§ At this stage, I must say something about the external position and the future of sterling. We can reasonably hope for some continued improvement in our current balance this year. On the other hand, we must expect that our long-term capital outflow will also tend to increase. The needs of other countries for economic aid are rising. In the last two years we have experienced a substantial inflow of capital in conditions which are not likely to be repeated this year. The change on the capital side might, therefore, well offset any improvement on current payments. But, as shown by the figures for 1962 which were published last Thursday, the underlying position from which we start is much sounder than has sometimes been realised.
§ I absolutely reject the proposition that a vigorous economy and a strong position for sterling are incompatible. A healthy expansion based on increasing efficiency and control of costs is the key to the strength of sterling. Of course, if expansion leads to inflation and to rising costs, then it cannot be sustained, both for external and for internal reasons. So long, however, as we can keep our costs steady and competitive, I am convinced that our basic strength is such that we shall have no need to be deflected by external factors from a policy of modernising and expanding our economy.
§ It is, of course, possible that in the early stages of a programme of more vigorous expansion, imports may rise faster than exports. But the pace at which imports are likely to rise with expansion is frequently over-estimated because there is normally a lag in the building up of stocks to correspond to 471 higher levels of output. Moreover, in so far as there is a stocking up movement related to expansion, in effect the building up of working capital, then I think that it is perfectly reasonable and sensible to finance such a movement out of our reserves or out of our borrowing facilities in the International Monetary Fund and elsewhere.
§ This is surely what these various facilities exist for. It is wrong to use reserves or borrowing facilities to boost up an internal position which is unsound because costs, prices and incomes have got out of hand. But it is equally unsound to refuse to use reserves and borrowing facilities for the purposes for which they exist, namely, to deal with temporary situations and prevent temporary difficulties obstructing the proper long-term development of the economy.
§ Sterling is subject to many influences. As an international currency it is to some extent open to the shifting currents of world trade and payments, and to political developments. But we must always distinguish between the intrinsic strength of sterling, which is what is most important, and temporary movements of confidence. So long as our economy is sound and our position competitive, the intrinsic strength of sterling must be great. We may face short-term fluctuations of one kind or another, but we have substantial resources available to meet them.
§ In addition to our first-line gold and dollar reserves, we have a stand-by arrangement with the I.M.F. which permits us quick access to 1 billion dollars of external finance—and this is only part of our Fund drawing rights, which total nearly 2½ billion dollars. And in saying this I have taken no credit for the dollar securities we own, which naturally fluctuate in value, but average around 1 billion dollars.
§ These are all large, tangible assets which we have available. In addition, there is the intangible asset of the developing co-operation between countries of the free world in tackling monetary problems, not least in dealing with speculative attacks against particular currencies. The Committee will, of course, be aware that at times during the past two months or so sterling has been subject to speculative pressure of this kind.
472§ We have, therefore, called upon the support available to us from other central banks, which has been willingly given. In all, 250 million dollars have been advanced to us during the months of February and March, and these borrowings have, of course, been reflected in the published figures of the change in our gold and convertible currency reserves for the two months. I have no doubt that what we have done is wise. Short-term capital movements one way or the other do not add to or detract from the economic strength of the country. The effect of recent movements has been that we have temporarily exchanged obligations to central banks for obligations to a wide variety of other holders of sterling.