HC Deb 21 March 1962 vol 656 cc455-66

Order for Second Reading read.

6.31 p.m.

The Economic Secretary to the Treasury (Mr. Anthony Barber)

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

The Bill is very short and its purpose is simple. It is to enable the United Kingdom to join in the scheme which the International Monetary Fund announced last January—and the purpose of that scheme is to enable the Fund to acquire additional resources if they should be needed. The details of the scheme are set out in a Decision of the Executive Directors of the Fund. This has been published by the Fund, and for the convenience of the House it has been reproduced in a White Paper Cmnd. 1656. The same White Paper also contains an exchange of letters, to which I shall refer in a moment, setting out an understanding between the countries which are expected to join in the scheme, about the way in which it will operate.

As my right hon. and learned Friend the Chancellor of the Exchequer has already referred to the I.M.F. scheme in the debate which took place on 18th December, and as a good deal of information about it has already been published, I will not delay the House unnecessarily in sketching the background. The House will recall that the I.M.F. found it necessary in September, 1958, at its meeting in New Delhi, to seek an increase in its total resources and that this was done by raising members' quotas. The increase in the United Kingdom quota was authorised by the International Bank and Monetary Fund Act, 1959. Since then the Fund has been very active in giving financial assistance from its increased resources. The gross drawings in 1961 of 2½ billion dollars were at the highest annual level in its history.

There are two other developments, in particular, which have led to this proposal for putting additional resources at the disposal of the Fund. The first is the change in the pattern of international payments. In the early days of the I.M.F. almost all Fund drawings were taken in dollars, because the dollar, as well as being a reserve and trading currency, was also the strongest currency. In recent years, however, the United States' balance of payments has been in continuing deficit, while the financial strength of some European countries has greatly increased. If the I.M.F. is to make the most effective contribution to international monetary balance, it is desirable that funds should flow through the I.M.F. from countries in surplus to those in deficit. This means that countries requiring assistance from the I.M.F. should draw the currencies of countries having strong balance of payments and reserve positions. It follows that although the Fund may at any given moment have considerable reserves of convertible currencies, it may be desirable temporarily for some of these currencies not to be used.

To put this in terms of figures, the Fund's resources now total about 15 billion dollars, of which 2 billion dollars is in gold and 6½ billion dollars in the major convertible currencies. Of this 6½ billion dollars, however, nearly 5 billion dollars is in dollars or in sterling and only about 1 billion dollars is in the currencies of the six Common Market countries. It is clear from these figures that the Fund has a real problem in finding enough suitable currencies for drawing whenever either one or both of the countries with reserve currencies, the United States and the United Kingdom, is in deficit.

Moreover, it is vital for the defence of the international monetary system that the I.M.F. should be able to give assistance to the reserve currencies whenever that becomes necessary. It proved possible last summer, as hon. Members know, to arrange a very large drawing for the United Kingdom. It is clear, however, that the Fund would have great difficulty in financing from its normal resources a drawing by the United States up to the full amount of its drawing right. Any such operation would seriously weaken the Fund's ability to finance other drawings at the level reached in the last year or so. I do not suggest that this dilemma will necessarily arise, but it is certainly a function of the Fund to anticipate it.

The second development, which I can deal with briefly, which has led to this proposal to put additional resources at the disposal of the Fund is the progress which has been made in recent years towards greater convertibility of currencies and the lifting of restrictions on payments. It is now very much easier for substantial movements of funds to take place quickly from one country to another, and such movements can affect particularly the two reserve currencies. If the international monetary system is to function satisfactorily, it is important that the Fund should be seen to be adequately equipped to cushion the effects of these short-term movements.

I now turn briefly to the scheme itself. The Articles of Agreement of the I.M.F. already give the Fund power to borrow. The Fund might, however, need to raise the extra funds quickly, and some of the countries concerned had no statutory powers to make loans to the Fund. The United Kingdom was one. If the negotiation of loans had been left until the need arose there might well have been considerable delay. Moreover, there is obviously great advantage in establishing in advance that the Fund will be able to call on the additional reserves when required.

For both these reasons, it seems better to set up a scheme under which the major countries would now put themselves in a position to lend up to specified amounts and on standard terms if and when borrowing by the Fund became necessary. The Managing Director of the Fund, therefore, has negotiated maximum amounts, and standard terms and conditions for the loans with the ten Governments concerned, and these are embodied in the Decision which is set out in detail in the White Paper.

All I need say on this occasion is that the arrangements will become effective when at least seven countries, with commitments totalling an equivalent of 5½ billion dollars, have told the Fund that they adhere to the arrangements and have taken all the steps necessary to enable them to take part. The scheme will then remain in effect for four years with provision for extension. If all the ten countries adhere—and I am confident that they will—the Fund will then have access to a total of 6 billion dollars of supplementary resources, including 2 billion dollars in United States dollars, 1 billion dollars in sterling and approximately 2½ billion dollars in the currencies of the Common Market countries. Hon. Members will, of course, realise that in the nature of the arrangements not all of this 6 billion dollars will be usable at any one time. Nevertheless, the figure of 2½ billion dollars for the currencies of the six members of the Common Market represents a very large supplement indeed to the figure of only 1 billion dollars I have already mentioned in the Fund at present.

The Bill authorises the United Kingdom to make loans under the scheme. The House is entitled to know briefly of the terms on which loans could be made. They are laid down in detail under the I.M.F. decision, and the decision is set out in the White Paper. I think, therefore, that I need indicate only two of them.

First of all, it is an essential part of the scheme that countries will only be asked to lend when their balance of payments and reserves position permits it. This is obviously a point of very great importance. A further safeguard is that all prospective lenders, the participating countries, will consult among themselves when any proposal is made by the Managing Director of the Fund for use of the borrowing scheme.

The exchange of letters set out in the second part of the White Paper embodies the understandings which have been reached about the form of those consultations. Voting arrangements form part of the understandings, but they are to be resorted to only in the unlikely event of participants being unable to reach unanimous agreement. The voting procedure—this, again, I think important—will only cover the question whether the participants are prepared to facilitate, by lending currency to the Fund, an operation of the general order of magnitude proposed by the Managing Director of the Fund. The amount to be contributed by any individual participant will not be determined by voting. This will be a matter for agreement with the participant after holding discussions at the various consultative meetings.

Secondly, the overall limit under the Decision. Loans by each country are limited after making allowance for repayments to a maximum figure. In the case of the United Kingdom, as hon. Members will see from the table in page 10 of the White Paper, the figure is £357 million odd, the equivalent of 1,000 million dollars. There is provision in the Decision for the limits to be increased by agreement. However, as the House will see, the upper limit is written into the Bill so that an increase in the limit could not be made without the sanction of Parliament. We thought that in the circumstances this was the right and proper thing.

Much of what I have had to say has been concerned with technical detail, but what lies behind it is of the utmost importance to every one of us. A strong and efficient structure of international payments is essential if we are to look forward to a steady increase of world trade, which is vital to a country such as ours depending on exports. Furthermore, the fact that ten countries are co-operating to support the scheme is a practical demonstration that they regard the whole structure of international trade as a matter of common concern. As one of the two countries with a reserve currency there can be little doubt that the arrangement is important to us, and one which should on all sides be welcomed as a new step in international co-operation.

This is a new venture which deserves the fullest support, and I commend the Bill to the House.

6.43 p.m.

Mr. Roy Jenkins (Birmingham, Stechford)

I do not think that this Bill is a controversial Bill in itself. Certainly the Bill is not a very informative Bill and we are grateful to the Economic Secretary for the amount of information that he has given to us about it. In so far as one is able to obtain information from a Government publication, the White Paper issued in March, even though to some extent it was an informative document, is certainly a compelling document to read. It begins with ten definitions—perhaps not the most compelling way to begin a document on this or any other subject.

It then goes on to the detailed paragraphs, and then we have an exchange of letters—an exchange of letters, rather oddly, between the Paymaster-General of the French Ministry of Finance writing to the Chancellor of the Exchequer and addressing him in very full terms as "The Honourable Selwyn Lloyd, C.B.E., T.D., Q.C., M.P." To that he gets in reply a letter from the Chief Secretary to the Treasury and addressed rather jejunely, "Monsieur Baumgartner, Ministre des Finances, Paris." I think that seems, both from the point of view of the address and possibly also from the point of view of the signatory, a rather inadequate reply to the more flowery letter which was received.

However, in so far as we know what is behind the Bill, we know more from the comments which appeared after the agreement was signed at the beginning of January, after the agreement was published, I think on 9th January, than we did from the White Paper, and the main comment, really picked on two points. They first of all suggested that this represented a fairly powerful shift of international financial influence from the other side of the Atlantic to Europe, considerably strengthening the obligations and the power of the countries in Europe in relation to the International Monetary Fund beyond what they previously had. Secondly, the comments suggested that the underlying assumption on which this agreement seemed to be based was that there was no remaining problem in international liquidity so far as trade is concerned, that the problem which had to be dealt with—and, indeed, the only problem which was suggested had to be dealt with—by this new arrangement was the question of capital movements, of hot money movements, but not the disequilibrium arising because of structural trade difficulties.

If it is assumed that we have left such trade difficulties entirely behind us, certainly in the old form, that of a semipermanent dollar shortage, I think that they will have disappeared from the world scene, at any rate for a long time to come. But this does not mean that they may not perhaps be replaced by some almost equally persistent but different difficulties, and I think it would be rash to assume that there was not a problem of this sort which had to be dealt with.

Therefore, I think our approach to this agreement should be that, if it is a stopgap agreement somewhat increasing the amount of international liquidity so far as the ten members subscribing to the club are concerned, well and good, then it is a step in the right direction, but if it is suggested that it deals with all long-term problems of international liquidity and that there is no need any more to think about the Triffin scheme or the Stamp scheme because the problem has entirely been dealt with, I think that would be a mistaken view and would mean that there were disadvantages in the agreement which had been arrived at.

After all, the basic position is that world trade over the past ten years has increased by approximately 50 per cent., and during that period world reserves have increased by little more than 15 per cent., by less than one-third of the amount of increase of world trade. Therefore, I think that there is liable to be a problem arising out of trading difficulties and not merely out of the movement of capital difficulties.

I think it is also important, too, to realise the fairly limited extent of the increase in liquidity which this agreement makes available. In the first place, of course, the assistance can only be given to the 10 members of the club. It cannot be given to any country outside. In the second place, as the Economic Secretary, I think, quite fairly indicated, the fact that this is so, the fact that assistance can only be given to the member countries, means that it can never be given to the maximum extent of the resources which appear to be made available by the agreement.

We can never give 6 million dollars of aid entirely to a country. A situation could arise in which the 2 billion could not possibly be given because the dollar is under pressure and, therefore, the drawing rights of the nation cannot be used, and, indeed, a situation in which we might have sterling under pressure, when, therefore, our billion of lending power could not be enforced either. Therefore, the effective increase in international liquidity is likely to be only about 3 billion dollars.

This is not by any means a complete answer to the problem, and it would be dangerous if it were thought that it were. Nevertheless, I welcome the arrangement. It is a step in the right direction, but there are other steps which need to be taken in the future.

6.50 p.m.

Mr. T. H. H. Skeet (Willesden, East)

I am not certain that we accept the view that this will lead to any vast increase in international liquidity. If so, it would be that we are passing to an international body some control over global inflation.

The Economic Secretary said that the vast proportion of drawings from the International Monetary Fund had been made in the form of dollars, and I think we should realise what drawings have been made over the past fourteen years. Out of a total of about 4,100 million dollars, 3,300 million have been made in the form of dollars, and the drawings in the form of sterling have been very small indeed. My hon. Friend is right in saying that there has been a weakening in the dollar over the course of years. It is thus necessary to have a new form of International Monetary Fund which can carry on in contemporary conditions.

This agreement is a logical step. I think hon. Members will recollect that the central bankers of Europe got together and decided to stockpile sterling, provided that they had recourse against our drawings from the International Monetary Fund, which were substantial indeed.

The question now arises whether we are right in accepting the principles incorporated in the Bill, the Jacobsson Plan, which is, after all, the baby conceived at the Vienna Conference, or should we have looked at something more radical such as the Triffin, Stamp or other plan? I subscribe to the view that it is acceptable to look at the present machinery or something approximating thereto at this stage. The time is not ripe for the acceptance of more radical schemes.

There are problems here. I have looked at the exchange of letters, and I see that those who will decide in the first instance whether other participants should be offered facilities will have a right to vote on the matter. If the donor countries are to subscribe additional funds, should not they have some control over how the money is spent? I hope that the Economic Secretary will give us his views on this matter. Obviously if the voting is to be at this stage two-thirds majority, on a numerical basis, that means that seven out of ten participants would have to agree. There is another condition about three-fifths of the majority of the weighted votes. This would perhaps include the United States who would be subscribing $2,000 million, the United Kingdom who would be subscribing $1,000 million, and, of course, Western Germany who would be subscribing another $1,000 million.

At this stage are the participants entitled to look at the position of the country asking for additional drawing rights, or is it an irrevocable appropriation? In other words, if this country is contemplating in the near future going into the Common Market, will it be as easy for us to go to the International Monetary Fund and get additional funds when we require them, or will we be faced with an inquisition as outlined in paragraph C of this exchange of letters?

We will be faced by at least five of the six members of the European Economic Community who will be sitting in judgment on us to decide whether these facilities should be granted. There is nothing in the exchange of letters to show that the French views have prevailed, but paragraph D says: If during the consultations a participant gives notice that in its opinion, based on its present and prospective balance of payment and reserve position, calls should not be made on it, or that calls should be for a smaller amount than that proposed, the participants shall consult amongst themselves to try to get the additional money required. Does that mean that a country will be entitled not to subscribe if it feels that the recipient country is not entitled to the money, or is a country only entitled to say that for its own balance of payment reasons it is not in a position to provide the money? In other words, there could be a dangerous situation if a country which has not put its own house in order comes along to the International Monetary Fund and finds that the fund is irrevocably committed, and that it must provide the necessary cover in an emergency.

The House may recollect a small article in The Times of 21st June, 1961, which referred to hot money. My hon. Friend talked about the form of short-term capital movements. Let us give it its correct name. It is volatile money which is moving rapidly over the Exchanges, and it has been a considerable embarrassment to us in the United Kingdom. It has led to our recent crisis, and is behind some of our principal troubles, the pay pause, and so on. This is what The Times said on 21st June, 1961: The Bank for International Settlements, for example, suggests that the outflow of funds from the United States last year was close on $2,000 million, and that the shift of funds within Europe in a single week this spring was more than a quarter of that sum (i.e., as much as $500 million or more in a week). The E.M.A. report puts the inflow of short-term funds into Europe last year at around $3,000 million. Hon. Members will realise that shortly after June, in fact in September, we faced one of the biggest crises of our history. If it were not for the Basle Agreement, we might have been forced into the situation which hon. Gentlemen opposite had to face in September, 1949. when the £ was devalued. If we go into Europe, and if there is a certain amount of strain on sterling, will we have full support under this arrangement so that we get through successfully without being forced to devalue the £?

I leave the House with two thoughts. First, that the creditor countries such as West Germany and Italy, two vanquished nations, should recognise their sense of responsibility to other States. In other words, that we should have the international co-operation outlined in this document. For this reason I am glad to give the Bill a Second Reading.

Secondly, it is important that we in the United Kingdom should not indulge in self-denigration and give other countries the impression that we feel that we cannot get through our difficulties. If we do this, nobody will try to assist us. We must ask other nations to be reasonable about what they are going to do, and see that we put our own house in order. We must not, as some people are doing in this House, go around saying that we are perhaps a little Great Power. This policy of self-denigration will have the result of under-mining our confidence and will let Britain down.

I need not go further on that matter. I think that I have got my point across. I welcome these proposals, and I hope that hon. Members will appreciate the additional point that this figure of $1,000 million involved in this Bill is a considerable sum of money, but if it contributes to the stability of the two key currencies, sterling and the dollar, it is welcome. What we want is stability in national currencies, and not what we could have—utter confusion.

7.0 p.m.

Mr. Barber

Perhaps I may say a few words in answer to what has been said by the hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) and my hon. Friend the Member for Willesden, East (Mr. Skeet).

First, I agree entirely with what was said by my hon. Friend in his closing observations to the effect that the basic purpose of the scheme is to provide stability in international payments. My hon. Friend seemed to consider that there was something perhaps disadvantageous to the United Kingdom in our having to subscribe to an arrangement of this kind which in terms provides for us not to participate only if we are in balance of payments difficulties. If he will look at the Preamble to the arrangement, which is set out in page 3 of the White Paper, he will see that the whole purpose is that the several countries should make a contribution unless and until they are faced with serious balance of payments difficulties. That qualification is set out in paragraph 7 (d) of the Agreement.

There is also—this is important—in paragraph 11 (f) provision that a participant which has made a loan to the international Monetary Fund may give notice representing that there is a balance of payments need for repayment of part or all of the Fund's indebtedness and request such repayment. The words are: The Fund shall give the overwhelming benefit of any doubt to the participant's representation. Bearing in mind that these arrangements were agreed to between ten countries, I think the terms are reasonable.

The hon. Member for Stechford and my hon. Friend referred to certain wider implications arising from these arrangements. I would certainly agree with the hon. Member for Stechford that these arrangements do not and, indeed are not, intended to deal with the long-term problems of international liquidity. They are not a complete answer. While the scheme was being negotiated, and in the months preceding it, there was considerable discussion as to whether or not there should be a bigger and wider scheme than the one which has just been arranged.

The hon. Member for Stechford referred to Professor Triffin and Mr. Stamp, who have made suggestions go considerably wider. The arrangements to which we have agreed follow broadly along the lines which were advocated by Mr. Bernstein.

The position of the United Kingdom in all this has been that as a short-term measure more needs to be done to strengthen the fund in order to deal with the problems arising from the present imbalance. This is the immediate need which confronts the leading countries of the world. I think that the arrangement which is now before us and which I am asking the House to approve goes a long way to help in that way.

I have dealt with the points which were raised by the two hon. Gentlemen, except that I think the hon. Member for Stechford seems to think that there was something odd about the Chief Secretary to the Treasury replying to M. Baumgartner. I think that at that particular time the Chancellor of the Exchequer was abroad.

Question put and agreed to.

Bill accordingly read a Second time.

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

Committee Tomorrow.