§ The Chancellor of the Exchequer (Mr. James Callaghan)Now for exchange control. The Committee knows that we have long had a comprehensive and effective system of exchange control covering both direct and portfolio investment in countries outside the sterling area and our current transactions with them. Of course, changes in policy and scope have been made from time to time. I have scrutinised the system again and have decided that some important changes must be made.
At present, for direct investment outside the sterling area, official exchange is allowed for certain specially favourable projects, and for the rest applicants are directed to the investment currency market or encouraged to borrow overseas. I have now decided that the criteria for the use of official exchange should be revised, and made more stringent. In future, official exchange will be made available only where two criteria are satisfied. First, the project must bring a substantial continuing return to the United Kingdom balance of payments—for example, in additional export earnings. Secondly, there must be good prospects that the overall return to the balance of payments will, within the short-term, equal or exceed the capital outflow.
270 In all cases where official exchange is allowed in future, or has been allowed since July, 1961, the Bank of England will call for periodic reports to show how the return actually achieved in exports or otherwise compares with the expectations, on the basis of which permission was given for the use of official exchange.
Where official exchange is not given, investment will continue to be financed as now with investment currency, or by appropriate long-term borrowing abroad. This applies to all projects, small as well as large. I hope particularly that firms planning such projects will make every effort to find the necessary finance, or as much of it as possible, by borrowing abroad.
Next, I propose some changes affecting the investment currency market itself. This is a market distinct from the official exchange market in which foreign securities can be bought and sold at a premium that has been varying recently from 7 per cent. to 13 per cent. over the official exchange rate. In the main, this market is based on trading in existing foreign investments owned by residents in this country. In addition, residents of the United Kingdom have been allowed to sell as investment currency—that is, at the premium—some other receipts of foreign currencies such as the proceeds of wills and gifts which have accrued to them from abroad. In future, these accruals will be exchanged at the official rate, and not at the premium rate, so that the foreign currency will come into the reserves instead of being available for reinvestment through the currency market. Details will be given in the usual notices issued by the Bank of England.
I also propose to end the arrangement under which investment currency is made available for the purchase of houses outside the sterling area. I do not consider it right, in present circumstances, when the balance of payments is the overriding consideration, that the proceeds of sale of remunerative overseas investments should be used for this purpose; and some reduction in the pressure of demand on the investment currency market would also be desirable. So, in future, the foreign currency proceeds of sale of houses and similar property abroad owned by residents of the United Kingdom will be earmarked as 271 property currency. From the pool so created property currency will be available for use by residents for the purchase of houses abroad, but no other foreign currency will be made available for this purpose. I am sure that the Committee would like to know that normally only one house per family will be permitted.
I next propose some measures to check that exchange control rules are being observed. The first concerns the receipt of payment for exports. Unless permission for extended credit has been given, exporters are normally required to obtain payments from their foreign customers within six months of the date of shipment of the goods from this country. Customs and Excise carries out sample checks to verify that this requirement is being observed. In present circumstances, I think it right that the percentage of cases checked should be substantially increased. This is being done.
It is also necessary to exercise closer supervision over the use made of foreign exchange for travel purposes. I do not propose to introduce a limit on foreign currency for genuine travel and holiday expenditure. Although this is costly, nevertheless if people work hard for 50 weeks in the year then we should not make it too difficult for them to enjoy a good holiday abroad for the other two. Of course, if they prefer to stay at home they will discover many delightful and uncrowded parts of these beautiful islands, and by saving foreign exchange will be able to make a contribution to the balance of payments. I hope that many will decide to do so, and I am sure that they will have a good holiday in Britain. I am sorry to say that there is evidence that the foreign exchange facilities for holidays are being misused by a number of unscrupulous people who are evading the regulations.
In future, therefore, the amount provided for this purpose in cash, or travellers' cheques, or the equivalent, will be recorded on the passports of travellers. Up to £250 for any one journey will be allowed on demand, as at present; and this will in no way inconvenience the genuine holiday maker. But anyone purchasing more that this in any year will be asked to provide evidence to the Bank of England that the funds are 272 required for genuine travel expenditure, and are not being accumulated for any other purpose. The amount of sterling notes which travellers may take out of the country and exchange abroad is being reduced from £50 to £25 a journey, and certain other modifications are being made in travel facilities.
Finally, I have decided to make a change designed to bring into the reserves some part of the proceeds of the sale of non-sterling currency securities held by residents of the United Kingdom. Under present exchange control rules, when a resident of the United Kingdom acquires foreign currency by selling foreign securities abroad, he is allowed to reinvest the whole of this foreign currency in other foreign securities, or to sell it at a premium on the investment currency market.
In future, with a few exceptions, a resident who sells foreign securities abroad will be required to exchange into sterling at the official rate the equivalent in investment currency of 25 per cent. of the proceeds of the sale. So he will continue to get the premium for 75 per cent. The investment currency to be exchanged may be provided either out of the proceeds of the sale of foreign securities, or by a purchase of investment currency in the market. Provided that the equivalent of 25 per cent. is exchanged in this way at the official rate, the proceeds of sales of securities abroad will continue to be available for reinvestment abroad in approved investments or for sale as investment currency.
The principle of exchanging 25 per cent. at the official rate will apply, in general, to all transactions which could give rise to investment currency, including those settled in London for sterling. It will apply to sales of direct investments outside the sterling area. But there will be special provision for exempting jobbers and financial institutions in respect of operations involved in making a market in foreign currency securities. The new arrangements will come into force immediately. Details will be made known to the Treasury and the Bank of England.
The broad effect of the change will be to bring into the official reserves 25 per cent. of the proceeds of all sales by United Kingdom residents of non-sterling securities and direct investments. This will help to strengthen sterling.
273 Total private portfolio holdings of foreign securities will be to some extent diminished, because of the diversion to the reserves from the investment currency market of the equivalent of 25 per cent. of the proceeds of all sales. But the capital value of private holdings of portfolio securities has greatly increased over the years. At the same time, we have been adding to our total stock of private investments outside the sterling area by the provision of official exchange for certain direct investments. We shall be continuing to allow official exchange for direct investments which meet the criteria. that I have already outlined. We shall be the better able to do this by reason of the measures I have just announced.