea of having currency which fluctuates according to the temporary movements of the market from day to day during the year. It is fairly obvious that when we give out notes of hand and when we trade, if those notes of hand are going to fluctuate in real value according to the state of the Zurich auction or according to the speculative movement of currency, our trade is not going to be on a very guaranteed or stable basis. So the floating £ does not seem terribly attractive.

I am sorry if I appear to be guilty of a minor heresy; I hope that it was not an implication of part of my right hon. Friend's speech that the floating £ is in some sense a protection against speculation. As a matter of fact it is precisely upon the variability of the value of the currency that speculators batten. It is only when a thing goes up and down that we get these great speculative movements in currency. The negation of speculation in currency is a hard, fixed parity value which people can depend upon, and when one can depend upon parity speculators have got nothing to speculate about.

There is a possibility, which I must hold for later discussion, that with a fixed rate guarantee to a holder of sterling he could speculate on the possibility that the Government will no longer be able to hold a fixed rate. But all the history in the post-war years is that non-convertibility of sterling as such and the wavering of sterling and other currencies, far from being a shield against speculation, is the direct opposite. As my right hon. Friend carefully illustrated, these speculative movements have occurred from time to time since 1945, in spite of the fact that we have been running a very considerable balance of foreign trade in our favour and a balance of payments in our favour, and in spite of the fact that we had no convertibility for foreign holders of sterling.

Mr. H. Wilson

I am sorry to interrupt my hon. Friend, but his reference to what my right hon. Friend said about floating rates might lead to some important misunderstanding outside. My right hon. Friend was referring purely to the cushioning effect of some freedom of the transferable rate to move up and down in the pre-convertibility period.

Mr. Lever

I was not suggesting that my right hon. Friend had said anything to the contrary, though I realise that his comments might have been open to misinterpretation. I am very glad to hear that both my right hon. Friend the Member for Huyton (Mr. H. Wilson), whom I hope to see shortly handling the conduct of our economic affairs in a much wiser manner than they have been, and my right hon. Friend the Member for Leeds, South (Mr. Gaitskell), whom I expect to occupy an even more responsible office in the near future, disavow these theories of the floating £. Nothing could be more inimical to our prospects than that we should espouse these crackpot theories, as I regard them.

Viscount Hinchingbrooke

Would the hon. Gentleman define that theory in terms of the situation in 1931–39 when the £ was free and there were no trading cataclysms?

Mr. Lever

If I were to go back into the history of that period I am sure that I should soon be called to order. It is enough to say that the floating £ is no guarantee against speculation, rather that it tends to provide a feeding ground for it to grow upon. It is quite clear that even the floating areas—jthe mildly floating transferable sterling areas—did not discourage the speculative movement of sterling to a point when, in September, 1957, we were at a moment of grave crisis. It is quite clear that the non-convertibility that we have enjoyed up to this moment has not provided any sort of shield against the speculative movement of sterling.

There is very little information about where these speculative movements come from. We find leaderettes in the popular Press about the hard-faced men in Zurich, and the average Englishman thinks that the misfortunes which have been brought upon him by the speculative movements of sterling, movements even at a time of a favourable balance of trade which have produced the most disastrous economic policies, have been caused by a number of continental Billy Hills who are engaged in buying and selling sterling and generally having a gamble, rather as a man enjoys a gamble on the two o'clock race.

It is very hard to find statistical evidence about this, but nothing could be further from the truth. The overwhelming weight of the speculative movement of sterling, I suggest, comes from where the overwhelming weight of sterling is held—inside the sterling area. It comes largely in the form of lags and leads which are due to a state of flexibility in sentiment, and, of course, in fairness to the gentlemen who engage in what are total speculative movements of sterling, it is only right to say that they are not aware of themselves being gamblers, gambling on the fate of the £. still less as people contributing to an evil fate for the £. They are engaged in their lawful avocations of buying and selling. Let me give an example of the kind of thing which produced the crisis in 1957.

An English trader buys goods from Germany, and has to pay in Deutsche-marks. He could get a fair amount of credit, but what does he do? He is afraid, if he takes credit, that, by the time he has to pay in Deutschemarks, sterling will have depreciated, and hence he will have to pay more in sterling for the goods he bought than he intended to do. So he rushes off, borrows money from the bank or from any other source, often at a high rate of interest, so that he can get rid of his Deutschemark obligation as soon as possible.

In fact, the speculative movement of sterling in large part derives from the desire not to speculate which the trader as a rule has. He does not want to be at risk of the Deutschemark later improving against sterling, so he has to hedge his risk by buying up Deutschemarks at the earliest possible moment. So we get the paradox that the sterling area is responsible for the great speculative movements of sterling, and the people who, in the aggregate, produce irresistible tidal waves of speculative movements of currency do it, not to gamble, as is popularly thought, but to evade the gamble on the currency rates.

I do not want to weary the House by showing how the reverse process works to delay the receipt of dollars or other hard currencies. Why the foreign holder of sterling moves his money about is because he wants to avoid the depreciation of sterling, except in the rather exceptional case of 1957 when he rather hoped for the appreciation of the Deutschemark, so that he put his money in a hurry into Deutschemarks.

The real truth, therefore, is that speculative movements of sterling, which have forced the hands of both a Labour and a Conservative Government and have dictated policies, are derived from the varying sentiment of the holders of sterling in the sterling area itself, rather than from the minor movements of speculative sterling held by foreigners. Most foreigners who hold sterling hold it for a purpose. They need it for trade, business or whatever it may be, and if they hold it, they cannot as a rule afford to part with more than a small part of it at any given time.

Just as a trader can only reduce his stock within certain limits, so the foreign holder of sterling can only reduce his sterling holding within limits. Only a fraction of sterling is held outside the sterling area, and only a fraction of that fraction can be used speculatively, so that it is plain that this movement of sterling actuated from within the sterling area is the real cause of the speculative problem on which my right hon. Friend rightly laid so much emphasis.

It is also quite clear that the rate at which foreigners change their money does not greatly affect this speculative problem. It is very hard to get figures, but if we come to the conclusion on the lines I have indicated, the speculative movement of sterling within the sterling area, is unaffected by the question whether we make our transferable currency convertible by auction at Zurich or at a fixed market rate, as has been decided by the Government.

The final objection to the floating £ is this. We came to the conclusion immediately after the war that, because of the changed circumstances of our country, the only hope we had of military and political security was by agreement for collective security measures with like-minded nations. The sad thing is that a similar understanding that our economic and financial security can only be secured in the modern world by collective security measures has been much slower in emerging.

This country can no more "go it alone" on currency, economic and trade matters than she can on military or strategic matters. In other words, just as we see the hope for our political security in the wider development of collective security arrangements with like-minded nations, so the only hope of economic stability and safety in the long run lies in this country developing a kind of economic and financial collective security.

Just as we have no "Suez Group" in the Labour Party, and the other side, though not run by the Suez Group, has a very pronounced sentiment in that direction, it is not surprising that in economic affairs the Suez Group mentality prevails in the financial and economic fields more on the other side of the House than it does on this. The urge to "go it alone", the urge co develop premature convertibility, has always been on the other side of the House rather than on this.

The urge to move towards convertibility, even if desirable in itself, as I have said and as my right hon. Friend said, backed by collective arrangements with like-minded nations which have vested interests similar to ours, has only been developed by my right hon. Friend and a Labour Government. In fact, the E.P.U.—and I will not go into a lot of technical matter here—compared in the circumstances of its inception with the Bill before us today, in today's circumstances and many years after the war, was a great advance in economic and financial thinking which developed trade by means which I am not going to repeat, because we have already had them accurately stated by my right hon. Friend the Leader of the Opposition, and was an unmitigated blessing to the trade of Europe and the stability of our currency. This Bill, compared with that, is a retrograde step.

One or two illustrations were given by my right hon. Friend. I will not go into the matter in great detail, because it is enough to say that, as the need to have collective arrangements for propping up of currencies and the development of international trade has shown, by contrast, the Measure now brought in by the Government weakens the collective arrangements for the support of each others' currencies in unconditional terms. This is a retrograde step, because it fails to develop E.P.U. into something larger, more comprehensive and more effective. The party opposite has gradually whittled away E.P.U., damaged its functions, and now proposes to wind it up, and replace it by an international arrangement far less comprehensive, far less effective and far less wide in its reach than E.P.U.

Therefore, I am very sorry to say, I cannot vote for the Bill. I do not welcome it, not because it is harmful in itself, not because I am opposed to convertibility, not because I do not want to see our currency freely convertible at its face value, but because a prerequisite of effective stable convertibility of our currency must be, not the whittling away of the international arrangements to support it, but rather the development and extension of those arrangements as started by my right hon. Friend when he got E.P.U. going.

There is another question that I should like to mention. I do not altogether share to the full my right hon. Friend's apprehensions that, despite all the shortcomings of the Government, convertibility will fail. I agree with him that there are risks, but I am not sure by any means that those risks will prove fatal to convertibility, even though we had no need to take them. My charge against the Government is that had they taken the action open to them today we could have had convertibility without any risk at all and with complete unanimity between both parties in the House. As it is, with inadequate international preparation and with thoroughly disastrous home economic policies to suit, until very recently, there are some risks, but so slight as not to cause me, at any rate, great anxiety.

I should like an answer from the Minister on this point. It should surely have been possible to dispel those fears which some people have about convertibility if, for a trial period, the Government had supported the transferable rate at full parity with the official rate. If they had done that, we could have seen demonstrated in practice whether the strain upon the reserves would grow with transferable sterling supported at full parity. The Government's action now amounts only to the support of transferable sterling at full parity. Of course, they could have done that for a trial period in the last few months if they had had their wits about them. They have completely failed to do so, and now they have rushed in without adequate preparation.

I wish to know from the Minister, also, why we keep talking about the gold and dollar reserves in the same terms as the Bank of England. Why not disclose not only the Government holdings of dollar securities, but the privately held dollar securities? All those securities are registered with what are called "authorised depositaries". Nobody has the right to make off with them. Why on earth can we not have stated with our gold and dollar reserves the dollar securities held by residents in this country? Surely nobody in the House will deny that any Government in an emergency would be entitled to use those dollar securities as readily as the gold and dollars we have in the reserves if it were necessary to defend the £.

Certainly, it would have been far preferable in 1957 to have sold a few hundred millions of dollar securities rather than cast away nearly 25 per cent. of the entire potential steel production of the country, as was done by the restrictive policies which the temporary run on the currency, so they claim, forced upon the Government.

Mr. Ellis Smith (Stoke-on-Trent, South)

We did it in the war.

Mr. Lever

As my hon. Friend says, we did it during the war. There is no reason why, in peace time, we should not have those securities lodged at the Bank of England as evidence of the firm intention of the Government to defend sterling at the declared rates.

My right hon. Friend very properly said that, in spite of our disagreements, we on this side are determined to do all in our power to defend the sterling rate. To show that this is not a dishonest or a hypocritical pretence, I for one demand that there should be a further strengthening of our reserves by the Bank of England taking into its possession and regularly publishing, with the other reserves, all the dollar securities held by residents in this country. It would certainly be reassuring to public opinion abroad to know that we meant business and meant to use all our resources to defend our currency.

Another reason why we cannot welcome unconditionally the convertibility move which otherwise we should have been glad to see is that the last financial crisis, in September, 1957, resulted in a policy which the Government are always claiming saved the £, restored our reserves and all the rest of it, but which, in fact, if it had any effect at all, had the very reverse effect. I will not reiterate what my right hon. Friend said. The Chairman of Barclays Bank made it quite plain that the Government's policy bad nothing whatever to do with the restoration of our reserves. This came about because we gained on the terms of trade swings without losing on the commodity roundabouts.

The sterling area, at the same time as it lost money on the drop in commodity prices, which benefited our terms of trade, got an immense amount of dollar investment from outside the sterling area. We got it both ways. We had investment into the area where the prices were dropping, and we had advantageous terms of trade. Those factors, and not the Government's policy, resulted in the very modest improvement in our fortunes in that respect.

What sort of confidence can we have in a Government who support our currency by restricting our industries? We on this side are not prepared, at times of speculative crisis and temporary panic on the part of a half-comprehending Government, to accept for a moment their undermining of the very basis on which our currency must finally depend. In the end, coming back to what matters, the value of the notes of hand of this country will depend upon the skill, the effort, the social discipline and the industrial and economic achievements of our people.

All the rest is a kind of meaningless preparatory charade if, behind it, there does not run the organised economic and industrial effort of a great nation. The Government purport to strengthen our position by cutting steel production to about 75 per cent, of what it could be, by further stagnating the economy, and by general measures calculated to damage the long-term industrial and economic strength of the country. I shall not go into all that in detail; it is too well known.

The odd thing about this Government is that they are constantly knocking the economy about, yet, when they lay off doing that, they come to the House with fatuous smiles of self-congratulation, saying that they are actually making things a little better, after having half strangled the economy. The Prime Minister, to his eternal credit, extruded the right hon. Gentleman the Member for Monmouth (Mr. P. Thorneycroft) from his Cabinet. [An HON. MEMBER: "Where is he?"] The right hon. Gentleman who had charge of our financial and economic affairs no longer has the ear of the Prime Minister and his colleagues. As hon. Members must be aware, the right hon. Gentleman the Member for Monmouth accepted the infantile economic and financial theories which largely guided the Conservative Party in its normal mood, and he actually had the temerity to attempt to give full practical effect to those policies.

In all fairness to him and his colleagues, I will say I respect their great sincerity, but the Prime Minister, faced with the practical consequences of giving effect to these policies, cast the right hon. Gentleman the Member for Monmouth on to the back benches of the House of Commons and was even more severe with his economic adviser, whom he cast on to the red seats in another place. I think that we can now safely suppose that both will, perhaps, be prevented from taking part in economic debates in which their counsel might have been heard.

When we note the reaction of the Government to the crisis of 1957 and previous crises, we are bound to come to the conclusion that we cannot support them in any convertibility move of this kind, for two reasons. To be absolutely safe, convertibility requires two things: first, the development of our whole economy to its maximum strength and on an expanding basis; secondly, adequate international arrangements for what I call collective economic and financial security. On both these counts the Government fail. In home affairs, at the first sign of the squall, their reaction is of a destructive character. Tight lacing, which has long since been abandoned for controlling the female figure, is much in vogue in the minds of Tory economists at the first sign of any trouble in the economy. Their natural reaction is to contract, and it must be said that the further move towards convertibility is not to be entrusted to the hands of people with that attitude.

I have explained that I am bitterly opposed to the economic approach of the Government. I have explained that, for my part, I should unreservedly welcome a £ restored to its pre-war strength, freely convertible in the hands of foreigners, of non-sterling area residents, at a fixed parity, were it not for the fact that the Government have not made the necessary arrangements externally to deal with what might occur and have not shown the approach internally which is required for the strengthening of the economy.

I hope that I have made it plain that I. have no confidence in the Government in the handling of either our internal financial affairs or our external financial affairs. I agree with what the right hon. Gentleman said about the years since the war. We can see running through the post-war years, and through the way in which this country has tackled its peacetime problems, the same thread of British character, talent and courage which, we know, enabled us to survive the trials and difficulties of the war. None of us here attributes that solely to Labour Party ideas, still less to what the party opposite has done. We attribute it to the people, of all parties and all kinds, who have contributed to this immense effort.

Not the least of our economic assets in the battle to improve our financial and economic position in the very difficult post-war world into which we have been catapulted by a war which drastically changed the economic situation has been the fact that the country has a trade union movement which is more responsible, more patriotic and more intelligent than any comparable working class in the world. The trade union movement is deeply patriotic and deeply conscious of its social responsibilities. Without wishing to make a party point, if one had to pick one sector to which special tribute is due it would be the trade union movement.

It is right that we should proclaim to the world, however bitterly we may disagree about the timing of different steps and the correctness of different policies, that we are all agreed that in a matter which touches the safety and honour of our country, the value of our currency, whatever Government is in power, we will all, irrespective of party, lend every possible help in order to keep our famous and successful trading name as valiant and honourable in peace as it was during the war.

6.23 p.m.

Mr. Nigel Birch (Flint, West)

There was a moment during the speech of the hon. Member for Manchester, Cheetham (Mr. H. Lever) when I thought that he would try to talk the Bill out. However, that moment passed. I will not follow him in all the highways and byways of his speech, because many hon. Members wish to speak. I want to deal with only one part of his speech, the question of speculation.

The word "speculation" came as a sort of leit-motiv all the way through the speech of the Leader of the Opposition. It is dangerous to put too much weight on the question of speculation. It leads people to underestimate the scope and nature of our problems. It leads people to feel that they have no moral responsibility for the easily foreseeable consequences of their own actions. It has already led hon. Members opposite to the idea that as all difficulties are caused by speculation it is possible that by controls or by having some debased form of sterling, by paying in clipped coinage, one can avoid the easily foreseeable consequences of one's own actions.

There always has been and always will be speculation. We hear a great deal about Zurich. No doubt speculation will go on there and the speculators are outside the jurisdiction, but, as the hon. Member said, that sort of speculation is a very small matter indeed relatively to the really big movements of funds. We cannot calculate these things, but I have always found that those in the best position to know, such as officials and bankers, believe that speculation in the strict sense of the word—that is to say, people who sell sterling which they do not own and to which they have no future title, in the hope of making an uncovenanted gain —is relatively unimportant.

That sort of thing has never been an important factor in any of the runs on sterling. The important movements have been on the part of those who do not want to put the assets of a business at hazard, the people who do not want to make uncovenanted gain but do not want to make uncovenanted losses—people who do not want to speculate.

We have heard about leads and lags. Let me take leads first. Let us consider two traders buying goods of the same value in America. Take the date as 1st August, 1949. The goods were ordered earlier. The goods are due to be paid for, let us say, on 1st November. Confidence in sterling weakens. No relevant action is taken and it is clear that no relevant action will be taken to put things right. What are the traders to do? One man may say, "I will scrape up the money somehow. I will borrow it. It will cost me more, but that will be only an insurance premium. I will pay my debt". The other trader may say, "No, I will not do that. I will risk it".

The first trader gets his goods at the price which he anticipated plus a small insurance premium. The second who took a risk loses 40 per cent. Which of those two men was the speculator? That is not an easy question to answer, but that sort of thing was going on all over the sterling area.

What are the means of control? I suppose that an order could be brought in to the effect that no British trader should ever pay his debts until the last possible moment, but that would not be a very easy order to enforce. To fly signals of distress like that would immediately cause panic. In the rest of sterling area the means of control will be none whatsoever.

Now let me deal with lags. Let us suppose that a trader in America who is buying goods in this country thinks that sterling will be devalued. If it were devalued the goods would fall in price. Anyone who buys goods after devaluation will undercut him. What will he do? Obviously, he will try to put off payment until the last possible moment. He may very well make it a condition of the purchase of the goods that payment is to be deferred. That happens all over the world. In this case, there are no means of control. What happens in the banking business? Countries all over the world keep working balances here. If they feel that sterling will be devalued they will run them down. There are no means of control short of a declaration of national bankruptcy.

Take the members of the sterling area who keep their reserves here; not all of them are members of the Commonwealth, and most of them are much poorer than we. If they think that the value of their reserves will go down because sterling will depreciate, for old times' sake they will probably leave their deposits here, but will be under the most bitter political pressure at home—and this has happened often before—not to put any more in but to form their own gold and dollar reserves. Here again, there are no means of control whatever.

Some of the means of control that can be exercised are ambivalent in their effects. The Kuwait gap, about which we hear so much, was closed on 5th July, 1957, about six weeks before the run on sterling started. As a result of closing the gap the premium on dollar securities in this country went up at one time to 25 per cent. This was a demonstration of lack of confidence in sterling. That was one of the things which triggered off the panic. If the gap had been closed earlier, I think that it is quite likely that the panic would have started earlier.

Panics cannot be stopped by changes in the terms of trade. I think that Mr. Tuke has been slightly unfairly quoted. The terms of trade in August, 1957, when there was the run on the £, was only a point less favourable than it was in November the same year, when money was flowing in. What stopped the money flowing out was honest and resolute action and the determination to see the thing through. As soon as the world decided that we meant business, then the leads and lags stopped, the working balances came back, and nobody wanted to put his money through the Kuwait gap anyway.

It is rather odd that right hon. and hon. Gentlemen opposite should put it to the country that the foreseeable consequences of their actions can be avoided by controls, and by having debased forms of currency. After all, they have had some experience of controls. In 1949, there was every sort of control. A docile majority opposite would have passed any control that Sir Stafford Cripps had wanted, and at that time it was said that there were no less than 57 varieties of sterling. What did it avail? Nothing whatever. A great devaluation took place.

In 1951, when there was another run on sterling, was the Leader of the Opposition short of controls or debased forms of currency? Not a bit of it. What he lacked was the courage and resolution to do unpopular things and, very rightly, threw in his hand and went. We got in, took some resolute action and the thing came right—[Interruption.]Of course it did. The right hon. Gentleman the Leader of the Opposition was heading for a second devaluation, and would have had it if he had stayed in office—

Mr. John Cronin (Loughborough)

rose—

Mr. Birch

No; I do not want to give way.

There is a good deal of danger in the attitude of hon. Members opposite that things can be put right by controls, and there is great danger in this hankering after debased forms of sterling. What is in their programme? Cheaper money—the re-Daltonisation of our economy, re-nationalisation of steel and road transport—adding hundreds of millions to the debt, and adding enormous sums which we would have to raise each year by the sale of gilt-edged securities. A vast increase in the debt would be caused by the municipalisation of rented property—there is great proposed increase in every item of expenditure, plus help to underdeveloped countries on a greatly increased scale. We are told that there is to be no general increase in the level of taxation, and that all this is simply to be paid for by running the economy flat out—a policy pursued by the French since the war at the cost of eight devaluations since VE-day, six of them before the Algerian War started.

This programme has certain foreseeable consequences, but hon. Members opposite say, "It is quite all right, because we shall have exchange control." But if they have a mysterious, wonderful, new exchange control which can control all the things they could not control before, and which no one else has ever been able to control before, I think that they are under some obligation to tell us what those controls are. If they do not say what they are, they will do themselves harm, and they will do the country harm. On top, of that, this hankering after debased sterling is bad.

I see the difficulties of hon. Members opposite. Socialism, after all, is intellectually and morally discredited now. How ever, as an Opposition they feel that it is their duty to oppose, and when some thing like this is done they come here and make ridiculous statements like those we heard from the Leader of the Opposition—

Mr. Sydney Silverman (Nelson and Colne)

Will the right hon. Gentleman give way?

Mr. Birch

No.

Nevertheless, it does harm. They had better stick to their own nonsense. What I say to them is, "Leave the £ alone, and stick to your labels."

6.34 p.m.

Mr. J. Grimond (Orkney and Shetland)

The right hon. Gentleman the Member for Flint, West (Mr. Birch) is a most effective debater, but I must say that there are certain points that could be made against him. He says that the Conservative Government put everything right, but what happened about eighteen months ago? What happened a year ago? The right hon. Gentleman then took the view that so serious was the outlook that he had to resign from the Government.

What is the position today? We may be able to take this step towards convertibility, but the fact remains that we have a high degree of unemployment, and stagnation in industry. I have a great deal of sympathy with what the right hon. Gentleman said about inflation and controls, but that is something that we have had ever since the war. We have swung from bouts of inflation, with foreign difficulties, back to stagnation and a strong £.

I should like to start from the same point as did the right hon. Gentleman on the question of controls and speculation. Unlike him, I must say that, although I disagreed with the conclusions of the right hon. Gentleman the Leader of the Opposition, I was considerably impressed by his speech. I thought that he made the case against this move very cogently but, in the end, he came to this: that in this year—which is one rather charged with political possibilities—or later there might arise an occasion when there was another lack of confidence in sterling, when it would be seen that this Bill was a step in the wrong direction.

There, I think, his case broke down, because if he really thinks that he can stop the consequences of such a lack of confidence in sterling, he must take very much more drastic powers than existed before the Bill was introduced at all and, so far as withdrawals of money from this country are concerned, I share the view of the right hon. Gentleman the Member for Blackpool, North (Sir T. Low) that the Bill will not make much difference. We must make up our minds either to go for an economy much more closely controlled than anything we have had, or we must accept the Bill as at least a small step in the direction of freer trade in the world and freer movement of currency.

Both sides have said we should do that—

Viscount Hinchingbrooke

In which does the hon. Gentleman believe?

Mr. Grimond

We believe in the second. The noble Lord must really make an effort to listen. I said that there are two alternative views before the House, and that those who did not want to accept the Bill—as I do—would have to turn to very much more stringent controls than we have ever had before.

I think that the Chancellor should have told us rather more clearly whether or not he considers this step to be an important matter, because I understood the right hon. Member for Blackpool, North to say that he thought that this was a very unimportant little step. If it is a very unimportant little step, I think that the Chancellor has to meet some of the arguments advanced by the Leader of the Opposition for thinking that it might not be so unimportant as it appeared at first sight.

The right hon. Member for Blackpool, North said that he regarded this Measure as being important mainly in the realms of faith—that it is an act of faith. The right hon. Gentleman is a banker, a distinguished banker, but I must say that I hope he does not run his bank on faith. The Government surely regard this Bill as more than a gesture—a symbol of faith. There is also the question whether or not the Government intend to go further. I think that they would be quite entitled to say that they must go further but, if that be the case, we should be told what further steps they have in mind.

I then come to the consideration of what steps might be taken if they run into the sort of difficulties which I think are certainly not beyond the range of possibility. At the present, we have the need to expand production at home. The Government are taking certain steps, such as lowering the Bank Rate and encouraging hire purchase, to step up consumption.

The Leader of the Opposition advanced as his main objection to the Bill that, in his opinion, it was one step in a series of disinflationary or deflationary steps, not only here but in Europe, and he doubted whether this was the right time for it. That is an important question, and the Government should tell us whether it is now their view that we have sufficient stability at home to loosen things up; to absorb a certain amount of extra purchasing power; to do little more investment; to get things going again, and whether that can be safely done in the context of convertibility. I also think it would be useful to know whether they are playing this by ear, and feeling their way, or whether they have any targets at which they are more definitely aiming.

Then I do not think it can be denied that, whether this is a small step or a big step, we may well be faced again with a situation in which people outside this country prefer to hold some other currency than sterling, and to withdraw their balances from this country. The advantage, as I see it, of making this move at the present time is that it is being coordinated with moves in other European countries, so that we shall not be left in the position that sterling is unprotected while other European countries have a high fence round them. Nevertheless, since 40 per cent, of the world's trade is done in sterling, it is obviously a much more serious matter for us if there is a preference for other currencies than it is for the other countries concerned.

I, therefore, if I may say so to the noble Lord, feel that the Chancellor of the Exchequer, if I may so put it, is trying to fly with the angels in this matter. He is flying in the right direction. He deserves a small halo. The question is, are his wings strong enough? Is he going to keep up? I think that that is the question to which we have to address ourselves. What do we do if we do run into the sort of difficulties we have experienced often since the war and which, clearly, are not impossible again.

One of the most popular methods, of course, is to raise interest rates. Doubt has been thrown upon the efficacy of interest rates, and some people are beginning to feel that we can pay too high a price for establishing confidence in the currency by raising interest rates. Still, this is an important weapon in the Chancellor's armoury.

There is the possibility of controlling imports and trying to regulate our balance of trade in that way. I myself regard it as undesirable on political grounds and as probably not very effective on economic grounds. It takes time, it leads to retaliation, and altogether I do not think it is a satisfactory way out of the difficulty.

Then there is the question of a floating rate. I am not quite certain about this, and I should like to ask the Government, is a floating rate incompatible with our international obligations? Would it be possible to have a floating rate and yet have the degree of convertibility to which the Bill points? If it were possible to have that I should have thought there was a good deal to be said for having a floating rate.

However, what I do feel with some certainty is that if the Bill is to be a success and we are really going to try to defend sterling as a more and more freely convertible currency, we certainly have to put our house in order at home.

For one thing, we have got to continue to earn a very large surplus on current account. I think that when the right hon. Gentleman winds up the debate he might confirm that it is the Government's view that we do require a much larger surplus on current account than we have been accustomed to earn in some years recently. It has been pointed out that very considerable obligations are to be met out of our reserves. In addition to the figures given by the Leader of the Labour Party I think there is also due a considerable repayment to E.P.U. at the rate of 36 million dollars a year.

We shall also have to keep down Government expenditure. Although it may seem remote from this Bill, I would press the Government to have a look at the financing of the nationalised industries. I think that this is a perpetual, incipient source of inflation in this country. If we are to be satisfied that we can defend sterling it seems to me that we must examine both Government expenditure and the financing of these industries.

Lastly, there are the longer term considerations. We all say and we read that Russia and China will make immense economic efforts and that they can do so because they are dictatorships, because they have vast resources, and because their deficiencies can be mopped up by their dictatorial powers. I do not know whether this is true, but I believe that the rest of the world has got to consider the matter very seriously indeed, and that one of the most disheartening things about the Western world is its inability to manage its foreign trade and financial affairs without perpetual monetary crises. It happens in all countries; I do not think it is confined to this country. We have a Committee going into financial matters, but I do not think it is empowered to look into these wider aspects of finance.

I believe that this is certainly a question to which the Western world must give very great consideration. Can we find a different basis for our currencies? Has the time come when we have to put up the price of gold? There is a widespread feeling that the dollar, after all, may become a comparatively soft currency. I know that this opinion is open to criticism in the view of some people, but it does look as though American costs now may be dangerously higher than those of the rest of the world. I myself believe that the refusal of the electricity tender to this country shows how very far out of line our costs are. That may well lead to trouble.

Are we satisfied with the steps which have been taken to strengthen the I.M.F., and, indeed, the steps which are being taken to set up this new European fund? As I understand it, the Fund is only of 600 million dollars, which, I must say, seems a small fund to be a stabilisation fund for the European currencies. If my figures are right the total extra quota of the I.M.F. from this country in gold and sterling is some £240 million, which, no doubt, is as much as this country can afford. However, do the Government really think we have sufficient liquidity now to carry the amount of Western trade which is being carried on and also to back the expansion of that trade? Are we in the West really going to be able to back the full use of our resources of both machines and men so as to keep up with the enormous expansion behind the Iron Curtain?

I do not think we have given nearly enough attention to the longer term implications of our financial policies.^* I support the Bill but I would ask the Government to let us know rather more of the steps they are taking to guard against the possible difficulties we may face in the future if the Bill is passed, and what their views are about the longer term need to increase international liquidity.

6.47 p.m.

Sir Henry d'Avigdor-Goldsmid (Walsall, South)

It is always a pleasure to follow the hon. Member for Orkney and Shetland (Mr. Grimond), and particularly is it a pleasure to follow him on this occasion as I understand that his views will lead him into the Government Lobby. I must say that, perhaps like other hon. Members, I was left in considerable doubt, until his concluding sentence, in which direction he was proposing to go. I am very glad to think that he will come with us, and, perhaps, his followers will come, too.

I had rather dreaded this debate, Mr. Speaker, because, although I appreciate very greatly the honour you have done me in calling me, I felt hanging over me the fear that I should have to cite the events of 1947 against my right hon. Friends. I was then a very humble worker in the City of London, but I did see the disastrous effects of the premature convertibility in which we were involved in that year in terms of the American loan, and it made an impression on me which made me feel that if ever I should be fortunate enough to speak here I should be extremely nervous about advocating repeating that experiment. It is good to think that now, after one month of this experiment, many of my fears have been relieved.

I do not know whether hon. Members realise that we enjoyed convertibility for exactly thirty working days, from 15th July until 20th August, 1947. During that time our drawings and expenditure on dollars were 1,300 million dollars. In addition to that we had to sell £20 million of sterling out of our gold reserves, immediately after convertibility had been withdrawn, so that the total cost became almost astronomical.

Some of the consequences which the House and the people of this country had to face were announced by the right hon. Member for Bishop Auckland (Mr. Dalton). The meat ration was reduced from 1s. 2d. to 1s. a week, the tea ration remained at 2 oz. a week, there was no currency allotment for pleasure travelling abroad, and the basic petrol ration was totally abolished. These are the things which happened eleven years ago. They seem to be completely forgotten but they have left a very deep recollection with me, and I might describe myself as working at the time as a clinical assistant in the hospital where the patient was being operated upon and was having this enormous loss of blood.

I have always felt, therefore, that premature convertibility was the greatest disaster in which this country could be involved. Why is it that now one can feel confident that the move to convertibility is not premature? In the first place, and I attach the greatest importance to this, it is a step that we have not taken alone. Despite the remarks of the hon. Member for Manchester, Cheetham (Mr. H. Lever) this is exactly a case where we have not gone it alone.

Mr. H. Lever

I never said so.

Sir H. d'Avigdor-Goldsmid

No fewer than eleven other European nations have taken the step with us. In the 1947 crisis the real trouble that we had to suffer was the demand for dollars from all over the world. It was not our own demands, but the demands of all the nations of the Western world, and they include Canada, and the South American countries. The right hon. Member for Bishop Auckland said: All these countries … are running very short of dollars and are increasingly demanding from us sterling convertible at once into dollars, quite apart from any obligations of the American Agreement."—[OFFICIAL REPORT, 7th August, 1947; Vol. 441, c. 1667.] The fact was that the pent-up hunger for dollars on the part of the free world, which was due to the war with all its deprivations and economic distortions, found an outlet through the channel of convertibility of sterling and burst its banks in a very few days. Thank goodness we can now look back on a month of sterling convertibility and can see that nothing of the sort has happened this time.

When the step was taken some people were nervous about it. The Financial Times, which welcomed it, said on 29th December: The £ might be disturbed by the rumours about the German mark. What has happened since 29th December is that not the German mark but the Belgian franc has been under suspicion and under pressure, due to events in the Congo and elsewhere, but there has been no adverse reflection on sterling whatsoever. My information is that so far from our losing gold and foreign exchange as a result of the Belgian crisis, some may have been gained. This is a most marvellous and welcome change from the events of 1947 and one which we should not overlook.

The Leader of the Opposition described this move, in the words quoted by the Financial Times on that day, as follows: One can only regard it as a surrender to creditor countries. But with the best will in the world, one must pay one's creditors. It is characteristic of the right hon. Gentleman's attitude, and that of his hon. Friends, that a move by this country to meet its obligations is a surrender to creditor countries. I do not think that I need enlarge on that.

I also thought that, in the course of his very interesting speech, although he showed great expertise in all the matters which he discussed, the right hon. Gentleman was a little ingenuous when he spoke about commodity shunting and said, as I recall his words, "I have never yet been convinced whether it is more expensive for a country to stop commodity shunting by holding the rate or by allowing it."

The essence of commodity shunting is the sale of a commodity in the sterling area for dollars at a price and on terms where the proceeds do not come to the sterling area. Therefore, one is losing an asset which had a potential dollar value and one is not receiving dollars in exchange; and as one, two, or more intermediaries may have been making a profit en route I cannot see how the right hon. Gentleman, with his great financial knowledge and expertise, can bring himself to regard a transaction of that sort as otherwise than harmful and damaging to this country.

We have also had a point made about "hot money". It is a somewhat technical point but it has great relevance. At the moment in New York the rate for three month Treasury bills is 3 per cent. The rate back in London is 3⅛ per cent, but in the foreign exchange market sterling is at a discount, for three months, of a quarter of a cent, which represents a rate of interest of ⅜ths per cent. Therefore, any American bank sending money here to invest at 3⅛ per cent., and covering the forward exchange, would be receiving a net rate of 2¾ per cent., that is less than it could have got by leaving the money in New York.

This seems to me a major point. It proves quite conclusively that people are finding it convenient and satisfactory to leave their money here for the purposes for which they could find employment for it. Previously, when we have had high rates of interest here, they have been counter-balanced to a great extent by a corresponding discount on forward sterling so that in fact we have really enjoyed only "fairy gold". That is to say, we have had money here from America but the forward exchange has been covered so that the money was liable to be withdrawn in the three months and, although we had the use of it for three months, it was liable to melt away on the very day when we could use it. That is why it is called "fairy gold".

On the question of reserves, it is clear that no adequate explanation will be convincing to the public as a whole. It is generally thought that the monthly figures of gold and dollars now published by the Government are only part of the picture. The Leader of the Opposition has indicated that in his opinion the position is not as good as that which the Chancellor of the Exchequer indicated in the course of his most interesting and illuminating remarks. Whatever the position, neither of them spoke simply on the basis of the published monthly figures.

That leads me to ask the question whether any really useful purpose is served in present circumstances by publishing those monthly figures which are, from what has been said by all those eminent and hon. and right hon. Gentlemen, misleading in themselves. I should like to think we had reached the situation where, instead of publishing monthly reports on the Exchange Equalisation Fund, we should do so once every three months, and then finally we might reach the stage when people were no longer interested. After all, before the 1914 war we had no reserves, as such, and there was no Exchange Equalisation Fund. People were willing to leave their money here because it was fully convertible into any currency they wished. I feel that we are moving towards a similar position again, and in that belief I suggest that the monthly publication of a figure admittedly misleading no longer serves a useful purpose.

It is always a relief to hear from hon. Gentlemen opposite their great belief in maintaining the £ sterling and their determination to do so. We share that belief and determination but we sometimes express it differently. Incidentally, I do not think that all the remarks we have heard today will equally strengthen that admittedly tender plant.

In 1947, when the great disaster of premature convertibility struck us and we seemed to be bleeding to death, we still had a gold reserve of £600 million. Those were not devalued pounds. In other words, we had a gold reserve of 2,400 million dollars. The gold reserve today is not markedly different. For reasons which I have given already the figures are not very straightforward, but we can take it that we have 2,500 million dollars in gold.

In the words of the Financial Times, the available reserves amount to …about twice the sterling balances held by, and the acceptance credits outstanding to, foreigners outside the sterling area…". Although that is a very convincing amount to hold, it is not enormous and it cannot protect us against a permanent imbalance in our terms of trade.

Speaker after speaker has stressed the fact that this Measure has nothing whatever to do with balance of trade conditions. It will not alter the balance of trade one iota and despite the progress we are making, I am sure the actual gains by London in foreign exchange and other markets will be larger than the small figure of £100,000 mentioned by the Leader of the Opposition. They are obviously not sufficiently substantial in themselves materially to affect our balance of payments. Therefore, there can be no doubt of our duty as responsible Members to stress to our constituents the fact that the balance of trade position is everything to us, and that nothing we have done today has reduced its importance in any way.

7.4 p.m.

Mr. M. Philips Price (Gloucestershire, West)

The hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) has referred in an interesting way to what happened in 1947, and we can agree that things have improved very much since that time. The difference between the two sides of the House is on the question whether this is the right time to take this step. We can all agree that some such step will be necessary sooner or later; the question is whether it is right now. In my few remarks I hope that I shall be able to give a few reasons why I think it is unwise.

I, and I think, also, my right hon. and hon. Friends on this side of the House, have no particular prejudice against the City of London, but I can remember the time that we were on the Gold Standard and the policy of Mr. Montagu Norman, the Governor of the Bank of England. He was a very strong man who certainly dominated the policy of the Government of that day. At that time, in the words of a famous American statesman, we were being crucified upon a cross of gold. I remember well Mr. Montagu Norman coming to this House and talking to a number of us about the financial policy of the country. He said that he would not like to be responsible for the direction of the Bank of England if we went off the Gold Standard, and within less than two months we were off it and have been off it ever since.

We all recognise the value of the City of London in earning money which supports our balance of payments in various ways, such as by interest and discount, and so on, on money coming here. On the other hand, there is no use disguising the fact that its activities can sometimes dominate the industrial interests of the country. I say that because an increase in the Bank Rate may enable certain operators in the City to earn money, and this may disastrously affect our industrial interests.

It is things of that kind which are responsible for those of us on this side of the House wondering whether we ought to take this step now. Only recently we have been through a serious crisis. We have shut down on expansion, we have even reduced production, and we have had a very high Bank Rate because of the position of the £ sterling. I will not say that some of those measures were not necessary, but we join issue with the Chancellor on quite a number of measures which he adopted to attain that end and which we think were wrong.

There can, therefore, be no doubt that at times the financial interests of the City, or of some people in the City, and the industrial interests of the country conflict. We have now a large section of our workers unemployed. It is true that this is not as bad as it was in the great financial crisis of 1931, when we had 1½ million unemployed, but this danger is always lurking.

The issue today is not quite the same as it was in 1931, since now we have a managed currency, but we are still in a difficult position. We are a small island, dependent on our export trade, and our balance of payments should be the lodestar of our financial policy. I would not object to the action taken by the Government in the Bill if it were clear beyond peradventure that no dangers lie ahead, but we on this side, who do not want to spread alarm and despondency, would be lacking in our duty if we did not point out the dangers which we think lie ahead and which make a step of this kind just now a rash step.

The Chancellor said in his speech that we cannot have a closed economy. I agree, but we cannot have an unstable economy, either. How can we be sure that the circumstances which have enabled us to get this large surplus on our balance of payments are likely to persist? I should say that they are most unstable. That is why the Chancellor ought still to retain a number of controls and means by which he can prevent things getting out of hand. We are glad to see that the commodity markets are now firm after their movements over the last eighteen months. That very fact, although it has enormously helped us in our balance of payments, meaning that we have lower debts with other countries, may bring trouble because former dependencies of ours which are now independent are unable, because of their raw material situation, to buy so much from us. There is a danger. Can we overcome it? The next six months may show whether we can. We all hope that we can, but it is by no means certain.

India, one of our former great dependencies, now has balances with us. She has an enormous five-year plan of development, absolutely vital for such a country, and she has to face the problem of a population increase out of proportion to the increase in her food resources, a very serious situation. We must help India in every way we can by letting her have all the balances possible and also helping her with loans and advances. This is one of our great duties, not only in respect of India but in respect of countries in Africa, for whom we still have responsibility or to whom we are still very close. All that means that there will be a severe strain upon sterling, because it means that we give credits but do not receive immediate payments. That is another example to show that the situation is by no means certain and why a step of this kind seems to be unwise.

The Chancellor reminded us that the contributions to the International Monetary Fund are being increased. I believe that we have to find £60 million. That is a further burden, a very right and proper one, because if world trade is to be on a sound basis we must assist the countries which cannot for a year or two pay for our exports and must give them credit. All these are difficulties which must be met.

Then there are our reserves. Are they such that we can feel quite confident about them? According to the Chancellor, we have considerable commitments in debts to the United States and Canada, to the International Monetary Fund and to a number of other countries and institutions, which have still to be met and will reduce the figure which he gave us. We still need a flexible policy to stop any danger which may arise from any of the circumstances to which I have referred. We must not have our hands tied and be unable to take steps when a danger of this kind arises.

There is the whole question of American investments over here and throughout the world, which have been very instrumental in assisting our balance of payments and assisting other countries, like France, which is always in difficulty with its finances. That is an uncertainty. We do not know what the attitude of Congress is likely to be. Congress is liable to have sudden waves of emotion and may suddenly take steps which the President and the State Department may be against, but which they have no means of stopping.

As the Leader of the Opposition pointed out, the great advantage of the European Payments Union is that it enables the European countries to help each other by credits. If there is a temporary difficulty, and payment cannot be made by one country to another without great embarrassment, credits can automatically be provided. That is an example of the flexibility to which I have referred.

The policy of the Government, however, like the policy of the Conservative Party generally, is to leave things to work themselves out. That may be all right when the weather is fair; but I am not so sure that the weather is fair. There are still some storms ahead, though they may not be as great as in the past. I believe we can see the dawn coming, but there are still some severe storms on this side of the horizon.

Private financial interests must not be allowed to have a free hand. The Chancellor must always keep the right to intervene in the public interest. I return again to the great crisis over the Gold Standard in 1931, when the interests of the City conflicted with the interests of industry and we had 1^ million unemployed. Miners, steel workers, engineers and others were passing through a very serious crisis of unemployment and depression. Although, in 1931, we were being crucified upon a cross of gold, I feel that the danger now is that we may be left to the mercies of a laissez-faire system.

7.18 p.m.

Viscount Hinchingbrooke (Dorset, South)

The Labour Party has given another example of its propensity to diehard reaction. The speech of the hon. Member for Gloucestershire, West (Mr. Philips Price), whom I have always regarded as the most reactionary Conservative of them all, was no exception. It was one long tale of woe, alarm, fear, and anxiety about the future.

What comes out increasingly from the speeches of hon. and right hon. Gentlement opposite is their desire to hang on long after the need has passed and the mood of the public has changed to the ancient and creaking machinery which they themselves invented in 1945 or thereabouts. Nationalisation is an example. Long after the time when nationalisation has failed in many ways, and the ordinary individual wishes to see drastic changes made in it, hon. Members opposite hang on to it and even express the intention to renationalise.

It is the same with these monetary devices. The Leader of the Opposition and the hon. Member for Manchester, Cheetham (Mr. H. Lever) hang on desperately to the baby of E.P.U. long after it has been thrown out with the bath water of transferable sterling, not realising that they have nothing left with which to wash it and that it is no use keeping this piece of machinery any more. The Leader of the Opposition is, at any rate, consistent; he regretted the departure of both. But the hon. Member for Cheetham, who generally delights the House with sporadic interventions from the North on sociological and literary subjects, today bored us to tears on a subject about which he knows nothing and was wildly inconsistent on the major theme which he propounded.

The hon. Member regretted the departure of E.P.U., but he liked convertibility. What is the purpose of trying to keep a rusty old machine alive when it is not even designed to do anything in the economic and monetary world into which we are now moving? How much more free and enlightened is, if we like to use the old-fashioned economic term, the laissez-faire apparatus of full convertibility applied to the life of the individual and the trader than even the most perfectly devised economic machinery set up in Western Europe of which the hon. Gentleman can possibly conceive.

The Chancellor, as he always does, delighted the House today in a speech at times contemplative and philosophic but in the main stream of advanced and enlightened opinion throughout the country, certainly on these benches and I am quite certain in the international trading centres of the world. It was the pure gospel of the right trading philosophy for this country and I was very delighted to hear him expound it. I should also like humbly to congratulate him on the sudden, perhaps, but not wholly unexpected move which he made at Christmas towards the partial—I use that word advisedly—convertibility of sterling and on securing the assent of our important partners in Europe for it.

I believe myself that that move could have been taken a year ago had it not been for the unfortunate disputes which took place with regard to the level of Government expenditure. The one thing that has made convertibility possible is the cessation of inflation. Once we have the atmosphere right for convertibility it does not really matter if our gold and dollar reserves are not enormous. They can be nothing at all if the psychological atmosphere is entirely right.

I think that it was getting right in December-January of last year as a result of the wise steps which the Chancellor at that time took and the Government wholly approved of. We could have had convertibility a year ago. However, we have got it now and the question is whether we advance from there or whether we do not.

I missed part of the speech of the Leader of the Opposition but I am quite sure that he would not have mentioned this subject, because he hates the whole thing. Little, if anything, has been said about the next stage in convertibility which may not be of enormous importance from the trading point of view but from the point of view of the liberty of the subject is of very great significance—that is to say, the total convertibility of resident sterling.

Four nations of the world have a totally convertible currency. No one complains about the United States and Canada. They have had it all along. Switzerland has had it all along. No one can complain of the fact that Western Germany has now full convertibility and everyone in Germany, no matter whether traders or private persons or people with a little capital or ordinary people who want to go abroad, can do so at will. We do not complain about that; we note it. We note where Germany is today and where she was 10 years ago and we wonder whether Britain should be very far behind in the pursuit to full convertibility of her own currency so that British individuals, not necessarily the rich and prosperous businessmen with enormous backing and allowances from the Treasury, but individual people—I will say more about that later—can go abroad.

Mr. Arthur Lewis (West Ham, North)

The half-million unemployed, for instance.

Viscount Hinchingbrooke

I have not the slightest doubt that when the hon. Gentleman makes expeditions to certain parts of Central Europe he does so with adequate trade union backing.

It would not be a very dangerous thing, it seems to me, to take this step and take it now. It may have been a little risky to do that all in one fell sweep. We have to see what will happen. The major step is convertibility of non-resident sterling but, as the Chancellor himself pointed out today, when it was taken sterling was at 2.80 dollars and today it is at 2.81 dollars. Moreover, this is the season for making such changes. In a few months time we shall get to a season which is a little bit more dangerous. Many times convertibility has been brought up to the boil. The present Home Secretary and a great many economists were arguing in favour of convertibility in the summer of 1955 and then the psychological moment passed and the run on sterling came through the natural trading causes which take place in the autumn of the year. I am sure that the Chancellor has very much in mind that if full convertibility is to take place it must take place within the next six months.

There is an argument about the floating exchange rate. The hon. Member for Gloucestershire, West seemed to despair of the circumstances that prevailed in 1931. I quite agree that unemployment then was disastrously high, but, as I pointed out in an intervention to the hon. Gentleman the Member for Manchester, Cheetham, who did not deal with it, no disasters in trading took place between 1931 and 1939.

On the contrary, sterling was expanding and trade improving and had it not been for the advent of Hitler—a piece of violent wishful thinking—the whole trading system of the world and of our own country and employment would have improved as the result of going off gold in 1931.

Mr. Philips Price

Was it not because we went off the Gold Standard?

Viscount Hinchingbrooke

We did go off the Gold Standard and I want us to go off the Gold Standard now, or partially so, as I will explain in a moment. We had the benefit of the Exchequer Equalisation Grant and it operated on this rating system just as it would operate today.

I notice, on reading Article 4 of the Final Act of Bretton Woods, Section 5, that it is clear that we are estopped more completely from a system of a free £ than we were in 1931. We had then no international engagements. Today, we have. If we wanted to free the £ entirely and allow rates to go completely free we would have to approach the International Monetary Fund under the provisions of the Final Act of Bretton Woods, 1945.

I wonder whether attention might be given to the possibility that widening the rates at which sterling is quoted against the dollar might not take place under Article IV, Section 5 (c) which reads: When a change is proposed, the Fund shall first take into account the changes, if any, which have already taken place in initial par value of the member's currency as determined under Article XX, Section (4). If the proposed change together, with all previous changes, whether increases or decreases, (i) does not exceed ten per cent, of the initial par value, the Fund shall raise no objection. That is to say, there is liberty, after consultation with member countries, to devalue or revalue our currency by 10 per cent. That is a question which I want to ask, but I do not expect an answer today.

Cannot we now go to the Fund and say, "We wish to be allowed to widen the rates by 10 per cent, permanently". That is to say, the dollar would be able to fluctuate—taking it at 2.80 today— between limits of 2.52 and 3.08 without the loss of gold and dollars, or without the gain of gold and dollars, as the case may be. I suggest that is a possible means which might be explored of gaining a certain freedom of manoeuvre for the £ without violently impinging upon our international obligatons.

Apart from the possibility of doing those things, can the Government hold the situation as it is at present without resorting to full convertibility? The front is crumbling, or will crumble from this time on. Just as it becomes extremely difficult to manage the multiplicity of currencies without doing something about transferable sterling, so it will be very difficult, having got rid of transferable sterling, to allow the external owner of sterling to draw down on English balances without allowing the British holder to do the same.

For example, what happens if someone desires to go on a holiday? Formerly, one took one's money from the Bank of England and used the amount of the travel allowance, and only that. What is to prevent an individual sending a cheque in respect of a holiday abroad to a banking account of a non-resident holder of sterling?

Mr. H. Lever

Try it and see.

Viscount Hinchingbrooke

Many transactions take place between the Smiths and the Joneses. Supposing it is not Jones, but Johannes. Supposing that Johannes, as he will be entitled to do after this relaxation, draws out the money in his sterling account. Of course, these transactions would have been discovered even if I had not disclosed the possibility, but I want to disclose the possibility because I do not agree with a system which perpetuates exchange control for British subjects long after people overseas have been entitled to draw upon our currency.

I shall give a more striking example. I shall not waste much time on it, because there is no doubt that much will be said about it next week. There is a certain proportion of the Egyptian sterling balances not earmarked for discharge against the claims of British traders, the Shell Company or Suez Canal Company owners. The calculation is difficult because we do not yet have the figures, but let us suppose that it is a sum of £50 million. Will Nasser be able to draw upon that £50 million at will and pay it to the Russians for his equipment, or to the United States for his equipment? I presume that he is to be able to do that. Can we defend a situation like that and yet prevent people resident in the sterling area from doing what they like with their capital and with their earnings?

That is not a situation which can last for very long. Why should not British personal capital be exported to foreign countries if people so desire? Are we not trying to create a freer world society for persons and goods? We have had it for traders who can more or less do as they like, as can important British firms. However, relatively humble people cannot now satisfy their desires in the normal way unless they resort to the most elusive tactics.

If one wants to spend a holiday in North Africa or in the South of France, one may have to do it on the royalties of a book sold in the United States or by entering into an au pair arrangement with a family which wants to come to this country. Is that legal or illegal? Nobody knows, yet the thing is done on a vast scale. I hope that before long we shall hear the news that travel allowances are to be abolished and that people are to be allowed to move themselves and their property to any part of the world at will.

There does not seem to be any standard of equality in these matters, either at home or in the sterling area. Great dukes can leave their estates in the Midlands and move to Central Africa and make a "killing" and yet a humble historian who wants to write a work on a holiday in the South of France, Spain, North Africa, or somewhere else, where there is a little sun and refreshment, has to get the permission of the Economic Secretary to the Treasury and officials of the Bank of England. They will run him on a shoestring in those conditions. It is absurd. I hope that within the next two or three months the Chancellor will find it possible to put Britain at last into the same position as Western Germany, a country over which, not long ago, we were supposed to have been victorious.

7.35 p.m.

Mr. John Diamond (Gloucester)

The noble Lord the Member for Dorset, South (Viscount Hinchingbrooke) appealed for fair shares for the rich to travel more easily from this country, but it was an appeal which did not strike a sympathetic note with me. I regret that he should have started his speech by criticising my hon. Friend the Member for Manchester, Cheetham (Mr. H. Lever) on the ground that my hon. Friend did not know what he was talking about. My hon. Friend speaks with great knowledge of these matters, very differently from myself, since I approach this subject with considerable timidity and humility, recognising that it is very technical and a subject on which it is quite possible to be wrong.

Certainly, it is the correct approach to learn from one's experience, and the noble Lord might well think so, too. He heard my hon. Friend the Member for Gloucestershire, West (Mr. Philips Price) remind the House of his recollections of the financial crisis of 1931. He heard his hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), with his great experience and knowledge of the City, reminding the House of his views about the financial crisis of 1947.

None of us who was in the House in 1947 will readily forget what happened then. What happened then was what the noble Lord is criticising us about, calling us Conservatives or even worse.

Viscount Hinchingbrooke

Diehard reactionaries.

Mr. Diamond

He said that we were holding on to outmoded and unnecessary controls, presumably as happened in 1947.

The noble Lord has not given this matter any thought. This is not a matter for violent controversy. It is a matter of timing, about which there can be opinions and which both sides should consider carefully. It is true, as the Chancellor said, that our ultimate objectives are identical, to have a strong £ to increase international trade and Britain's share in it, and for that purpose as soon as possible to have a strong and convertible £"as soon as possible", meaning when it can be done without damage to wider interests.

The Government have made a mistake in timing. As the Chancellor will remember from his nursery, there is a time and a place for all things. The time to introduce a further measure of convertibility is not when we are in a period of recession. That that is the case has been underlined lately by a chorus of bank chairmen—I do not know whether "chorus" is the right word; perhaps a more suitable collective noun would be a "credit" of bank chairmen. However, the bank chairmen are unanimous in describing the present situation in strong terms and as a period of recession. What the Government are now doing is to make our position slightly more vulnerable to external financial weather.

I know they say that this state of affairs has been going on for some time; in fact, they have had to maintain transferable sterling, and, therefore, there is no major difference. There is a difference. Previously we have, as it were, been like a man who has an overcoat in the cupboard which he has not used because he has not needed it. That overcoat is now being destroyed. That is satisfactory so long as the weather continues mild and we do not need to wear overcoats.

But what happens when the external financial climate gets bitter once more, as it is liable to do from time to time, and we go to the cupboard and find it bare? That is what is happening with the removal of this protection which, admittedly, we have not used for some time.

Mr. John Arbuthnot (Dover)

The rats got at the hon. Gentleman's overcoat a long time ago.

Mr. Diamond

That is not quite true.

Mr. H. Lever

And it is not very clever.

Mr. Diamond

Anyone with experience of what happened as recently as September, 1957—I am not referring to the Gloucester by-election, but to the financial crisis—will not speak too lightly of our need for safeguards in difficult external financial circumstances. If, as I say—and as the banking chairmen seem to agree—we have a period of recession, what steps would we wish to take, and to what extent would those steps be assisted or retarded by what the Government propose to do?

Presumably, the steps we would take to encourage the economic activities of the country would be to lower interest rates; to increase investment; to undertake larger overseas lending; to stimulate increased consumption. All these are the normal steps which would be taken, and I do not think that there will be any argument as to the wisdom of doing these things, were it an appropriate time to do them and we could do so with safety. All these steps are rendered slightly more dangerous by what the Government are proposing.

The Paymaster-General (Mr. Reginald Maudling) indicated dissent.

Mr. Diamond

It is no use the Paymaster-General shaking his head. I would not accept his head shaking against the evidence of The Times. It is always a good thing to quote The Times, because generally one gets good sense from it. It is biased in favour of the Government, if anybody, and, therefore, one can use it in an argument in a case like this. It has the added advantage that what one says is likely to be reported in The Times on the following day. The Times said today, in its leading article: The various types of encouragement which bank chairmen have suggested, such as easier money, stimulants to consumption, and overseas lending and investment, would all in fact be somewhat safer in the short run with an inconvertible pound.

Mr. Muudling

At the risk of never being reported in The Times again, may I say that I think that what appears in The Times is not evidence, but opinion?

Mr. Diamond

It is an opinion which I share. I apologise for the fact that I read the whole quotation and I did not put in a stop which did not appear—and in that I did not follow the precedent set so ably yesterday.

Assuming that I am right in saying that all the steps we wish to take to assist the country out of the recession in which we find ourselves are rendered slightly more difficult as a result of what the Government are proposing to do, one has to balance the two and see which is more important and useful to the economy of the country. T find these things very difficult to reduce to simple terms in order to explain the situation to a constituent.

A constituent may come to an hon. Member and ask why are there not more houses. The answer is that at the moment there should have been more houses, because the Conservative Government have a very good record on houses—one has only to ask the Conservative Government to have confirmation of that. There would have been more houses but for the fact that the cost of borrowing money is so great that it has made some local authorities clamp down completely on building houses; and so there is not a house for the constituent who asks that question because of the excessive cost of borrowing money.

The constituent may ask why the cost of borrowing money is so excessive. The answer is to protect sterling; to encourage funds to come into this country at a time when funds are going out we are considering making the £ even more convertible.

Let us go on to another item, investment abroad. Surely nobody would deny that the greatest step which could be taken by any Government of this country to assist world peace would be to invest in the underdeveloped countries. We are unable to do this—which would assist those countries to take more imports from us and so assist our economy—because, again, we have to retain funds to protect the £.

Let us take a third example. What if we invest a great deal more—as we should—in capital investment in our industries and get economic activity at a much higher level, which would produce further imports? There would be the problem of paying for the imports. All these are problems which have been increased by the present proposals of the Government. That would be a further difficulty which we could not face with the same security against temporary balance of payment difficulties, now that we are shorn of the protection which the Government are removing today.

How am I to explain to an unemployed aircraft worker in my constituency, for example, that the Government are not prepared to make an adequate Exchequer contribution to his superannuation fund because Herr Schmidt, in Zurich, does not like that sort of social policy? How do I explain to an old-age pensioner—who has not the money to buy the coal which is being piled up in the Forest of Dean, in the constituency of my hon. Friend the Member for Gloucestershire, West (Mr. Philips Price), during this freezing weather—that the Government are not prepared to increase old-age pensions at the moment because such a policy may be frowned on by Herr Braun, in Berne? Do not think that these policies of ours do not affect our partners? They do.

This is exactly what the right hon. Member for Flint, West (Mr. Birch) was referring to but he was putting it the wrong way round as usual; he was saying we had to pay for whatever we did. That is quite right. Our policies are, in the long run, good policies, good for the country as a whole. Yet they are totally misconceived by foreign bankers who dislike them—and, therefore, lose faith in us and them—and so they are going to lead to difficulties. It is right that we should be protected from such stupidity until our policies have been proved to be wise. For all these reasons it is wrong that at present, in a period of recession, we should take any action which, however slightly, might mitigate against the immediate recovery which is needed in the country.

I say that hon. Members on this side of the House, much more than hon.

Members opposite, are anxious to achieve the necessity for a really strong £, based on actual assets and wealth produced by people who are fully engaged and not 20 per cent, under-employed, as are our factories at present. Those factories should be fully engaged in producing the wealth which is the real backing for the £, as any banker in this or any other country will agree. We wish to achieve that. We say that the Government are prejudicing that achievement in favour of something which is not reality at all. The Government are searching for the shadow instead of producing the substance.

7.47 p.m.

Mr. John Arbuthnot (Dover)

The hon. Member for Gloucester (Mr. Diamond) has reiterated a fallacy which has permeated a good many of the speeches made by hon. Members opposite. He put the matter in graphic terms by describing the use of transferable rather than convertible sterling as his overcoat. What he does not seem to have appreciated is that the overcoat has been non-existent from 1955 when we took the decision to support the exchange rate for transferable sterling. We have had no option ever since 1955 and the overcoat just does not exist.

Mr. Diamond

I apologise for interrupting the hon. Gentleman so soon, but if this has been the position since 1955, why are we wasting our time here today? What are we doing now and what were we doing in 1955?

Mr. Arbuthnot

That point has been answered several times so I shall not go into it again. The apparent protection to which the hon. Gentleman refers is purely illusory. The hon. Gentleman is rather like the king in the fable who was getting himself a coat and it had to be made of extremely fine material. The king was not satisfied with the first coat so he sent it away and chopped off the head of the man who made it. Then he got a coat of even finer material but, not being satisfied with that either, he chopped off the head of the second tailor. Ultimately, he got someone to make him a coat which he deluded himself to be of extremely fine material so fine that it was invisible, and which in fact did not exist. The king was satisfied with it until some of his courtiers found that he was running about naked and started to laugh. That is the position in which hon. Gentlemen opposite find themselves at the moment in thinking that transferable sterling provides us with any more protection than convertible sterling.

The Leader of the Opposition was less than fair to my right hon. Friend the Chancellor of the Exchequer in suggesting that my right hon. Friend had said that we no longer had a dollar problem, that dollars were easy from our point of view, and that it did not matter how many dollars we spent. My right hon. Friend has never taken that line—either in this debate or before. Right hon. and hon. Gentlemen opposite should not accuse my right hon. Friend of suggesting that a dollar problem does not exist. Of course, a dollar problem exists.

This Bill is just one step, and a small step at that, in the general process of enlarging the freedom of trade and exchange which is generally regarded as desirable on both sides of the House and ought to be welcomed. It is not a major step since, as my right hon. Friend pointed out, it merely gives de jure recognition to a position which existed de facto from the time at the beginning of 1955 when we took the decision to support the exchange rate for transferable sterling. In recent months in fact transferable sterling has been marketable in exchange for dollars at a price which from time to time has had to be helped out by the Bank of England and which has been roughly within 1 per cent, of the official sterling-dollar rate.

A point which it is very necessary to get over to hon. Gentlemen opposite is that, whatever happened, transferable sterling would have had to be supported no less than convertible sterling which now takes its place will have to be supported. No additional strain therefore is being put upon the economy by the Bill.

Hon. Members opposite have criticised the timing of my right hon. Friend. If it is generally accepted, as I think it is, that the freeing of trade and exchange is desirable as an objective, in my view this move could not possibly have been better timed. The dollar, whether rightly or wrongly, is relatively weak in comparison with what it was some months ago and with what it may become again. This is in part, as The Times pointed out, because so often the same goods are available elsewhere promptly and at lower prices than they are from dollar sources. There is no longer therefore the intense hunger for dollars that existed even a short while ago.

A further factor which indicated the timing of this move is that France, for the first time since the war, has a strong enough Government to take the drastic measures necessary to enable France to take her part with us and to enter into the convertibility system. To have neglected this opportunity would have been criminal folly of which no Conservative Government would have been guilty, although apparently the opposite side does not feel the same way about it.

In the long run the proof of the pudding is in the eating, and, this particular pudding is palatable. As my right hon. Friend the Chancellor has pointed out, transferable sterling was at 2.79½ before his announcement and convertible sterling was at 2.80½. Now the rate is 2.81 for the two merged together. It seems clear that anyone who looks at this matter objectively—your international banker for example—must feel that this has been the right moment for us to take this further step towards freedom. Perhaps we are not the people to judge best and most objectively since we are too close to what is going on.

If we ask ourselves whether the mythical Swiss banker agrees with the Opposition Amendment that this Measure makes more difficult the achievement and maintenance…of industrial expansion and full employment it will be clear from the way in which the rate of exchange has improved since the announcement was made that the objective observer outside agrees with the way in which Her Majesty's Government have handled it rather than the way in which the Opposition would have handled it had they been in power.

The Leader of the Opposition expressed fears about what the next steps were to be and said that while he did not mind this so much his real fear was that further freedom would follow. Dollar imports, he suggested, would not be easy to withhold from United Kingdom citizens, freedom would come for non-resident capital and eventually for the export of British capital. Well, that is an objective to be pursued but it is right to proceed cautiously. My right hon. Friend has been right in taking one step at a time.

We all look forward to the day when United Kingdom residents will have the same freedom of choice that is now available to others. I believe that that time may not be far off. Unfortunately, of course—and this is something that the Opposition must bear in mind—the greatest threat to sterling and to sterling balances is the fear that the Opposition might conceivably win the next General Election and put into practice some of the inflationary ideas such as we were discussing yesterday, for example. The Opposition can do much to set at rest that real threat to sterling.

The Opposition Amendment fears that it will now be more difficult to maintain industrial expansion and full employment, but I do not think that is so. It is true that the Government have found it necessary to stimulate employment recently by encouraging consumer demand, but that is only part of what the Government will have to do. It will undoubtedly be necessary to stimulate further industrial capital expansion as well if we are to keep pace with other progressive industrial countries. We need in this country more modern equipment. It is common knowledge that the capital equipment behind the working man in the United States is far greater than the capital equipment behind the British working man. We also need a greater use of the existing capital equipment behind our people. We must give more stimulus to greater production and greater use of the capital equipment we have today.

My right hon. Friend's opportunity further to stimulate industrial expansion will arise, however, when he opens his Budget. He has already shown his sense of the need for greater production by the measures included in the last Finance Bill, for example the larger initial allowances. If in the next Finance Bill he finds himself able to take a smaller slice of the national income in taxation and leave more for individuals both to save and to spend he will be doing more than anything else to encourage industrial expansion.

If in addition to that he finds it possible to give tax inducements to encourage still further increases in savings, particularly savings put into industry and savings by the small man into whose pockets by far the greater proportion of the national income goes, we need have no fear for expanding industrial production.

Taking a further small step such as we are taking in this Bill to enlarge the freedom of trade and exchange is not I submit a threat to production and employment. On the contrary, it is a stimulus to both and a challenging opportunity in line with the spirit of enterprise which has made this country great. I support the Bill.

8.2 p.m.

Mr. John Cronin (Loughborough)

The hon. Member for Dover (Mr. Arbuthnot) made a very helpful speech and I find myself in agreement with much of what he said. I was a little disappointed, however, that he should lend some currency to the idea that a Labour electoral victory would lead to a flight from the £. His own Front Bench said no such thing because it was probably felt to be anti-British and not to make good sense, so I do not think he need have repeated the suggestion.

The general feeling on this side of the House is, I think, that the Chancellor by this step to make transferable sterling convertible puts the domestic economy of the country rather at the mercy of foreign influences. The Chancellor normally directs the economic traffic but now he is becoming rather like a robot traffic light on which foreign speculators operate the buttons. Before I develop this idea, I wish to say that the short-term effects of the Chancellor's action are obviously good. The hon. Member for Dover has pointed out the satisfactory effect it had upon the £ sterling.

No one will deny that, looking at it even from the long-term point of view, it is quite clear that the liberalisation of payments throughout the world is as an ideal a desirable thing, but of course exactly the same arguments apply to the liberalisation of trade. We may talk in terms of ideals, but I do not think anyone will seriously suggest that we should make a big reduction in our tariff, even if it is in the interests of world trade. We must think rather more in practical terms.

Of course there will be another effect, a long-term one, in that there will be a big increase in the turnover of the London foreign exchange market, but that, after all, is a negligible sum compared with our balance of payments.

In his speech, the Chancellor made several statements which I must say I found some difficulty in accepting. He pointed out that whenever transferable sterling had not been supported by the Exchange Equalisation Account there was a tendency for commodity shunting to occur. As my right hon. Friend the Leader of the Opposition pointed out, there is a good deal of doubt whether more gold is lost by commodity shunting or by a fall in the transferable rate. He also said that any fall in the transferable rate would cause a weakness in sterling. Unfortunately, that consideration applies equally well to any fall in our gold and dollar reserves. We merely transfer the effect of one problem to another.

Sir Peter Roberts (Sheffield, Heeley)

I do not know whether the hon. Member heard my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) who dealt with the question of commodity shunting and loss of gold. I do not think we can accept any contrary view unless some argument is put against that.

Mr. Cronin

I thought the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) made an admirable speech. I listened to it with great attention, but I did not think his argument showed that commodity shunting had caused a loss of gold and dollars compared with a fall in the transferable rate.

The Chancellor rather made a point that in taking this action we acted in concert with most of the other countries of Europe. I do not think that is really a particularly powerful argument, because we are doing all the other countries of Europe a favour by acting with them. We are solving their dollar problem. In future they will be able to get dollars in exchange for our sterling, so it would be quite extraordinary if they were not in favour of this step on those general lines.

The Chancellor said that the winding up of the European Payments Union was desirable because France had exhausted her credit. Certainly one has to concede that the European Payments Union was working less efficiently on account of the financial difficulties of France, but it is rather unfortunate that it should be wound up just at the time when France had put her financial house in order and when those difficulties are not likely to exist in future, particularly with the very substantial loan France is getting from Germany.

This is a difficult subject. I would concede to the Economic Secretary to the Treasury that this decision is a marginal one, but unfortunately most economic decisions are marginal. Although there are arguments both for and against formal convertibility, it is not easy to come to a definite decision. I think it rather important that we should try to fight our way through the undergrowth of debate and go back to some first principles to see where they lead us.

It is very difficult to have fixed first principles in economics, because it is a subject in which there are so many factors which are variable, but the whole basis of this convertibility controversy is the question of domestic price levels. If one has a fixed rate of exchange and if the domestic price level rises there is a tendency for exports to become more expensive and therefore for imbalance in the balance of payments—an adverse balance and a run on the reserves. When that happens, and in these days even before that happens, there is a tendency for speculation against the £, causing a further run on the reserves. I think the right hon. Member for Flint, West (Mr. Birch) discussed the subject of speculation very thoroughly.

In full employment, with this expansion of our economy, there is almost invariably a rise in the domestic price level. The result, of course, is a tendency for the gold and dollar reserves to decrease with speculation against sterling. For all practical purposes, so far as we are concerned there are only two world currencies, sterling and dollars, and the speculation against sterling is vis-à-vis the dollar. The protections this country has against speculation or running down of the gold and dollar reserve are three. One is devaluation, which of course is very unsatisfactory. Devaluation would cause an enormous loss of confidence in the £. We have found it does not help this country very much because, although we get slightly better exports, this is more than counterbalanced by the increased cost of imports of which the level does not apprsciably drop.

The second way to defend the gold and dollar reserves when there is an increase in the domestic price level is by taking some action to decrease the domestic price level.

The third way is to exercise some form of control on transactions in sterling either by controlling the exchange of sterling for dollars or controlling the import of goods from dollar areas. If we leave out devaluation, it seems to me that the only two effective ways of protecting the gold and dollar reserves are by action taken to keep down the domestic price level or by some form of control over sterling-dollar transactions. The Chancellor of the Exchequer has made a tremendous onslaught on our controls of sterling-dollar transactions. As a consequence, we are left only with the policy of reducing the domestic price level whenever there is an expansion of our economy. If that happens, we are very vulnerable when we are unable to control foreign transactions.

The Chancellor told us this afternoon that transferable sterling amounted to about 700 million dollars. He was referring merely to static transferable sterling, but I think the Economic Secretary will agree that, in addition, there are about 600 million dollars held by non-territorial organisations and also that the turnover in transferable sterling is about 1,000 million dollars a year. To put it in simpler terms, half the world's trade is done in sterling.

Our reserves, which the Chancellor told us today are about £1,100 million, are quite exiguous and inadequate for that purpose. I am sure that no hon. Member will contest that statement. We are extremely vulnerable to any speculation causing the gold and dollar reserves to fall. The only weapon of defence whenever there is speculation against the £ or a substantial drop in the gold and dollar reserves is an attack on our domestic price level.

In September, 1957, we had a very vigorous onslaught by the right hon. Member for Monmouth (Mr. P. Thorneycroft), when he was Chancellor of the Exchequer. We had the phenomenally high Bank Rate of 7 per cent, and some very severe restrictions on credit. As a consequence—I think that no one will disagree that it is a consequence—we now have, by our standards, a very large measure of unemployment.

It so happens that the measures taken by the right hon. Member for Monmouth in September were very powerfully assisted by a very large change in the terms of world trade, because of the difficulties of the primary producing countries, and also by the weakness of the dollar and the flow of dollars and gold from the United States to Europe. It has been suggested, as my right hon. Friend the Leader of the Opposition pointed out earlier, that these auxiliaries were so important in helping us with our economy that the change in the Bank Rate and the credit restriction measures were not of much significance. That is probably an extreme view, but we must not assume that next time there is a crisis in our gold and dollar reserves, and an external trade crisis, we shall necessarily have the advantage of favourable terms of trade or of gold and dollars flowing from the United States into Great Britain.

It is clear that if there is another crisis it may well be that much more severe measures will be made necessary to reduce the domestic price level—much more severe even than those adopted by the right hon. Member for Monmouth in September, 1957. That means, in simple terms, that whenever we wish our economy to expand, and whenever there is a danger, therefore, of the domestic price level rising, the Chancellor must look over his shoulder and wonder what will happen if there is speculation against the £. That will be his constant fear.

I do not think that there has been a time for a long period when it has been more necessary than it is at present for us to expand our economy. We are suffering at the moment from a very severe shortage of capital investment. I think that the Economic Secretary will agree that the money to be spent on capital equipment in 1959 will be substantially less than that spent in 1958. As a consequence, we shall be faced with a very difficult competitive position. We shall be faced with the European Common Market coming into operation, and in the undeveloped countries we shall be faced with a good deal of competition by Soviet Russia and even Communist China. It is a very disagreeable thought that when the money which we spend on capital equipment is decreasing, Russia has just produced a seven- year plan which envisages an increase of capital equipment by 81 to 84 per cent. What will happen when Russia comes into direct competition with us in the undeveloped countries?

I will not pursue further this argument of how the Chancellor's hands are tied, but we ought to face some of the other direct consequences of convertibility. We have tried convertibility before. We tried it in 1925, admittedly when the £ was excessively valued, and it was a disaster and led to massive unemployment. A well-known book was written called The Economic Consequences of Mr. Churchill. I hope that no book will be written on the economic consequences of the present Chancellor.

As several hon. Members have said, we tried convertibility in 1947 and the result was disastrous. I should like the Economic Secretary to recall that our gold reserves in 1947 compare favourably with our gold reserves now.

It seems that the Chancellor and his assistants have acted rashly. I fear that the Chancellor must have had some extraordinary advice. Usually he has behaved with extreme caution and his economic measures have been of a gradual nature, but on this occasion he has belied his nickname of "Derick, or Little by Little" and has taken a remarkably rash step.

Referring to the direct consequences of a more particular nature of the convertibility of transferable sterling, the first thing which occurs to me is that we in this country are now compelled to finance flights of capital from Europe. If any wealthy Frenchman is dissatisfied with General de Gaulle's taxes and wishes to transfer his money to the United States, or if a Swedish millionaire feels uncomfortable in the proximity of Soviet Russia and wants to move his money to the New World, all he has to do is to put his hands on sterling and he can get the dollars for it. We shall be formally obliged to finance all the capital flights from Europe.

Sir P. Roberts

How is that position altered by the Bill? That could have happened previously. The only difference is that he would have had a different rate for the transferable sterling, but he could have done it before. The position has not been altered.

Mr. Cronin

He could have done it before only as long as we agreed to support transferable sterling.

Mr. Arbuthnot

We could not afford to fail to.

Mr. Cronin

We could afford not to. Two years ago transferable sterling fell to 2.6 dollars. There were no disastrous consequences then. There is an enormous difference between de facto and de jure.

Another consequence is that overseas countries could formerly build up a gold and dollar reserve only by having an export surplus with the United States or Canada, or other dollar countries, but now all they have to do is to build up a sterling surplus with formal convertibility. We have solved their gold and dollar problem for them simply at our own cost.

While talking about speculation, another point to be considered is what further speculation will there be against sterling. When there was always a possibility of sterling becoming formally convertible it was in the interests of the financial speculators, the little men in New York and Zurich, to buy sterling, but now that sterling is convertible, what further interest have they in buying sterling apart from ordinary trading purposes? The whole speculative position of sterling is now reversed. Sterling is in a bear position.

We on this side feel that the Government have taken an ill-advised step, although there are arguments for and against it. We feel that a wrong decision has been made and it is a decision which we cannot reverse and have no intention of trying to reverse when we come to power. One thing is quite certain. As has been said by my right hon. Friend the Leader of the Opposition, and as no doubt my right hon. Friend the Member for Huyton (Mr. H. Wilson) will repeat, come what may, we on this side will do our utmost to support the £ under all circumstances.

8.22 p.m.

Sir Peter Roberts (Sheffield, Heeley)

I am grateful to have the opportunity of following the hon. Member for Loughborough (Mr. Cronin). As I understood him, he did not take into account the statement which my right hon. Friend the Chancellor of the Exchequer made earlier, that over the last eighteen months the Treasury has been keeping a very narrow margin between the two forms of trading values. I do not think for a moment that the issue which we are now discussing is nearly as wide as a number of hon. and even right hon. Members opposite have tried to make it. I support and congratulate the Government on the step which they have taken.

The hon. Member for Gloucester (Mr. Diamond) spoke about advantages and disadvantages. I thought that he stressed the disadvantages too much, but did not sufficiently stress the advantages. To my mind, the advantages on this very narrow issue—and I want to bring it down to the narrow issue—is that we were supported afterwards by moves into convertibility by other Western European countries. I do not know what sort of speech the hon. Member for Loughborough would have made this evening if we had not taken other European countries with us; if we had moved into the position as it was before, when we were the only country to take this step and other continental countries did not follow. That is an advantage which both sides of the House must accept.

The second advantage which was also touched on by the Chancellor was that we are increasing the resources of the International Monetary Fund and also creating increased resources in the new European Fund. I believe that those advantages must lead to increased liberalisation of trade, greater production, and, therefore, expansion.

When I saw the Amendment of the Opposition on the Order Paper, I wondered what arguments they would adduce for voting against the Bill and against the Government's decision. I listened most carefully to the arguments. I do not believe that they were directed against the Bill or the Government's decision, but against two bigger and wider issues. One is the question of convertibility as a whole, and further moves which may take place in future and, so to speak, stake a claim against that in advance. The second is the one with which the Leader of the Opposition ended his speech, which was an attack on speculators and speculating.

I do not think that anybody on this side of the House has a brief for speculators and speculating. Speculators give very little service to the community. As I should like to point out to the House later, I believe that the speculator's paradise is a fixed sterling rate with the possibility of devaluation coming after it. That is when the speculators make their money. But I cannot see why that is a reason for voting for the Amendment against the passing of the Bill.

When we look back on this debate in, possibly, a year or two's time, I think that the general feeling will be that it was a pity that the Opposition divided against the Bill. What else would right hon. Members opposite have done in the same circumstances? That is the question which we have to ask ourselves. I understood the Leader of the Opposition to start with a plea for the continuation of the E.P.U. agreements. I do not know whether the right hon. Member for Huyton (Mr. H. Wilson), when he winds up for the Opposition, will deal with this point, but I ask him: is it really the considered opinion of hon. Members opposite that it would have been possible to have maintained the E.P.U. arrangement on 28th or 29th December, last, whether that was a practical proposition? I suggest that it was not a practical proposition.

First, we all know that the position in France at that time was particularly serious. France's Budget deficit was running at about I billion francs, or the approximate equivalent of £1,000 million, which was an extremely serious position. There were inflations, enormous quota restrictions, and, on top of that, the French Government were breaking their liberalisation clauses in the Treaty of O.E.E.C. They had exhausted their credits with the E.P.U. and the debt at that time was 476 million dollars. Despite that, France was talking about discrimination against the other eleven members of the O.E.E.C. at that time under the Common Market trading arrangements. That was certainly restrictionist. We also had the action of the West German Government which should, admittedly, have been operating in the spirit of E.P.U. but was not—that Government had credits of 994 million dollars.

At that time, the E.P.U. was not operating, and I do not think that the Opposition can now say that it would have been possible, in those circumstances, to have continued that sort of arrangement. The Government, there- fore, had to take the steps they took, and it is almost irresponsible, in my opinion, for right hon. and 'hon. Members opposite to vote against the Bill tonight. They could have had exactly the same Second Reading debate without going into the Division Lobby afterwards.

I want, secondly, to congratulate the Government on taking the initiative when they did. I seemed to sense almost an attack by the Leader of the Opposition on the Chancellor of the Exchequer for having taken the initiative. I do not think that the Government should be in any way despondent about their action. In my view, they might have taken this action earlier, but that would have inconvenienced the French Government considerably. I think that they took a very realistic view, and only brought forward these proposals when they did, which was at a time most convenient for the French Government.

This view is supported by an article in Figaro of 29th December, which more or less admits that the initiative in convertibility came from the British Government; the Government of Bonn decided to keep in step with London, and the de Gaulle Government could do nothing but accept convertibility for France. As a result, I think that we have a far better working arrangement for the expansion and increase of European trade than we would have had had we tried to go on with the Common Market arrangements, a broken E.P.U. Treaty organisation, and the difficulties flowing from it. In other words, we are now doing exactly the opposite to that of which we are accused in the Amendment; we are working for greater expansion and further trade negotiations.

Many hon. Members have spoken of wider convertibility, and if I may be permitted to say something on that subject I will be able to state views that I have wanted to express for some time. First, the value of sterling is not what we may peg it at, but what people abroad think that it is worth. The value of the £ is alternating up and down all over the world at different times. We may try to peg it officially at a certain rate, but that is an artificial rate.

The danger from speculation comes when world feeling against sterling drops, and we have to maintain it at an artificially high rate. It is when world confidence in sterling falters that the danger of speculation arises. Therefore, to get away from the fear of speculation and the possible drain on gold and dollar reserves the ultimate answer must be a free convertible rate for sterling.

At the beginning of his speech, the Chancellor of the Exchequer quoted from speeches that have been made on both sides of the House to show that both parties believe, in the long run, in convertibility as the ultimate goal; yet the whole tenor of speech after speech from the other side has shown the party opposite to be very frightened of convertibility. We seem to be seeing from the party opposite a reversion of policy against convertibility as a long-term objective. I do not know whether there will be a reply on that from the Opposition Front Bench tonight, but I think that that is the impression that the country will get from this debate tonight.

I would join issue with those who are frightened of convertibility as an end in itself. At present, the United States Government have had their gold reserves depleted, either by foreign aid or investment abroad, to the tune of 2,240 million dollars. We, in the United Kingdom, may have gained of that very nearly half—about 1,000 million dollars. That must be a helpful factor in the matter that we are now discussing.

Next, as has been mentioned already, we have a surplus on our international trading account this year of £600 million. The Leader of the Opposition is always very quick to try to play down the part which the Government have taken in this matter, but I believe that it is an example of how Conservatism does work. We are now seeing the results of good administration and sound finance. Of course, the position of raw material prices abroad is another point in our favour, and should not be played down.

Again, as has also been mentioned, our gold and dollar reserves stand at £1,100 million. There is no need to run that down. It is a very creditable achievement. My point is that our position is basically far more stable than it was two, three or four years ago, when we had the Suez crisis. A lot of what is termed unstable money went out, and was replaced by loans from various international banking organisations, the Monetary Fund, and other bodies.

That is a much more stable form of holding of investment of our gold and dollar reserves than the gentlemen who are quick to withdraw when anything goes wrong. That is something the Government must bear in mind; that if we have to face a future temporary setback the people now holding the gold and dollars for us are much more likely to leave them there than take them out.

On top of that, we have possibly 900 million dollars worth of Government holdings in investments in the United States and Canada. If we put those two together—the Government holdings in the United States and our gold and dollar reserves fund—we get much nearer to the figure of 6,000 million dollars that the Leader of the Opposition gave as the figure at which he might consider convertibility. Therefore, if we do not merely pay lip-service, but appreciate the position vis-à-vis the gold reserves in America and here at present, plus our balance of payments position, I think that we are not far from the time when we can take the next step forward; and I believe that that will be not a restrictionist but an expansionist step forward.

I have not very much knowledge of the City of London, but from my experience of the business world my feeling is that the rate might well go over three dollars if it were allowed to find its own level at the present time, and that would be a very great advantage to this country.

The Opposition Amendment seems to be an example of what I might call Socialist double-talk. What hon. Members opposite really want is restriction and control of finances and currency. With that must come quotas, and after quotas—whether they like it or not—rationing. That is the form of restriction they really want, yet, at the end of their Amendment, they talk about expansion.

I believe that what happened when we had to put the Bank Rate up to 7 per cent, was that the Opposition found that the expansionist cry was a popular one, and I think that a number of people in the country were possibly taken in by the idea that Socialists might be expansionists. Of course, it is not so. We are now, in the arguments we have heard today, back to what I have been very glad to hear, and that is that Socialism must be restrictive. Socialist financial policies must be restrictive; and from this debate I think that the country will learn that Socialism and restriction go hand in hand, and Conservatism and expansion also go hand in hand.

8.40 p.m.

Mr. Austen Albu (Edmonton)

The hon. Member for Sheffield, Heeley (Sir P. Roberts) concluded his speech with a wonderful peroration, I must say, but, of course, what Socialists have always said is that finance shall be the servant of industry and the people and not their master. In so far as we need a restriction of financial activities it is so that we can have an expansion of industrial activities.

The hon. Gentleman asked—and I am sure that my right hon. Friend will reply to him—what our attitude towards convertibility is. I think the answer is roughly that given in The Times in its leading article today, that when we are in a position to undertake full convertibility we shall undertake full convertibility. We are not so yet. Moreover, we think that the steps which the Government have taken so far have been taken prematurely.

The hon. Gentleman asked us why we were by our Amendment attacking the Bill, and he put forward some quite reasonable arguments about the position of E.P.U. and its demise, but if the hon. Gentleman had heard the speech of my right hon. Friend the Leader of the Opposition he would have known that my right hon. Friend's argument was that the ending of E.P.U. came after the decision to move further into convertibility, and that it was the move into convertibility which we are attacking in our Amendment rather than the ending of E.P.U., although that in itself was a very regrettable thing.

I think that in this debate the difference between the two sides of the House lies in the meaning of the words of the Chancellor of the Exchequer, "Britain depends on international trade." What do we mean by trade? I think that hon. Members opposite are still thinking in terms of the nineteenth century, when the City of London was the main financial centre of the world, based, as it was then, on Britain's being the main provider of finance for capital investment in the world. This position no longer exists. We are now a debtor country and we now have difficulty in maintaining the present level of investment abroad, and yet, as my right hon. Friend has said, at the same time we are not only seeking to finance the sterling area but launching into the financing of the trade of the rest of the world.

Hon. Members opposite are still looking upon this matter from the point of view of prestige. The right hon. Gentleman the Member for Blackpool, North (Sir T. Low) talked about faith and words like that and prestige and emotive language of that sort, are often used when we ought to be looking at what the actual effects of any change in financial policy will have on the people of this country. Undoubtedly we have not today the resources to maintain the City of London in the sort of prestige it had before the war. Indeed, in financial and economic terms the value of the transactions of the City is very much less than it used to be. Its contributions to our foreign exchange earnings and, therefore, to our balance of payments is by proportion much less than it was before the war, and, as my right hon. Friend said, even to the foreign exchange market now restored, it will only be worth about £100,000 a year and even with the other services of the City, it will comprise only a relatively small part of our foreign exchange earnings. Certainly the earnings of the City, which have been restricted by our policies so far, are not going to bring us any very great expansion in earnings.

The truth, of course, as the House really knows, is that the strength of our economy depends today, as to more than 90 per cent., on physical exports, and the whole object of policy must be to expand the competitive power of our industry, not only by expanding investment in plant and machinery so that it may improve its productivity and therefore its competitiveness but also in encouraging continual change and innovation so that we are in a competitive position to offer the most advanced types of goods in the world. As long as we can maintain those exports and as long as we can maintain some reasonable trade balance and as long as people want our goods, I must say I find it difficult to see why our currency should come into danger.

I have sometimes had a dream, which may possibly give some of my right hon. Friends on the Front Bench the shivers, but which a private Member of the back benches can have, that when the balance of payments is comparatively good and our reserves are not looking as bad as they have in the past and our trade is booming and we are selling our goods and they are competitive, we might allow the £ to go.

I really should like to see what would happen in those circumstances. Of course, if the balance of payments were adverse, and our industry non-competitive, it would not be an occasion to do this, but I am talking about a case like 1957, when there did not appear on the face of it to be a real economic reason for a run on sterling. In those circumstances, I should like to see what would happen if we allowed the run to take place. This would show up some of the gentlemen who gamble on sterling. They would find that they would very soon burn their fingers when it came to getting sterling to pay for imports from this country. It may give my right hon. Friend the Member for Huyton (Mr. H. Wilson), and perhaps the Paymaster-General, the shivers but it is something which we might try one day, though it depends upon our maintaining investment at home, upon an expansion of industry, upon innovation and change in industry, and a highly competitive position in which people want our goods and must acquire sterling to buy them.

The Government congratulate themselves on the general liberalisation of trade in the world which has taken place in the last few years and upon their contribution to it, including the removal of restrictions on dollar imports. But what a slap in the face they have had—first at Montreal from the Canadians, and secondly over the turning down of the English Electric tender for the Greer's Ferry turbine contract in the United States. That showed that in certain circumstances even a country as wealthy as the United States will re-impose restrictions on trade for undoubtedly protectionist reasons.

The areas of the world where trade liberalisation is safe are very limited indeed. I believe that the Western world will not continue much longer to accept policies which hold back a country's own economic expansion at home, in face particularly of the competition—I do not call it the threat—that is coming from Russia. If there is in the future in the countries of the Western world a conflict between liberal trade policies and full employment and expansion, I believe that those countries will choose expansion, and this may mean again restrictions on trade. Ideally, the greatest expansion of trade would take place with complete liberalisation, but if we do not have complete liberalisation and we have a situation in which affairs like that of the English Electric tender and what happened at Montreal can again take place, undoubtedly other countries will have to take similar action.

That is not the least of the arguments why it may be dangerous to expose our currency to the full range of convertibility It may well be that the extent to which we have made our currency convertible has already made it more difficult for us to trade. On this side of the House we agree with those who believe that the most important thing is the expansion of industry, industrial investment, and full employment, and we believe that it is the Government's policy in moving towards convertibility that has made it more difficult for them to undertake such a policy in this country.

8.49 p.m.

Mr. Harold Wilson (Huyton)

This has been an interesting and serious debate, as I am sure the Paymaster-General will agree. It has been rather difficult to sort out the exact theme of speeches made by hon. Members opposite. There have been some who have regarded the convertibility decision as the crowning glory, the last triumph of the successes of Tory freedom in the overseas economic sphere. There have been others, not least the Chancellor of the Exchequer, who have wanted to play it down. They have said that it does not really make any difference—it is a continuation of what was announced in the House on 24th February, 1955. I will do my best, in the time that I hope to have before the Paymaster-Genera] replies, to try to draw some of the main threads of the debate together.

The Chancellor began by speaking as though the Government's action was merely a fulfilment of policies initiated by the Labour Government. He spoke as if this had been a continuous process and there was no room for controversy; that, after all, we started it and were committed to it. I want to remind the House again that the Labour Government insisted that there could be no decision to introduce convertibility until three conditions were fulfilled—not one but three.

The first was that our gold and dollar reserves should be a good deal higher, as my right hon. Friend the Leader of the Opposition made clear this afternoon. When he was asked by the Americans in 1950 to elucidate this, he said that the reserves should be double the then level—that is, something like double the present level. The second condition he laid down was that we must have adequate guarantees that markets would not be closed arbitrarily or suddenly against British goods. Thirdly, we insisted that the balance between the dollar area and the rest of the world had to be right. I want to say a word or two about each of these three conditions because those were the conditions we laid down for convertibility.

First, on the adequacy of the gold and dollar reserves, it is true that the reserves have improved over the past year but they are still far from adequate. They stand today at just under £1,100 million, but they are still less by £71 million than the figure at which they stood in October, 1951, which was actually £1,167 million. So they are still £71 million below the figure at which they stood when this Government took office.

Of course, they are not all free reserves. They would be a good deal lower if it were not for the loans raised by the Prime Minister, when he was Chancellor of the Exchequer, to pay for the Suez operation, which he so irresponsibly commended to his colleagues, despite the responsibility he was supposed to carry for the defence of the £; not to mention the further borrowings made in 1957 to stem the speculative flight from sterling of which we have heard a lot this afternoon.

Therefore, and I put this point to the Chancellor, the present level of reserves is to some extent an illusory one because of the amount of borrowings included in them, borrowings which have to be repaid. After the Suez "binge" comes the reckoning. When the Chancellor finally summons up courage to answer the questions that were put to him about the terms of the Anglo-Egyptian financial agreement, we shall know that about another £50 million or £60 million have to be paid for that. But that is not the reckoning I am dealing with tonight.

The reckoning I am dealing with tonight is the repayment of that borrowing. As I understand the figures, about 800 million dollars, nearly £300 million, have to be paid in the next three years. Indeed, as we were reminded this afternoon by the Chancellor, 200 million dollars, or £70 million, have to be repaid by next April. So, out of the present level of reserves, we have to set aside £300 million for more or less immediate debt repayment. Then there are all the other factors. The Germans have deposited £75 million with the Bank of England for debt repayment covering the next ten years. Incidentally, that debt repayment was a repayment of debt incurred when the Labour Government were in power.

We used to hear a lot then about unrequited exports. Some of these created a debt obligation on the part of Germany, and the present Government were glad to have that repaid by one payment covering ten years in order to deal with the crisis that they had created. The Germans have also made heavy advance payments for purchases of arms which have to be met out of our future national production. Again, there has been heavy sterling area borrowing, especially in the last year or two, and this, also, has to be repaid.

Our present reserves, therefore, nominally standing at about £1,100 million, if we set aside the amount which has to be earmarked for early debt repayment, come down to about £800 million, and that is a long way short of the figure that this country had in October, 1951. Yet we said at the time that this figure, as my right hon. Friend repeated this afternoon, was much too low a figure to justify any rash moves towards convertibility. I do not need to remind the House of the increase in the price level since 1951 and the increase in the volume of trade which has to be financed with sterling. All this means that in real terms the reserves are still lower as compared with 1951, not much more than half the real value of the reserves which we bequeathed to this Government in October, 1951.

I will put it another way to make it clear to hon. Members opposite. In 1951, the reserves, measured in terms of the volume of sterling area trade which they had to finance, represented about 40 days' volume of trade, not very much. It shows the narrow margins on which we have been operating since the war. Today, they represent about 30 days of sterling area trade, and if we set aside that amount which has to be earmarked for debt repayment, our reserves today represent only about 22 days of sterling area trade, which we feel, is much too narrow a margin for making rash experiments of the kind that we have been debating today.

Our second condition was that we must be guaranteed against the sort of situation which we had to face in 1947, when countries, finding the £ convertible, suddenly closed their doors to British goods and hurriedly converted any sterling they had earned into dollars or other allegedly desirable currencies, as we remember from that move in 1947. For instance, the Argentine sold its meat to us and then closed its doors to British goods so that it could convert into dollars the pounds it had earned from the sale of meat.

What assurances have we against discriminatory action of this kind? I agree that the O.E.E.C. agreements, the liberalisation agreements, provide some sort of assurance against such action. I was glad that the Chancellor fairly paid tribute to the fact that the great move towards liberalisation in Europe was proposed by the Labour Government to the countries of Europe.

It is still possible for the kind of discrimination which I have mentioned to happen elsewhere. Indeed, the Government have so weakened Commonwealth trading links that New Zealand and Australia repeatedly impose restrictions on British exports whenever they get into balance of payments difficulties. If they do it, what assurance have we that other countries will not apply similar restrictions? Even in Europe, what about the Common Market? All the efforts of the Paymaster-General—we agree that he has not been helped very much by the President of the Board of Trade—have only produced a situation in which, as things are at the moment, we must expect not less but more discrimination against us in Europe.

I turn to the third condition that we laid down in 1951, the dollar balance. This problem has been with us ever since the war, but it is only within the past few months that there has been a flight from the dollar. I was surprised to hear so many right hon. and hon. Gentlemen today who were so intoxicated by this unusual sensation of seeing the dollar weaken that they think that they can base our future policies for many years ahead on this possibly very temporary phenomenon.

As my right hon. Friend the Member for Battersea, North (Mr. Jay) has said, this is like throwing away one's umbrella just because the sun has been shining for a couple of hours. We know that it comes as a surprise to the Minister of Transport that it sometimes rains in Lancashire, but surely that sort of attitude is not typical of the expert advisers in the Treasury. Do these expert advisers think that a weak dollar is likely to be a permanent phenomenon? This decision seems to be based on that assumption.

As my right hon. Friend said this afternoon, one important factor redressing the balance between the dollar world and the rest of the world has been the heavy volume of credits provided by the United States to sterling area countries, especially in the last year. Many countries, such as New Zealand, have in the past few months been driven to borrow in New York by the high interests rates which would be charged them by this Government. I should like to ask the Paymaster-General whether the Government expect that this flow of capital from the dollar area to the rest of the world will continue at the rate we have been witnessing over the past year.

It seems as if the Chancellor is very confident about the world dollar situation. This afternoon he foreshadowed decisions to open the British market to dollar consumer goods. I think that we must warn him about any rash action of this kind. As The Times has argued, time and time again, it is quite impossible to measure the elasticity of demand for some of these American dollar goods. We have seen over the past few years, since the Government liberalised the import of dollar manufactured goods into this country, a phenomenal increase in the American manufactured goods, at a time, over the same period, when we have not increased our imports from Commonwealth countries at all.

We saw what a sudden leap there was in the importation of tinned salmon, which was the one real result of the Chancellor's conference in Canada last year. No one can say what will happen if the Chancellor says that American motor cars can come in. There will be some people in this country daft enough to run Cadillacs on purely prestige grounds.

This is a very risky measure. I want to put this to the Chancellor very seriously, and I would put it to the President of the Board of Trade, for what good that would do, if he were here. The Government really ought to make it quite clear to the Americans that they are not going to make any further move in opening British markets to American manufactured goods until we have some assurance about the Americans opening their market to British goods.

The decision announced last week about the English Electric deal came as a shock to hon. Members in all parts of the House. This really is shabby treatment as between Allies. English Electric, like other companies, was invited to tender and although its bid was 70 per cent, below the lowest American bid of the Baldwin-Lima-Hamilton Corporation it was rejected on the pretence of national security.

We all remember that the Prime Minister came scurrying back across the Atlantic last year talking about interdependence with the Americans in economic and military matters. He was so full of this interdependence that he fell over himself to give the Americans missile bases in this country, yet the American definition of interdependence is such, in spite of all the talk about exchange of nuclear information, that they claim protection on grounds of national security and that security is involved in the damming of a river in Arkansas.

The British Ambassador in Washington who, if I may say so, always puts the British point of view with clarity and firmness, was quite right in saying that if the Americans are really putting out that story they had better tell it to the marines, because sailors will not believe it—and, frankly, I have doubts about the marines. We were then told it was not a question of military security but that this company had some large machine tools—jumbo machine tools—and if those tools were not given work to do they would wither away and not be available in times of national emergency.

This has been a shocking case and I think that hon. Members in all parts of the House will agree that the Government should seek an assurance which will be honoured and is not just words that can be set aside by some bureaucratic American Department, that before we give any thought to removing restrictions on American dollar consumer goods the American market will be open to British goods. I am sure that if my hon. Friend the Member for Ashton-under-Lyne (Mr. Rhodes) had spoken in the debate he would have made exactly the same point about the iniquitous wool tariff quota imposed by the Americans last year.

Therefore, the three conditions for convertibility which we laid down in 1951 have not been satisfied, and we have to ask whether it was right to take this decision now. The Chancellor said that the timing was a matter of judgment. We think that it was reckless and bad judgment. If the Chancellor had listened to the words of wisdom for a little while, instead of to the words of the Economic Secretary, who has obviously misled him so much, he would not have done this. We believe that this reckless decision was the result of the complacency which utterly obsesses the whole Government machine, resulting from the temporary fall in commodity prices and the flight from the dollar.

We have had this complacency after every economic crisis with every recovery. I once gave the House a series of quotations of Ministerial pronouncements after crises in which it was said how everything had been solved. I particularly remember the Lord Privy Seal's broadcast in the 1955 General Election when, on 19th April, he referred to the Bank Rate increase of February, 1955, and said: Thank goodness we took action in time…already in the field of the exchanges our action has produced distinct results, which have taken the shape I had hoped for. Within three months of that complacent statement, we were facing a sharp run on sterling. Within six months we had the autumn Budget. Within three years we lost 2,300 million dollars from our gold and dollar reserves.

Whatever complacency the Lord Privy Seal may have shown in recent months, this complacency and fecklessness have grown beyond all bounds. The extreme case is that of the Prime Minister. I am sorry that he is not here tonight. [An HON. MEMBER: "He is on the by-pass."] I am delighted to hear it. I always thought that he had been treated rather shabbily in being invited to the opening and not to the closing of the Preston by-pass. He showed the supreme example of self-satisfaction and complacency when he was answering Questions yesterday, believe it or not, as Prime Minister. Referring to the deflationary decisions of September, 1957, he said: I feel that the action which we took was necessary and alone provided the basis for the great increase in credit which we are now able to give."—[OFFCIAL REPORT, 27th January, 1959; Vol. 598, c. 886.] I emphasise the word "alone." Not only was it not alone, but it had nothing to do with it.

Some of us forecast last spring that it was Government strategy so to run down the economy that they would reach a point at which they could present an election Budget as an economic necessity. The improvement in our balance of payments is due and is solely due to the fall in world commodity prices. The Prime Minister claims that it is due to the policies of the Government which alone have provided the basis for these recent essays in re-expansion.

Does the Chancellor agree with the Prime Minister's statement? Does he agree with the statement that it was Government policy which produced this situation, or will he not acknowledge, as, in an honest moment, he once did, that the fall in commodity prices has been responsible? Will the Chancellor tell us? This is an important matter.

Hon. Members

Answer.

Mr. Wilson

The House is being asked to vote on a very important economic matter and we ought to know what view the Government take in this important matter of diagnosis.

Mr. Amory

I have often made it perfectly clear that the fall in our import prices has helped us considerably and that the effects have been reinforced by sound Government policy.

Mr. Wilson

Yes. The Chancellor will be able to answer tomorrow for his repudiation of the Prime Minister.

In fact, the Chancellor, so far as he has gone, has not given us the true facts. I am sorry to have to weary the House—and particularly the Chancellor—with one or two figures, but I think it essential that these figures should be given. The visible trade gap in 1958 was £424 million, an improvement of £189 million on the 1957 figure of £613 million. So far, I am sure. I carry the Chancellor with me, because these are Government figures.

Last year our imports were £3,780 million. Those are Government figures which I hope the right hon. Gentleman does not deny. Again, according to the Government figure, import prices last year stood at the index figure of 99 compared with 107 the previous year, a fall in prices of about 8 per cent. I am sure that the Chancellor will agree that if prices have not fallen last year—if I may put it in arithmetical terms—our imports would have been

107/99 X £3,780 million.

I hope I am still carrying the Chancellor with me. I see that he is hurriedly doing calculations on the back of an envelope. I can assure the right hon. Gentleman that the answer which he will get, finally, is a figure of £4,085 million.

That is what our imports would have been last year, but for this adventitious aid of falling prices. That would have been £305 million more than it actually was. So, against an actual improvement in the trade gap of £424 million, we would actually have had a gap of £729 million. To put it in another way, the improvement in the balance of payments for which the Prime Minister so modestly took credit yesterday was £189 million, as I have just shown. But the effect of more favourable import prices was £305 million. So much, therefore, for the Prime Minister's claim.

What does this decision about convertibility mean in practical terms? First, for Europe. That was fully dealt with by my right hon. Friend the Member for Leeds, South (Mr. Gaitskell) this afternoon. The Government, having embarked a year ago on a policy of internal deflation, have, I am sorry to say, been the moving genius in this dash towards international deflation. My right hon. Friend made very clear that the European Payments Union provided a credit house for both increased trade and production in Europe. It was able to liberalise trade and take the chance of increased production without the nagging fear all the time of a balance of payments crisis. Now, under this new European Monetary Agreement, credit will be available only case by case and probably on very harsh terms, because the terms will be controlled by the international deflationists, the central bankers, and the rest of it.

I would ask the Paymaster-General—if he be the right person to ask—what about the position of France? France will be more than ever dependent on German economic aid. It may be that that will suit their political purposes, I do not know, but they have certainly lost a valuable economic aid with the going of E.P.U., and are in danger, as a result of what this Government and what the French and Germans have done, of becoming economically a German colony. I hope that the Government realise where this decision will lead them.

What does it mean for Britain, and for the sterling area? We are told that it is only a little change; that the real position was taken in 1955, and that the events of 29th December were merely conferring a de jure recognition of a situation which had long existed on a de facto basis. That is not what we were told at the time. It was then put forward as a purely technical move when my right hon. Friend and I criticised it as backdoor convertibility. Whatever changes there may have been, it is clear that the greater part of the loss of gold and dollars in 1956–57 was on the backdoor support of a transferable rate.

What is the basis of our anxieties? I should make clear that these anxieties go much wider than among members of the Opposition. They exist among people who do not agree with us politically. They share our anxieties about the convertibility movement. The main thing is that it makes us more vulnerable to a speculative crisis. The £ in London will be converted, as of right, into dollars, or other currencies without even the cushion of a drooping transferable rate.

The Chancellor may say that we were following the rest of Europe. [Interruption.]My right hon. Friend the Leader of the Opposition made it clear this afternoon that there was reason for thinking that the British Government were in the lead in this matter of European convertibility. Even if it is true that we had to follow the rest of Europe, which is very surprising, sterling is in a very different position from the currencies of other European countries.

No one holds French francs beyond his immediate trading needs. Sterling is held because it is an international currency and nearly half the world's trade is financed in sterling; so the holdings are considerable. If the situation occurred at any time that traders suddenly wanted to hold some other currency, dollars, Swiss francs or German marks, sterling will have to bear the brunt which most other countries would not have to do.

What happens if another run occurs? What this Government will do is to say, "Confidence is in danger and can only be met by deflationary methods in this country, involving restriction of production and an attack upon employment standards". [HON. MEMBERS: "NO."] That is what they said in 1957 before we had convertibility, and they will be forced to say this, irrespective of the state of production and employment in this country. This was the theme of a statement put out today by the General Council of the T.U.C. I hope that the Chancellor will study the statement, because he received a letter in October warning him of the consequences of convertibility. The General Council has made it clear that if confidence in sterling weakens, and the Government lack exchange control to defend the reserves, they will no doubt argue that forces outside their control compel them to restrict economic activity and cause unemployment.

That is the fear of the T.U.C. and represents the nub of the argument. It is a fear that exchange controls will be cast aside and that, at the margin, full employment and increasing production will be swept aside for considerations of international finance, and even of financial prestige. My hon. Friend the Member for Cheetham (Mr. H. Lever) said this afternoon that all these financial manœuvres were just a charade if we did not mobilise the full production power of the nation.

The decision of the Government of September, 1957, to sacrifice production and employment to the obsolete financial shibboleths urged by the right hon. Member for Flint, West (Mr. Birch) has gravely weakened this country. [HON. MEMBERS: "No."] We have often said, and we said at the time, that this was like the old eighteenth century quack doctor whose only remedy for any kind of disease was blood-letting, which was ultimately weakening.

What is the position in Britain? Production in Britain today is lower than in 1955 at the time of the last General Election. [Laughter.]Let me ask hon. Gentlemen who laugh whether they can name any other country in the world of which it is true that its production today is lower than it was in 1955. This is the country that the Prime Minister told us, on television, when he became Prime Minister, was to be made "Great" Britain, yet not one hon. Member in any part of the House can think of a single country being worse off than we are. They have had plenty of time to answer and I should have thought hon. Gentlemen would have thought of one now.

Take the figures of unemployment. The registered figure is 200,000 up on a year ago, but the registered figures are only part of the story. There are workers on the guaranteed week for whom no work can be found. Many miners are being kept at work by the nationalised Coal Board. About 75 per cent, of our factories are working below capacity. That is one reason why, if we get an expansion of production it may not lead to a corresponding expansion of employment. There are school leavers who cannot find jobs when they leave school, in this "Opportunity State" that we hear so much about from the Tories.

Apart from that, and apart from the national figure, some areas are very badly hit, yet the Government are putting out complacent statements. The Minister of Works, at a big employers' dinner, said that we should have boom conditions by the end of the year. Is that the Chancellor of the Exchequer's view? The Parliamentary Secretary to the Board of Trade said at Exeter that he thought the Government's measures to bring work to the depressed areas would soon be showing results. It sounded like the speech of the pre-war Tory Minister of Agriculture, who said that the agricultural policy of the Government was showing results in a number of fields. There will be no solution of this local unemployment problem unless there is a real head of steam in the economy, and the Government dare not create that head of steam because of fear of foreign repercussions.

The right hon. Member for Blackpool, North (Sir T. Low), in a characteristically agreeable speech, quoted our statement that the Labour Party will make the defence of the £ the first priority of our overseas economic policy. We utterly reject the Tory notion that the £ can be strong only if the economy is weak. I say that for two reasons. If the economy is depressed, if industry is working below capacity, then costs are increased. Furthermore, what is of great importance, productivity cannot increase unless industry is expanded. Secondly, if the economy is depressed we fail to extend and to modernise our economy and, in the long run, we lose ground to all our competitiors, be they Germany, the United States, the Soviet Union, Japan, or for that matter, China.

We believe that we could have a strong £ and a strong economy only on the basis of controls and expansion. The right hon. Gentleman seemed to find the idea of controlled expansion entertaining. Under the Government we have stagnated for four years. We need expansion—does anyone deny that?—but that expansion must be controlled, because without controls and purposive planning a free-for-all expansion will mean inflation, just as it did under the Lord Privy Seal. The slack incompetence of an unplanned economy must give place to the disciplined efficiency of rational organisation and control. [Laughter.]

I am sorry that hon. Members opposite do not accept that and find that thought shocking or amusing, because it is taken from a chapter entitled "Expansion" written in his expansionist days by the Prime Minister, in a book published in 1939, oddly enough by Macmillan.

Our Amendment says that the Government's decisions make more difficult the achievement and maintenance in Great Britain and Western Europe of industrial expansion and full employment. We are not trying, in the Amendment, to over-dramatise the situation. We do not say that this is the same as the action of the then Conservative Government, in 1925, in returning to the Gold Standard with the wrong parity although there is perhaps some similarity of motive—the feeling of prestige, the idea that the £ must look the dollar in the face and the rest of it. That decision in 1925 condemned whole industries, especially coal and cotton, to mass unemployment.

We do not say that this decision will have the same effect. For one thing, it is not of the same parity, but what we say is that the Chancellor's freedom to take the necessary measures to expand economy will be limited. If we need lower rates in this country for employment loans and, at the same time, there are rising rates in America, the Chancellor will be inhibited from taking the necessary measures because of the difficulty of chasing "hot money".

The real difference between us has come out plainly in the debate. We believe that both nationally and internationally finance, as my hon. Friend the Member for Edmonton (Mr. Albu) said, must be the servant and not the master of production, trade and employment. They look at it the other way round. They see nothing wrong with a system in which British financiers, as in September, 1957, could almost bring this country to its knees by freely transferring British owned capital out of the country, whether via Hong Kong or in other ways. The gentleman who said that it was "anti-British, but it makes sense" will find it just that much easier to do it again under convertibility.

I will explain what we feel to be wrong about these decisions—the kind of decisions taken in September, 1957, taken "on the grouse moor" and all the rest of it. What was it that was said? "Nigel was very depressing". What is wrong in our eyes is that these decisions led to unemployment a year later in Liverpool, Llanelly, Greenock and—I am sorry that the Prime Minister is not here—Stockton.

There is no middle way between the two views which have been expressed in the House, but I hope that we can agree on one point, whatever difference there may be about method. Even so, we certainly feel that the record of the present Government is pathetic in that? the £ today, after seven years of uniquely favourable international economic conditions, is only twenty-nine thirty-secondths of an American cent higher than it was in 1949, and we have avoided disaster and devaluation twelve years after the end of the war only by massive borrowings and a defeatist policy of industrial stagnation—twelve years after the end of the war, not two years.

Hon. Members are entitled to reject the proposals which we have put forward if they wish, but we have the right to demand that they do not bring the £ into their pre-General Election manœvurings or tactics. I know that I need not make this appeal to the Chancellor, but we need to make it to Lord Hailsham and certainly the President of the Board of Trade, if anyone were ever in danger of taking him seriously. I want to make it plain that even over Suez, when we fundamentally disagreed with the Government's policy, we rallied round the Government to the support of the £. [HON. MEMBERS: "Oh."] I challenge any hon. Member to produce any evidence to the contrary. In September, 1957, my right hon. Friend the Leader of the Opposition went on record with a speech strongly calculated to maintain the strength of sterling. [Laughter.]I know that the strength of sterling is a laughing matter to some hon. Members opposite.

If they are thinking of using it in the General Election, I remind them that talk of this kind is not only unpatriotic and anti-British but is fundamentally undemocratic. It means that whatever decisions the British people may take in an election, some people are relying on their friends at home and abroad to exercise a right of veto. As my right hon. Friend said, they will be voting with their bank balances.

This kind of talk can be a boomerang, as the right hon. Gentleman knows, and that is why we call on him to exercise his authority over his colleagues to stop it, because, as my right hon. Friend made clear this afternoon, the resources of civilisation are not exhausted. I hope that it will not be necessary to deal with a situation in the way that he mentioned, but I am sure that the whole House, in a somewhat cooler mood, would agree that we cannot tolerate a situation in which the economic destinies of this country are to be dictated not by the Government, not by the House, not by economic realities, but by decisions taken for the sake of a quick and unpatriotic profit at the expense of sterling and of the employment of our people.

9.29 p.m.

The Paymaster-General (Mr. Reginald Maudling)

We have had two lengthy speeches from the Opposition Front Bench, but, if I may, I will concentrate on the speech of the right hon. Gentleman the Leader of the Opposition, for while the right hon. Member for Huyton (Mr. H. Wilson) made his speech sound more amusing in some places and more offensive in others, I do not think that it added anything to the argument.

I should like to sumarise what seemed to be the main point made by the Leader of the Opposition. He said that the Government are taking a risk with sterling and are placing new restrictions upon the economy in order to create more profitable business for the City of London and in order to hamper a Labour Government. I think that that was the accusation. [Interruption.]This was the latter and less serious part of the right hon. Gentleman's speech. If he looks at his speech tomorrow he will find that that is so. The simple answer is that that is untrue and unfounded, because in our view the steps which we have taken will make it not more difficult to defend sterling in times of strain but more easy.

There are two reasons for that. First, sterling being officially convertible, the overseas holder knows that he can convert it if he wants to and is far more likely to leave it on deposit in London. Secondly, it is easier to defend one rate for sterling in a market operating in this country than to defend two rates of sterling, one of which is operating in markets outside this country. The right hon. Member for Huyton referred to the advantages to be gained from a drooping transferable rate. If he thinks that a drooping transferable rate will help us more with the official rate, he ought to think again.

To make the argument that the steps we have taken will strengthen the position of sterling, I want to run through one or two agreed principles. First, the Opposition accepts, as the right hon. Member for Huyton said last year, that sterling should be given first priority in all calculations and actions. That is agreed between us. But the international value of sterling must depend upon supply and demand; it cannot be fixed by the British Government. This is particularly true of sterling in its function as international currency. This is the main fallacy of the Opposition's case. People cannot be forced to hold sterling by any amount of exchange control. They can choose other currencies and will choose to do so and are entitled to do so if they think that other currencies are sounder and stronger. Theoretically, one can block currencies, but if we block overseas holdings of sterling we cannot do that indefinitely and it will not come back again. Such a course is not supported or advocated by the Opposition.

The fact is that the strength of sterling internationally depends upon giving it value in the eyes of the foreign holder, sometimes called the speculator. It is not only the gnome of Zurich which appears so often in the mythology of the right hon. Member for Huyton. He is the man whom my right hon. Friend the Member for Flint, West (Mr. Birch) referred to—the banker and trader who needs to hold sterling in the course of his normal business and has to take a view about its future value. It is inevitable that the international value of sterling will depend on the view taken by foreign holders.

Whether we like it or not, there can be no doubt that when shaping our national policies we must bear in mind that there is overseas interest. As my right hon. Friend the Member for Blackpool, North (Sir T. Low) said, if we want to trade with, and borrow money from, people abroad we must have regard to the effect our policies will have on the valuation which they put on our currency.

Foreign holders will consider two things: first, the internal purchasing power of sterling and its probable future trend, and, secondly, the extent to which it is usable and convertible. A currency is usable only when it can be turned into something else. If we are agreed on the desirability of maintaining the strength of the £ we must have regard to the internal purchasing power of the £ and give the greatest possible usability to sterling held externally.

It is also agreed that convertibility is the objective of both sides of the House. The phrase used by the right hon. Member for Bishop Auckland (Mr. Dalton) in his authoritative text of 1947 was "full and free convertibility", which I take it in his mind means capital as well as current account convertibility.

Mr. Hugh Dalton (Bishop Auckland)

Long term.

Mr. Maudling

That is the objective. It is agreed on all sides that full and free convertibility on capital as well as current account must be the aim. It would appear that the Opposition do not consider that such convertibility in principle prevents us having an expanding economy and full employment.

Thirdly, on both sides of the House we are committed to a policy of nondiscrimination by the G.A.T.T., and by the International Monetary Fund agreement to which the party opposite is fully committed—in fact, it introduced both the relevant Measures. On both sides we are committed to the abolition of discrimination, save for balance of payments reasons. The party opposite is as equally committed to that as we are.

I should now like to refer to the question of dollar imports. This was referred to by both right hon. Gentlemen opposite and by other speakers. As my right hon. Friend the Chancellor of the Exchequer made quite clear, we are working out plans for further relaxation in our quantitative restrictions on dollar imports. Nothing in this move to make sterling convertible in any way compels us or obliges us to change the programme we have in mind for the further reduction, and final removal, of discrimination against dollar imports.

When the right hon. Gentleman the Member for Huyton is so critical of the American Government in this matter, he really ought to have some regard for certain facts. Naturally, we all share the very great disappointment over the decision about the Greer's Ferry Dam. Both Government and Opposition have expressed that disappointment, but the fact is that for the last four years the United Kingdom has had a current account surplus with the United States. In those circumstances, it really is difficult to criticise the United States for keeping out our imports. For four years we have had that current account surplus with them, yet we have been maintaining, and continue to maintain, quite severe quantitative restrictions upon United States imports.

That, therefore, is the position; that both sides of the House are committed to maintaining the strength of the £, to full and free convertibility as the final objective, and to the abolition of discrimination, save on grounds of balance of payments difficulties. It seems to me, therefore, that it is accepted on both sides that convertibility and non-discrimination are the logical basis for a world trade and payments policy. Our policy as a Government, expressed so often, and confirmed so often by successive Commonwealth conferences—and, again, only recently at Montreal—towards freer world trade movements seems to be the only policy that can commend itself, in logic, to either side on the basis of stated policy.

The argument, therefore, should really boil down solely to one of timing. Indeed, the hon. Member for Gloucester (Mr. Diamond) and the hon. Member for Gloucestershire, West (Mr. Philips Price) both, by coincidence perhaps, referred to this as a matter of a difference of timing between the two sides, and I would have thought the logic of the facts would lead to that conclusion.

That, however, is not what is contained in the Opposition Amendment. That Amendment does not really refer to timing, but gives two reasons why the Opposition consider that the Government move will make …more difficult the achievement and maintenance in Great Britain and Western Europe of industrial expansion and full employment. The first of these is the ending of the E.P.U., about which I should like to say just a word. We all accept that the E.P.U. has made a very great contribution indeed to trade in Western Europe, and we readily admit the part that the right hon. Gentleman had in setting it up. But it has been accepted for some time by all concerned that we cannot reconcile the continuation of the E.P.U. with convertibility—there are overwhelming technical reasons for that. Therefore, if the Opposition accept convertibility as the objective then, once again, they accept the abolition of the E.P.U. It is only a question of timing.

What is happening in the E.P.U. is that the credit facilities had been very largely used up, although they were not entirely exhausted, and continuation depended upon the willingness of the creditor countries, particularly the Germans, to go on giving unlimited credit and taking only 75 per cent, payment in gold far beyond their quote. Whatever the right hon. Gentleman may say about creditors, whom he appears to regard as by nature immoral, it is still, I think, a strange principle to assume that we have a right to expect other people to lend us money on our terms. In any case, automatic credit has its disadvantages. It can be used, I think, by countries for continuing internal policies which are unsound. I should have thought that from our point of view, with our interest in international trade, automatic credit as a principle has its disadvantages as well as advantages.

There will be a new source of credit available both by the expansion of the International Monetary Fund—and, of course, the part of this expanded quota which is within the gold tranche is automatic credit, because it can be automatically withdrawn—and the European Fund which will be set up and which my right hon. Friend described in his opening speech. These facilities together should surely answer the question which I think the hon. Gentleman the Member for Orkney and Shetland (Mr. Grimond) asked, whether there would be adequate liquidity available in these new circumstances.

Certainly the move from the E.P.U. to the new European Monetary agreement was a move concerted between the main European countries, and I would say a word again at this moment about the extent to which the lead was taken by one country or another, because although the Chancellor of the Exchequer has already referred to this it came up again in the speech of the right hon. Gentleman the Member for Huyton.

The facts are these, that we had for some time been feeling that the time was approaching to make this move of merging the rates, but one thing was very much in our minds, and that was that we did not want to do anything at all which would embarrass the French Government. And for very good reasons. As the House is well aware, the negotiations for the European Free Trade Area were not at an easy stage, and it might well have been said, if we took a move which would have embarrassed the French, that we were retaliating, paying them back, and acting in order to do the French harm. Therefore, for that reason, we were very loath to make any move which would have embarrassed the French Government. But we did hear, to our considerable pleasure, that they were contemplating a move of this kind themselves.

Therefore, it was possible for my right hon. Friend, in consultation with the French and German Finance Ministers, to start this general, concerted move which resulted in the developments of 29th December. I think that the right hon. Gentleman and everyone else would agree that it was a very valuable thing at this stage of European economic relationships to be able to have that concerted move forward in the currency field.

The second part of the Opposition's Amendment refers to the obligation of the Bank of England to provide gold or dollars on demand to any overseas holder. This is, of course, a misstatement of the position. Of course, we are only dealing with current sterling in the broad meaning of the word. No change is being made on capital account.

My noble Friend the Member for Dorset, South (Viscount Hinchingbrooke) referred to the travel allowance. The fact that it cannot be abolished is linked with the maintenance of control over capital movement. No doubt we all hope it can be increased at the appropriate time, but clearly we could not abolish al! control over the amount of money people can take abroad when they go abroad on holidays without automatically abolishing it on capital movement, and it is certainly not the opinion of my right hon. Friend that the time has come yet for freeing capital movement. The sums involved are very large indeed, and the time does not seem ripe for a move on this front. That is the answer to the Leader of the Opposition who raised this matter.

I think the other misunderstanding of the Opposition Amendment is this. It talks about the acceptance by the Bank of England of an obligation to supply gold and dollars on demand". The Bank, of course, has no such obligation. Its obligation is to provide enough dollars to support the market if the market rate looks like falling to the lower permitted level, which is, of course, a very different matter.

The main effect of this new move is that now it is a matter of indifference from the point of view of our balance of payments whether a foreign holder of sterling lives in an American account area or in the transferable account area. Surely, the basic illusion of arguments put forward from the other side of the House is that payment in something other than gold means no payment at all. That seems to be an illusion which hon. and right hon. Gentlemen opposite often cherish—that it is somehow far more damaging to pay for something in gold and dollars than in Deutschemarks, francs or lira, but the answer is that all sterling held, abroad must be ultimately redeemed either in goods or in gold, either by British exports or gold. There are no other means of settlement available.

The only other possibility is, in certain circumstances, to postpone payment and have access to credit, either automatically or not automatically. Before the recent move, all external sterling in fact had to be redeemed either in goods or in gold. Let us look at the position of the various categories of external sterling. People living in a dollar area already had free convertibility of their current sterling. Our sterling area partners have never had any limitation on the extent to which they can convert their sterling balances.

The right hon. Member the Leader of the Opposition asked earlier whether sterling area partners in these circumstances would not be freer in their demands for dollars than they would have been otherwise. The answer is "Certainly not", because Commonwealth countries have the same interest as we have in maintaining the value of sterling. They have always worked in the closest co-operation with us to that end, and the policy which has led to the merging of rates and external convertibility has been a policy constantly re-affirmed by successive Commonwealth Finance Ministers meetings.

I cannot see, therefore, that any practical change occurs, as far as either the dollar area or the sterling area balances are concerned. There remain only the balances held by people in Europe or in the rest of the world. Practically all these could already pass through the clearing system of E.P.U. and had to be met in 75 per cent, of gold immediately, with the balance to follow. Quite apart from that, overseas holders of sterling have been able for a long time to convert it into dollars at a small discount, through the transferable markets.

Already, before 29th December, overseas convertibility of sterling had proceeded de facto to a pretty well 100 per cent, position. The Opposition tend to argue that we should not have allowed a situation to arise in which sterling was so convertible de facto, but that was completely impossible. The markets in transferable sterling started to grow up in 1947. It was impossible to prevent their growth and the party opposite, even by using a complete battery of exchange controls could not possibly prevent their growth; and those markets in the countries concerned were perfectly legal.

It is quite wrong to talk about them as black markets or grey markets. They were perfectly legal in the countries concerned but their existence, of course, meant two rates of sterling and the danger that one rate might fall. As soon as the gap between the transferable rate and the official rate became too wide, we came to commodity shunting and other devices which led to a strain on the official rate. Therefore, the decision was taken in 1955 to intervene and to assist and support the transferable rates, simply because it was in these circumstances clear that the best way and the cheapest way of protecting sterling as a whole was by this sort of policy.

I think that there was a great misunderstanding here. The right hon. Member for Huyton keeps on referring to the vast losses which we incurred in 1956 and 1957 by supporting the transferable markets, and the Leader of the Opposition referred to its great cost in 1957. In fact the support of the transferable market in 1957 cost us nothing at all. If anything it made a profit. Over the whole period, from the first decision in 1955, the cost of maintaining the transferable rate has been negligible; and without that tiny expenditure the strains on the official rate would have been very much greater.

Therefore, the policy of 1955 has been proved up to the hilt in practice, and what happened on 29th December was the recognition de jure of what has de facto been the position for a considerable period. So I conclude this part of my argument by saying that the change we have made will make sterling stronger and will make it easier to defend sterling in times of strain than it was a month or two ago.

Now I come to the third part of the Opposition Amendment, which seemed to me to be the most unimpressive of all. This is the part about making more difficult: … the achievement and maintenance in Great Britain and Western Europe of industrial expansion and full employment. This seems to be not so much a declaration of war as a declaration of surrender in the economic field, because in effect it amounts to saying that in the view of the Opposition we cannot have industrial expansion, we cannot have full employment if at the same time we have convertibility. [HON. MEMBERS: "Oh."] Oh, yes. The deduction from that is that in the view of the party opposite we cannot have industrial expansion and full employment unless we also have inflation. That is a perfectly clear deduction.

Mr. Douglas Jay (Battersea, North)

Rubbish.

Mr. Maudling

Oh yes, because if we have expansion without inflation then sterling will grow not weaker but stronger, and there will be no danger whatever in convertibility.

The only possible danger in convertibility would be if inflation were expected, and therefore it clearly follows that if the party opposite think that convertibility and full employment are inconsistent, they also think that inflation and full employment are inseparable. The fact is that employment and expansion can be affected only if in the long term the maintenance of some form of control would enable us to have inflation in this country without affecting the international value of the £, and I think even the Opposition would not seriously maintain that proposition.

The only other possibility is the effect upon employment of short-term fluctuations. I think this is very much what the right hon. Gentleman the Leader of the Opposition had in mind, but here again the £ is not made more vulnerable to speculation; it is made less vulnerable by the measures we have just taken. [An HON. MEMBER: "Why?"] That has been explained several times by my right hon. Friend the Chancellor of the Exchequer. There are several good reasons. One, in particular, is that over recent years we have had more experience of the working of the transferable rate. I think many people felt a little while ago that there was something in the idea of a cushion provided by having a second unofficial rate, but experience has shown that this is not so. As experience of the working of the two rates has proceeded, over the last four years we have realised that we can defend ourselves better with one rate than with two. That is a conclusive reason why the move has not been taken before this time.

This makes no difference to the vulnerability of sterling to speculation, because it does not create any new facility for short-term capital movements. Therefore, as the market will be in England and more under the control of the authorities, it will be easier to defend sterling against speculative movements and, therefore, the need for deflationary measures and so on, which the Opposition have so much in mind, are more likely to be less than more as a result of the measures we have taken.

So I conclude by saying that the case the Opposition have made out on timing falls to the ground completely. They have not attempted to make any case against convertibility as a principle. They have concentrated on the question of timing and they have based their arguments on the proposition that we can protect sterling by forcing people overseas to continue to hold sterling when they do not want to do so. If that were true, I grant them that their argument would be a strong one.

If it were true that by exchange controls and regulations we could force bankers to keep their balances in London at a certain level; if, as my right hon. Friend the Member for Flint, West said, we could force all British traders to pay their bills on the last possible day, perhaps we could iron out these leads and lags, perhaps we could stop those movements which, though called speculative, are the normal movements in the flow of international trade. But it is impossible, and quite out of tune with the facts, to argue that by maintaining the inconvertibility of the £ we could protect sterling against short-term attacks more than we can do by the policy we are adopting, by giving the maximum freedom and usability to the holders of sterling outside this country.

I have endeavoured to deal with the arguments put forward by hon. Members opposite and to deal with the Amendment which they advanced in the terms in which it was written, although the terms in which it appears are rather dissimilar from the speeches that they have made in support of the Amendment. One or two other points were raised by hon. Gentlemen and I am sorry that I have not been able to deal with them all in the course of what I have had to say.

I should like to finish by saying a word or two about the reserves situation. The right hon. Gentleman in talking about the reserves made one or two very good points and omitted one or two others. He talked about the actual level of the gold reserves. It is true that that is not the whole picture, but it is where things have changed and improved so much since 1947. The composition of our liabilities has changed very much for the better both in size and in the pattern of holding. The right hon. Gentleman is departing from his normal standards of fairness when he counts as a liability against us the contribution that we shall have to make for our increased quota in the Fund and omits the fact that we shall get drawing rights five times that amount.

There is also the position of the dollar shortage. The hon. Member for Orkney and Shetland (Mr. Grimond) also referred to this. It is true to say that to talk of a weak dollar is misleading. It may be a weak currency for a short time in purely technical terms, but to talk of it as weak currency in the long term is misleading. On the other hand, there is not now the world-wide shortage of dollars that there was in 1947. What is most impressive is the way the United States last year, when it had such a recession and such problems of unemployment, continued the very substantial outflow of dollars to the rest of the world. I see no reason why the dollar problem should re-emerge.

What has underlain most of the arguments of hon. Members opposite is their inability to get up to date in economic matters. They are always trying to solve the problems that no longer exist. In these matters of international currency they are still sitting slightly bemused in the debris of 1947. I can assure them of one thing; we agree entirely with them that it was a great mistake in 1947, and we should not have made it.

All their arguments lead to the conclusion that they will attempt, if they are ever by any misfortune returned to power, once again to run this economy 101 per cent, flat out on an inflationary basis and rely for maintaining the value of sterling on exactly that system of controls and regulations which proved utterly ineffective in former days. What emerges from the debate is, first, the solid practical case for the Government's move, and, secondly, the utter bankruptcy of the ideas of the Opposition and the inevitable fate of the country if they were ever returned to power.

Question put, That the words proposed to be left out stand part of the Question:—

The House divided: Ayes 308, Noes 255.

Division No. 24.]	AYES	[9.59 p.m.
Aitken, W. T.	Barber, Anthony	Biggs-Davison, J. A.
Allan, R. A. (Paddington, S.)	Barlow, Sir John	Bingham, R. M.
Amery, Julian (Preston, N.)	Barter, John	Birch, Rt. Hon. Nigel
Amory, Rt. Hn. Heathcoat (Tiverton)	Batsford, Brian	Bishop, F. P.
Anstruther-Gray, Major Sir William	Baxter, Sir Beverley	Black, Sir Cyril
Arbuthnot, John	Beamish, Col. Tufton	Body, R. F.
Armstrong, C. W.	Bell, Philip (Bolton, E.)	Bossom, Sir Alfred
Ashton, H.	Bell, Ronald (Bucks, S.)	Boyd-Carpenter, Rt. Hon. J. A.
Atkins, H. E.	Bennett, F. M. (Torquay)	Boyle, Sir Edward
Baldock, Lt.-Cmdr. J. M.	Bennett, Dr. Reginald	Braine, B. R.
Baldwin, Sir Archer	Bevins, J. R. (Toxteth)	Bromley-Davenport, Lt.-Col. W. H.
Balniel, Lord	Bidgood, J. C.	Brooke, Rt. Hon. Henry
Brooman-White, R. C.	Hesketh, R. F.	Molson, Rt. Hon. Hugh
Browne, J. Nixon (Craigton)	Hicks-Beach, Maj. W. W.	Moore, Sir Thomas
Bryan, P.	Hill, Mrs. E. (Wythenshawe)	Morrison, John (Salisbury)
Bullus, Wing Commander E. E.	Hill, John (S. Norfolk)	Mott-Radclyffe, Sir Charles
Burden, F. F. A.	Hinchingbrooke, Viscount	Nabarro, G. D. N.
Butcher, Sir Herbert	Hirst, Geoffrey	Nairn, D. L. S.
Campbell, Sir David	Hobson, John(Warwick & Leam'gt'n)	Neave, Airey
Carr, Robert	Holland-Martin, C. J.	Nicholls, Harmar
Cary, Sir Robert	Holt, A. F.	Nicholson, Sir Godfrey (Farnham)
Chichester-Clark, R.	Hope, Lord John	Nicolson, N. (B'n'm'th, E. & Chr'ch)
Clarke, Brig. Terence (Portsmth, W.)	Hornby, R. P.	Noble, Michael (Argyll)
Conant, Maj. Sir Roger	Hornsby-Smith, Miss M. P.	Nugent, G. R. H.
Cooke, Robert	Horobin, Sir tan	Oakshott, H. D.
Cooper, A. E.	Horsbrugh, Rt. Hon. Dame Florence	O'Neill, Hn. Phelim (Co. Antrim, N.)
Cooper-Key, E. M.	Howard, Hon. Greville (St. Ives)	Orr, Capt. L. P. S.
Cordeaux, Lt.-Col. J. K.	Howard, John (Test)	Orr-Ewing, C. Ian (Hendon, N.)
corfield, F. V.	Hughes Hallett, Vice-Admiral J.	Osborne, C.
Craddock, Beresford (Spelthorne)	Hughes-Young, M. H. C.	Page, R. G.
Crosthwaite-Eyre, Col. O. E.	Hurd, Sir Anthony	Pannell, N. A. (Kirkdale)
Crowder, Sir John (Finchley)	Hutchison, Michael Clark(E'b'gh, S.)	Partridge, E.
Crowder, petre (Ruislip—Northwood)	Hutchison, Sir Ian Clark (E'b'gh, W.)	Peel, W. J.
Cunningham, Knox	Hutchison, Sir James (Scotstoun)	Peyton, J. W. W.
Currie, G. B. H.	Hylton-Foster, Rt. Hon. Sir Harry	Pickthorn, Sir Kenneth
Dance, J. C. G.	Iremonger, T. L.	Pike, Miss Mervyn
Davidson, Viscountess	Irvine, Bryant Godman (Rye)	Pilkington, Capt. R. A.
Davies, Rt. Hon. Clement (Montgomery)	Jenkins, Robert (Dulwich)	Pitman, I. J.
D'Avigdor-Goldsmid, Sir Henry	Jennings, J. C. (Burton)	Pitt, Miss E. M.
Deedes, W. F.	Jennings, Sir Roland (Hallam)	Pott, H. P.
de Ferranti, Basil	Johnson, Dr. Donald (Carlisle)	Powell, J. Enoch
Digby, Simon Wingfield	Johnson, Eric (Blackley)	Price, David (Eastleigh)
Dodds-Parker, A. D.	Johnson, Howard (Kemptown)	Price, Henry (Lewisham, W.)
Donaldson, Cmdr. C. E. McA.	Jones, Rt. Hon. Aubrey (Hall Green)	Prior-Palmer, Brig. O. L.
Doughty, C. J. A.	Joseph, Sir Keith	Profumo, J. D.
Drayson, G. B.	Kaberry, D.	Ramsden, J. E.
du Cann, E. D. L.	Keegan, D.	Rawlinson, Peter
Dugdale, Rt. Hn. Sir T. (Ricnmond)	Kerby, Capt. H. B.	Redmayne, M.
Duncan. Sir James	Kerr, Sir Hamilton	Rees-Davies, W. R.
Duthie, W. S.	Kershaw, J. A.	Remnant, Hon. P.
Eccles, Rt. Hon. Sir David	Kimball, M.	Renton, D. L. M.
Eden, J. B. (Bournemouth, West)	Kirk, P. M.	Ridsdale, J. E.
Elliott, R. W. (Ne'castle upon Tyne, N.)	Lagden, G. W.	Rippon, A. G. F.
Emmet, Hon. Mrs. Evelyn	Lambton, Viscount	Roberts, Sir Peter (Heeley)
Errington, Sir Eric	Lancaster, Col. C. G.	Robertson, Sir David
Erroll, F. J.	Langford-Holt, J. A.	Robinson, Sir Roland (Blackpool, S.)
Farey-Jones, F. W.	Leather, E. H. C.	Robson Brown, Sir William
Fell, A.	Leavey, J. A.	Roper, Sir Harold
Finlay, Graeme	Leburn, W. G.	Ropner, Col. Sir Leonard
Fisher, Nigel	Legge-Bourke, Maj. E. A. H.	Russell, R. S.
Forrest, G.	Lennox-Boyd, Rt. Hon. A. T.	Scott-Miller, Cmdr. R.
Fort, R.	Lindsay, Hon. James (Devon, N.)	Sharples, R. C.
Fraser, Hon. Hugh (Stone)	Lindsay, Martin (Solihull)	Shepherd, William
Freeth, Denzil	Linstead, Sir H. N.	Simon, J. E. S. (Middlesbrough, W.)
Galbraith, Hon. T. G. D.	Llewellyn, D. T.	Smithers, Peter (Winchester)
Gammans, Lady	Lloyd, Rt. Hon. C. (Sutton Colbfield)	Smyth, Brig. Sir John (Norwood)
Garner-Evans, E. H.	Lloyd, Maj. Sir Guy (Renfrew, E.)	Soames, Rt. Hon. Christopher
George, J. C. (Pollok)	Lloyd, Rt. Hon. Selwyn (Wirral)	Spearman, Sir Alexander
Gibson-Watt, D.	Longden, Gilbert	Speir, R. M.
Glover, D.	Loveys, Walter H.	Spence, H. R. (Aberdeen, W.)
Glyn, Col. Richard H.	Low, Rt. Hon. Sir Toby	Stanley, Capt. Hon. Richard
Godber, J. B.	Lucas, Sir Jocelyn (Portsmouth, S.)	Stevens, Geoffrey
Goodhart, Philip	Lucas, P. B. (Brentford & Chiswick)	Steward, Harold (Stockport, S.)
Gough, C. F. H.	Lucas-Tooth, Sir Hugh	Steward, Sir William (Woolwich, W.)
Gower, H. R.	McAdden, s. J.	Stoddart-Scott, Col. Sir Malcolm
Graham, Sir Fergus	Macdonald, Sir Peter	Storey, S.
Grant, Rt. Hon. W. (Woodside)	Mackeson, Brig. Sir Harry	Stuart, Rt. Hon. James (Moray)
Grant-Ferris, Wg Cdr. R. (Nantwich)	McLaughlin, Mrs. P.	Studholme, Sir Henry
Green, A.	Maclay, Rt. Hon. John	Summers, Sir Spencer
Gresham Cooke, R.	Maclean, Sir Fitzroy (Lancaster)	Sumner, W. D. M. (Orpington)
Grimond, J.	McLean, Neil (Inverness)	Taylor, Sir Charles (Eastbourne)
Grimston, Hon. John (St. Albans)	Macleod, Rt. Hn. Iain (Enfield, W.)	Taylor, William (Bradford, N.)
Grimston, Sir Robert (Westbury)	Macmillan, Rt. Hn. Harold (Bromley)	Teeling, W.
Grosvenor, Lt.-Col. R. G.	Macmillan, Maurice (Halifax)	Temple, John M.
Gurden, Harold	Macpherson, Niall (Dumfries)	Thomas, Leslie (Canterbury)
Hall, John (Wycombe)	Maddan, Martin	Thomas, P. J. M. (Conway)
Hare, Rt. Hon. J. H.	Maitland, Cdr. J. F. W. (Horncastle)	Thompson, Kenneth (Walton)
Harris, Frederic (Croydon, N.W.)	Manningham-Buller, Rt. Hn. Sir R.	Thompson, R. (Croydon, S.)
Harris, Reader (Heston)	Markham, Major Sir Frank	Thornton-Kemsley, Sir Colin
Harrison, A. B. C. (Maldon)	Marlowe, A. A. H.	Tiley, A. (Bradford, W.)
Harrison, Col. J. H. (Eye)	Marples, Rt. Hon. A. E.	Tilney, John (Wavertree)
Harvey, Sir Arthur Vere (Macclesf'd)	Mathew, R.	Turner, H. F. L.
Harvey, John (Walthamstow, E.)	Maudling, Rt. Hon. R.	Turton, Rt. Hon. R. H.
Hay, John	Mawby, R. L.	Vane, W. M. F.
Heald, Rt. Hon. Sir Lionel	Maydon, Lt.-Comdr. S. L. C.	Vaughan-Morgan, J. K.
Henderson, John (Cathcart)	Medlicott, Sir Frank	Vickers, Miss Joan
Henderson-Stewart, Sir James	Milligan, Rt. Hon. W. R.	Vosper, Rt. Hon. D. F.

Wakefield, Sir Wavell (St. M'lebone)	Webster, David	Wood, Hon. R.
Walker-Smith, Rt. Hon. Derek	Whitelaw, W. S. I.	Woollam, John victor
Wall, Patrick	Williams, Paul (Sunderland, S.)	Yates, William (The Wrekln)
Ward, Rt. Hon. G. R. (Worcester)	Williams, R. Dudley (Exeter)
Ward, Dame Irene (Tynemouth)	Wills, Sir Gerald (Bridgwater)	TELLERS FOR THE AYES:
Watkinson, Rt. Hon, Harold	Wilson, Geoffrey (Truro)	Mr. Legh and
Webbe, Sir H.	Wolrige-Gordon, Patrick	Mr. Edward Wakefield.
NOES
Abse, Leo	Grenfell, Rt. Hon. D. R.	Mitchison, G. R.
Ainsley, J. W.	Grey, C. F.	Monslow, W.
Albu, A. H.	Griffiths, David (Rother Valley)	Moody, A. S.
Allaun, Frank (Salford, E.)	Griffiths, Rt. Hon. James (Llanelly)	Morris, Percy (Swansea, W.)
Allen, Arthur (Bosworth)	Griffiths, William (Exchange)	Morrison,Rt.Hn.Herbert (Lewis'm, S.)
Allen, Scholefield (Crewe)	Hale, Leslie	Mort, D. L.
Awbery, S. S.	Hall, Rt. Hn. Glenvil (Colne Valley)	Moss, R.
Bacon, Miss Alice	Hamilton, W. W.	Moyle, A.
Balfour, A.	Hannan, W.	Mulley, F. W.
Bellenger, Rt. Hon. F. J.	Hastings, S.	Neal, Harold (Bolsover)
Bence, C. R. (Dunbartonshire, E.)	Hayman, F. H.	Noel-Baker, Rt. Hon. P. (Derby, S.)
Benn, Hn. Wedgwood (Bristol, S.E.)	Healey, Denis	O'Brien, Sir Thomas
Benson, Sir George	Henderson, Rt. Hn. A. (Rwly Regis)	Oliver, G. H.
Beswick, Frank	Hewitson, Capt. M.	Oram, A. E.
Bevan, Rt. Hon. A. (Ebbw Vale)	Hobson, C. R. (Keighley)	Oswald, T.
Blackburn, F.	Holman, P.	Owen, W. J.
Blenkinsop, A.	Holmes, Horace	Padley, W. E.
Blyton, W. R.	Houghton, Douglas	Paget, R. T.
Boardman, H.	Howell, Charles (Perry Barr)	Paling, Rt. Hon. W. (Dearne Valley)
Bottomley, Rt. Hon. A. G.	Howell, Denis (All Saints)	Paling, Will T. (Dewsbury)
Bowden, H. W. (Leicester, S.W.)	Hoy, J. H.	Palmer, A. M. F.
Bowles, F. G.	Hughes, Cledwyn (Anglesey)	Pannell, Charles (Leeds. W.)
Boyd, T. C.	Hughes, Emrys (S. Ayrshire)	Pargiter, G. A.
Brockway, A. F.	Hughes, Hector (Aberdeen, N.)	Parker, J.
Broughton, Dr. A. D. D.	Hunter, A. E.	Parkin, B. T.
Brown, Rt. Hon. George (Belper)	Hynd, H. (Accrington)	Paton, John
Brown, Thomas (Ince)	Hynd, J. B. (Attercliffe)	Peart, T. F.
Burke, W. A.	Irvine, A. J. (Edge Hill)	Pentland, N.
Burton, Miss F. E.	Irving, Sydney (Dartford)	Plummer, Sir Leslie
Butler, Herbert (Hackney, C.)	Isaacs, Rt. Hon. G. A.	Prentioe, R. E.
Butler, Mrs. Joyce (Wood Green)	Janner, B.	Price, J. T. (Westhoughton)
Castle, Mrs. B. A.	Jay, Rt. Hon. D. P. T.	Price, Philips (Gloucestershire, W.)
Champion, A. J.	Jeger, George (Goole)	Probert, A. R.
Chapman, W. D.	Jeger, Mrs.Lena(Holbn & St.Pncs, S.)	Proctor, W. T.
Chetwynd, G. R.	Jenkins, Roy (Steohford)	Pursey, Cmdr. H.
Cliffe, Michael	Johnson, James (Rugby)	Randall, H. E.
Clunie, J.	Johnston, Douglas (Paisley)	Rankin, John
Coldrick, W.	Jones, Rt.Hon.A. Creech (Wakefield)	Redhead, E. C.
Collick, P. H. (Birkenhead)
Corbet, Mrs. Freda	Jones, David (The Hartlepools)	Reeves, J.
Craddock, George (Bradford, s.)	Jones, Elwyn (W. Ham, S.)	Reid, William
Cronin, J. D.	Jones, Jack (Rotherham)	Reynolds, G. W.
Crossman, R. H. S.	Jones, J. Idwal (Wrexham)	Robens, Rt. Hon. A.
Cullen, Mrs. A.	Jones, T. W. (Merioneth)	Roberts, Albert (Normanton)
Dalton, Rt. Hon. H.	Key, Rt. Hon. C. W.	Roberts, Goronwy (Caernarvon)
Darling, George (Hillsborough)	King, Dr. H. M.	Robinson, Kenneth (St. Pancras, N.)
Davies, Ernest (Enfield, E.)	Lawson, G. M.	Rogers, George (Kensington, N.)
Davies, Harold (Leek)	Ledger, R. J.	Ross, William
Davies, Stephen (Merthyr)	Lee, Frederick (Newton)	Royle, C.
Deer, G.	Lee, Miss Jennie (Cannock)	Shinwell, Rt. Hon. E.
de Freitas, Geoffrey	Lever, Harold (Cheetham)	Short, E. W.
Delargy, H. J.	Lever, Leslie (Ardwick)	Silverman, Julius (Aston)
Diamond, John	Lewis, Arthur	Silverman, Sydney (Nelson)
Dodds, N. N.	Lindgren, G. S.	Simmons, C. J. (Brierley Hill)
Donnelly, D. L.	Logan, D. G.	Skeffington, A. M.
Dugdale, Rt. Hn, John (W, Brmwoh)	Mabon, Dr. J. Dickson	Slater, Mrs. H. (Stoke, N.)
Ede, Rt. Hon. J. C.	McAlister, Mrs. Mary	Slater, J. (Sedgefield)
Edelman, M.	McCann, J.	Smith, Ellis (Stoke, S.)
	MacColl, J. E.	Snow, J. W.
Edwards, Rt. Hon. John (Brighouse)	MacDermot, Niall	Sorensen, R. W.
Edwards, Rt. Hon. Ness (Caerphilly)	McGhee, H. G.	Soskice, Rt. Hon. Sir Frank
Edwards, Robert (Bilston)	McInnes, J.	Sparks, J. A.
Edwards, W. J. (Stepney)	McKay, John (Wallsend)	Spriggs, Leslie
Evans, Albert (Islington, S.W.)	McLeavy, Frank	Steele, T.
Evans, Edward (Lowestoft)	MacMillan, M. K. (Western Isles)	Stonehouse, John
Fernyhough, E.	MacPherson, Malcolm (Stirling)	Stones, W. (Consett)
Finch, H. J.	Mahon, Simon	Strachey, Rt. Hon. J.
Fitch, Alan	Mainwaring, W. H.	Strauss, Rt. Hon. George (Vauxhall)
Fletcher, Eric	Mallalieu, E. L. (Brigg)	Stross,Dr.Barnett(Stoke-on-Trent,C.)
Forman, J. C.	Mallalieu, J. P. W. (Huddersfd, E.)	Summerskill, Rt. Hon. E.
Fraser, Thomas (Hamilton)	Mann, Mrs. Jean	Swingler, S. T.
Gaitskell, Rt. Hon. H. T. N.	Marquand, Rt. Hon. H. A.	Sylvester, G. O.
George, Lady Megan Lloyd(Car'then)	Mason, Roy	Taylor, Bernard (Mansfield)
Gibson, C. W.	Mellish, R. J.	Taylor, John (West Lothian)
Gooch, E. G.	Messer, Sir F.	Thomas, George (Cardiff)
Greenwood, Anthony	Mikardo, Ian	Thomas, Iorwerth (Rhondda, W.)

Thomson, George (Dundee, E.)	Wells, William (Walsall, N.)	Willis, Eustace (Edinburgh, E.)
Thornton, E.	Wheeldon, w. E.	Wilson, Rt. Hon. Harold (Huyton)
Timmons, J.	White, Mrs. Eirene (E. Flint)	Winterbottom, Richard
Tomney, F.	White, Henry (Derbyshire, N.E.)	Woodburn, Rt. Hon. A.
Ungoed-Thomas, Sir Lynn	Wigg, George	Woof, R. E.
Usborne, H. C.	Wilcock, Group Capt. C. A. B.	Yates, V. (Ladywood)
Viant, S. P.	Wilkins, W. A.	Younger, Rt. Hon. K.
Warbey, W. N.	Willey, Frederick	Zilliacus, K.
Watkins, T. E.	Williams, David (Neath)
Weitzman, D.	Williams, Rt. Hon. T. (Don Valley)	TELLERS FOR THE NOES:
Wells, Percy (Faversham)	Williams, Richard (Openshaw)	Mr. Popplewell and Mr. Pearson.

Bill read a Second time.

Bill committed to a Committee of the whole House.—[Mr. Bryan.]

Committee Tomorrow.