HC Deb 05 July 1965 vol 715 cc1123-31
The Chancellor of the Exchequer (Mr. James Callaghan)

With your permission, Mr. Speaker, I should like to make a statement about my visits to Canada and the United States.

Both these visits had as their aims the exchange of views and information with my opposite numbers in the two countries, and in particular to see what common ground exists, or can be developed, for achieving progress on the vital question of international liquidity.

In Ottawa, I had very useful talks with Mr. Walter Gordon, Canadian Minister of Finance, and some of his colleagues.

In Washington, I met the recently appointed Secretary to the United States Treasury, Mr. Henry H. Fowler, and several other United States Ministers. In addition I had conversations with the President and Vice-President. With permission, I will circulate in the OFFICIAL REPORT the text of the communiqué issued in Washington on 30th June.

On the particular issue of international liquidity, Her Majesty's Government regard as urgent the problem of devising appropriate arrangements which might be used for the creation of additional liquidity. In this connection, I would remind the House that there is an expectation that the growth of world trade will slow down over the next year. We must try to ensure that our problems are not made more difficult by deficiencies in international monetary arrangements. Some progress has, of course, already been made. As the House knows, if the recommendations recently made by the International Monetary Fund are fully implemented the total of Fund quotas will be increased from about 16 billion dollars to 21 billion dollars.

I am under no illusions about the serious difficulties in the way of making further progress, which can only come by agreement. At present, the nations hold many differing views. There are those who believe that the present scale of international liquidity is in itself sufficient, but that the system is being misused by countries in balance of payments deficit; while there are others who believe that there is currently a shortage of liquidity and that immediate action should be taken to create more.

Following from this, nations are not yet in agreement about the priority of the tasks which need to be undertaken. One view, for example, is that the first requirement is to put in hand a fundamental reconstruction of the international monetary system, in the belief that once this has taken place the supply of liquidity will be brought under more conscious control than hitherto. Another view is that comparatively small adjustments in the functioning of the system would be sufficient.

My talks with the United States authorities show that they are actively considering these problems and are proceeding—as we are—with a sense of urgency. I see the rôle of Her Majesty's Government as one requiring continued persistence and flexibility. I should myself prefer to reach a solution which is built upon, or is closely linked with, the International Monetary Fund, since this institution has great capacity for expansion and development, and has served the world well during the last 20 years.

I therefore propose to continue my discussions with the French Finance Minister and with the Secretary of the U.S. Treasury. I also hope to have talks with other Finance Ministers, in an endeavour to secure a solution which will contribute to the growth of world trade and thus assist both the industrialised countries, and also the developing nations.

The talks in Washington shewed that both Governments are agreed that the pound and dollar will continue to play an essential rôle as reserve currencies; that there is an identity of interests between them; and that both Governments must, and will, maintain and intensify the measures of financial co-operation which already exist.

Mr. Heath

While welcoming the Chancellor back to take part later in the Report stage of the Finance Bill, may I ask whether he will answer three questions? First, can he give to the House any one practical, concrete result which has been achieved by his visit to Ottawa or Washington, since all that emerges from his rather lengthy statement is the fact that he proposes to continue to have talks? In particular, what is meant by the phrase "intensify the measures of financial co-operation"? Is this just part of the talks or is some practical action meant?

Secondly, on the question of liquefying the portfolio, which is mentioned in the communiqué, the phrase used is: … would continue to co-operate by managing the portfolio in such a way as to minimise the impact of the operations on the United States balance of payments … This implies that there has already been some transfer of the proceeds of liquefying the portfolio into the reserves themselves, but I know that the Chancellor recently stated that this was not the case. Will he now clarify the situation?

Thirdly, on the question of international liquidity, his statement describes the various positions which are held in the world on this point, but it does not give Her Majesty's Government's position. Would the right hon. Gentleman kindly tell the House what exactly is the view of Her Majesty's Government about international liquidity and what action they consider should be taken?

With great respect, now that the right hon. Gentleman describes the rôle of Her Majesty's Government as "one requiring continued persistence and flexibility," is he aware that continued persistence and flexibility is not a policy? Will he now say exactly what is the policy of Her Majesty's Government?

Mr. Callaghan

On the last point made by the right hon. Gentleman, I went on from what he quoted to the next paragraph, which he did not read out. These problems must be based—at least, it would be best to base them—on the International Monetary Fund and we are making it our aim to try to get international liquidity increased in that way. At the same time, where extreme views are held on either side, in view of our desire to see a mechanism for creating international liquidity in existence, it is not for us to take up an extreme view one way or the other if we are to try to synthesise different points of view.

Although I could make a tremendous demarche, if the main objective is to secure a mechanism which will enable additional liquidity to be created I am certain that the best rôle which Her Majesty's Government could play is persistently and patiently to try to reconcile different points of view which may not be so far apart as they seem at first blush.

The right hon. Gentleman also asked what concrete results came from the meeting. I went there to meet my opposite number, and to exchange views for the first time with him. We did not set out to solve all the world's problems. We did achieve a certain identity of interest, and found that the approach we were making to problems in which the United States and Britain are very largely concerned is a joint one. But I cannot pretend that in the course of 48 hours we achieved concrete results. What we found was an identity of view.

The expression "intensifying financial co-operation" refers to the particular measures that exist between the United States and Britain at present in this field, and they will continue. As to liquefying the portfolio, I can tell the right hon. Gentleman that no transfer has taken place so far into the reserves; when it does take place I shall say so.

Mr. Grimond

As the policy of the Government as expressed by the Chancellor is to reach a solution built on or linked with the International Monetary Fund, can the right hon. Gentleman give the House a little more information? Does it mean that he views the International Monetary Fund as eventually taking the place of what one might call the International Central Bank, or has he in mind to initiate or administer one of the numerous schemes linked with famous economists put forward during the last few years?

Mr. Callaghan

All I have in mind is that the General Agreement to Borrow was designed—and it comes up for renewal this year—among the main industrial nations in close connection with the International Monetary Fund. As is, I think, well known, there are some nations which feel that any proposal for creating international liquidity should not be based on the Fund. It could possibly be that a solution was found by linking arrangements outside the Fund with the Fund, perhaps somewhat on the lines of the General Agreement to Borrow. It is in that connection that the phrase was used.

Sir C. Osborne

The Chancellor said that it was agreed that world trade would slow down next year. This is very important to this country, which has to live, as to 30 per cent., on its exports. Can the right hon. Gentleman say by about how much it is thought that world trade will slow down next year? Will his plans forestall any possibility of a repetition of 1931, which started in the same way as this movement seems to be starting?

Mr. Callaghan

I do not think that I said that there was agreement on this, but that there was an expectation that world trade would slow down. I must particularise, and say that that is my expectation, based on the advice I get; but not all nations would share that view. That is one of the difficulties in trying to get them to move at present. Some say that it is merely a question of maldistribution of liquidity, and do not think that a slow-down in world trade will arise as a result of the present arrangements.

I do not think that there is any prospect of 1931 being repeated. The underlying strength of the United States economy is profound; and the United States authorities recognise their responsibility in this field. No speeches that have been made there—although certain phrases have been picked up—would, I think, lead anyone to believe that a responsible body of opinion in the United States, which has such a great weight in the development of world trade, thinks that there is any danger of the sort of situation that arose over 30 years ago occurring again.

But I take the view that there is the danger of slow-down. I cannot quantify. It is making our export problem more difficult, and I have based my forecast that we will get into balance in the second half of 1966 on a large increase in exports, so that we have a large interest in this country in maintaining a high level of world trade.

Mr. Emrys Hughes

In his discussions with his opposite number, did my right hon. Friend explain that we were trying to solve some of our financial problems by reviewing our defence expenditure? And did he dare suggest to his American opposite number that the dollar might be safer if Americans themselves spent a little less on defence?

Mr. Callaghan

I did not like to suggest what their policy should be, but I did inform their financial authorities that we were hoping, from now on as far as possible and certainly by 1970, to keep within an overall limit of £2,000 million on defence at 1964–65 prices. I made it quite clear, and I repeat it now in this House, that without the great burden of overseas defence and overseas aid across the exchanges, this country would have a balance of payments surplus at the present time.

I may say also to my hon. Friend that we had some very interesting discussions on the operation and nature of the Corporation Tax; and that they found some of our recent discussions a little surprising.

Mr. Maudling

Are the Government still pursuing, amongst other possibilities, the possibility of a mutual currency account within the Fund?

Mr. Callaghan

That proposal, which is linked with the name of the right hon. Gentleman, and which I always thought was rather unfairly attacked when it was put forward, is certainly one that I would be very glad to adhere to if there seemed any likelihood of general agreement on it; but, alas—and the right hon. Gentleman found this, too—it is not so easy to get unanimous agreement on matters of this sort.

Several Hon. Members

rose—

Mr. Speaker

Order. We must pass on.

Following is the text of the communiqué: Statement on discussions held 29th June by Chancellor of the Exchequer James Callaghan of Great Britain and Secretary of the Treasury Henry H. Fowler at the United States Treasury. British Chancellor of the Exchequer James Callaghan and Secretary of the Treasury Henry H. Fowler agreed in their talks at the United States Treasury that in present circumstances the primary contribution of both the United Kingdom and the United States to international financial stability and the improvement in the international monetary system is to achieve and sustain a broad equilibrium in their international balance of payments. Secretary Fowler noted that the voluntary effort by American bankers and businessmen to reduce their net dollar outlays abroad undertaken earlier this year at the President's request is having an encouraging effect. Provisional indications are that this and the wide range of other efforts being made to end the United States payments deficit resulted in surpluses during March, April and probably in May, however the United States plans no relaxation of its efforts. The country is now entering the period of the year when tourist expenditures increase dollar payments to foreigners markedly. Imports are rising with continued internal expansion and there are increased dollar outlays in South Vietnam and in the Dominican Republic. The accumulation of dollars in reserve holdings abroad in past years is the cause of large continued gold outflows, such as those of the current year. The Chancellor of the Exchequer and Secretary Fowler agreed that the prospects for an early and sustained equilibrium in the United States balance of payments resulting from the efforts of the last four years were good, and that there should be no relaxation in the execution of President Johnson's programme of 10th February, 1965. The Chancellor said that a substantial improvement had taken place in the British balance of payments during the first quarter of 1965. He expected a big reduction in the deficit on current and long-term capital account for 1965 as a whole. The measures which the British Government had taken in the fields of fiscal policy, credit control, the stimulation of industrial efficiency, incomes policy and economic planning were beginning to work through the economy—and he reiterated his aim of balancing Britain's overseas payments in the second half of 1966. In discussing the interaction of the balance of payments programmes of the two countries, the Chancellor drew attention to the effect on the British position of the measures which the United States had undertaken to correct its balance of payments. In this connection, Secretary Fowler emphasised that the guidelines for the voluntary restraint programme take account of the United Kingdom payments problem. The United States pointed out that the British Government's programme described by Mr. Callaghan to the British Parliament on 12th April, for continuing to raise gradually the proportion of the British Government's holding of non-sterling securities in a liquid form, and their use to reinforce the reserves, would involve an adverse impact on the United States balance of payments. Secretary Fowler recognised the need for this British programme and the Chancellor reiterated earlier assurances that the British authorities would continue to co-operate by managing the portfolio in such a way as to minimise the impact of the operations on the United States balance of payments and avoid any significant impact on the United States security markets. He added that these operations had now been carried to a point where the portfolio could be used to reinforce the United Kingdom reserves at short notice. With respect to the problem of international liquidity, it was felt that a number of countries will require time to consider their attitudes in the light of changing developments in international payments, and with the benefit of technical studies now being completed in the Group of Ten. In this connection, the Chancellor referred to discussions which he had held with M. Giscard d'Estaing, the French Minister of Finance, and Secretary Fowler indicated that he hoped to have talks with the finance ministers of other major countries in the latter part of the year on the subject of international liquidity. These talks would explore the various possibilities with a view toward any reinforcement that would help to assure a payments system fully responsive to the continued growth of international trade. The British and American Ministers were agreed that any such reinforcement must await the development, out of the present divergent opinions, of an international consensus on this subject, but that constant and persistent efforts should be pressed at the ministerial level, both during and after the meetings of the World Bank and International Monetary Fund. In this connection the Chancellor stressed the importance of the needs of the developing countries. The Ministers agreed that the two reserve currencies would continue to play an essential part in the financing of international trade and as a medium in which to hold reserves. They recognised that the interests of the two currencies were closely bound up with one another. This identity of interests had already been recognised in the measures of financial co-operation taken by the two countries which should be maintained and intensified. In addition to the Chancellor and the Secretary, participants in the Treasury discussion included:

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