§ Order for Second Reading read.
§ 11.5 a.m.
§ The Chancellor of the Exchequer (Mr. James Callaghan)
I beg to move, That the Bill be now read a Second time.
The purpose of the Bill, as is indicated in the Long Title, is to enable effect to be given to proposed increases in quotas of the International Monetary Fund. The background to the proposals is set out in the Report by the Executive Directors to the Board of Governors of the International Monetary Fund in February, 1965, the full text of which I have presented to Parliament in Cmnd. 2675.
The proposals themselves are to be found in two resolutions annexed to the Report. The first resolution provides for a 25 per cent. increase in the quotas of all members of the Fund. The second resolution provides for individual increases over and above the 25 per cent. general increase for 16 member countries, which do not include the United Kingdom, whose relative economic importance has increased significantly since the last general adjustments in 1959. During March, 1965, the Governors of the Fund voted in favour of the two resolutions by an overwhelming majority, and as one of the Governors I cast my vote in favour on behalf of Her Majesty's Government.
The next step is for members individually to accept the quota increases which are thus offered to them. These quota increases for an individual member come into effect when the country itself has formally accepted it and when members having two-thirds of the total of the existing quotas have formally accepted the increases offered them. As the matter stands, this must be by 25th September 2138 next, but the Fund could extend the time limit. The third condition is that the member has paid a subscription equivalent to the quota increase, which it is required to do not later than 30 days after the two events which I have just described. There are certain qualifications to that, but I do not think I need trouble the House with those, unless it is so desired.
The present quota of the United Kingdom is £696 million—expressed in dollars, that is 1,950 dollars—to which it was increased by 50 per cent. under the authority of the International Bank and Monetary Fund Act, 1959. Originally, it was £464 million, provided for in the Bretton Woods Agreement Act, 1945. The first resolution of the Governors of the Fund provides for a 25 per cent. increase for the United Kingdom—that is, by 487 million dollars to 2,437½ million dollars. That is rounded up, so that, in fact, our increase becomes £175 million—490 million dollars—and our new subscription and quota is about £871 million, or 2,440 million dollars.
The agreement was reached last year in the Group of Ten and in the Fund that the quota should be generally increased. When the Executive Board came to work this out in detail, a 25 per cent. increase was found to be the figure which commanded almost universal acceptance. The previous Administration and we ourselves would have seen advantage in a higher figure, but other countries favoured less because of the fundamental disagreement which has existed on the likely liquidity shortage. Until such agreement is reached, we have found that 25 per cent. is the highest figure which could be agreed. To have pressed for more would have aggravated the problem of finding ways to reduce the effect of the obligation to pay one-quarter of the subscription in gold.
This obligation goes some way to offset the increase in liquidity which the quota increases are designed to provide. It hits hard also at the reserve centres—basically, the United States and ourselves—to whom many other members holding dollars and sterling naturally turn to purchase the gold they need for their own subscription payments.
The Command Paper shows that a way was devised for providing some relief from the impact of the gold subscription 2139 I will explain it, but I hope not to have to go into too much detail, because it is one of the most complicated, esoteric arrangements that it has been my misfortune to have to try to understand—and after the Finance Bill that is saying something. That is not to say that the effect of the Finance Bill is not simplicity itself—its effect, not its provisions.
The precise proposal, as the Command Paper says, is that there should be this general increase of 25 per cent., and that 16 members whose economic development has rendered their existing quotas out of line should have additional increases. It is now up to the individual member countries formally to accept the increases proposed for them; and for many, like ourselves, this involves legislation. Hence the Bill this morning. But before a member can enjoy its new quota, it has not only formally to accept and pay its subscription, but wait until members having two-thirds of the total existing quotas have done the same. This underlines the co-operative nature of the Fund to which the Executive Directors referred in their original Report.
It is clearly in the United Kingdom's interest that both categories of quota increase should take effect. The Fund has helped, and continues to help, the process of world economic expansion and advance along the path of co-operation, and certainly the United Kingdom is among the members which recognise the importance of keeping the Fund liquid.
Our drawings have included very large transactions in two recent periods. In August, 1961, we drew £536 million and had a stand-by agreement for an additional £178 million. In recent months, as the House well knows, we have had two drawings which together totalled £857 million. In 1961, the figure was over £700 million, including the stand-by agreement, and £857 million is the drawing now. Moreover, the one-year stand-by agreements which were entered into by the previous Administration in the summers of 1962 and 1963, although they were undrawn, were the largest stand-by transactions ever entered into by the Fund. If the House accepts the quota increase of £175 million proposed for us, we shall be increasing our drawing rights by five-fourths of this amount, or just over £218 million.
2140 As to the special quota increases, I am glad to say that most of the other countries which are able to take on the larger responsibilities as well as the larger rights of a relatively bigger quota intend, I believe, to do so. We ourselves have drawn the currencies of six of these 16 countries, and overall seven of them have had their currencies used in drawings. Individual adjustments of this kind certainly are one of the ways of keeping the Fund well balanced. After the increases, our own quota will be the second largest by a very large margin and our voting power will remain substantially unchanged—about 10 to 11 per cent. of the total.
Perhaps I had better say a few more words about the gold subscription and mitigating its impact. We would have welcomed even more effective arrangements for mitigating the effect, particularly upon the reserve centres, than those described in the Command Paper, but there were differences of view about this as well. No one denies that the Fund needs a certain amount of gold to serve it as the emergency reserve of liquidity. The question is whether over and above this necessary margin gold benefits the international payments system more by being in the Fund or in the members' reserves.
One difficulty, in our view, is that those who hold that the gold subscription rule should be rigidly observed and that even the easements provided in the Articles of Agreement should not be invoked tend to be those who press the Fund to sell from its gold when the Fund needs to reinforce its reserve and has time to do so deliberately. However, we realise that this difference of view about the rôle of gold was linked to one of the basic difficulties of the discussion of the liquidity problem and we could not hope to press it to an entirely satisfactory solution in this context. From the United Kingdom's point of view, I am satisfied with the outcome in relation to the size of the quota which is proposed.
Perhaps I should not attempt to abbreviate the mitigation system described in the White Paper. Although it is not possible to forecast its results exactly, the approximate outcome for the United Kingdom will be as follows. By taking a special drawing of the kind described in the White Paper equivalent to our gold 2141 subscription of £44 million—which we intend to do; it would be a technical operation—we shall, in effect, spread over five years the burden of paying our subscription. We tried to calculate the additional impact on our gold stocks caused by other countries using their sterling to buy the gold which they need for their subscriptions from us. Tentatively, it lies between £35 million and £40 million. This would be largely compensated by Fund deposits of gold at the Bank of England. It is impossible to assess the duration of those deposits because it is impossible to assess the Fund's future need for gold, but I feel fairly confident that we shall enjoy at least the greater part of the relief for quite a number of years.
As to the 75 per cent. of our subscription payable in sterling which I am asking the House to authorise, this has no budgetary effect. It costs us nothing now and is little more than a book-keeping operation at this stage. Practically the whole sum is lent back to the United Kingdom against the security of special Treasury notes which carry no interest, and these are not called up until the Fund needs sterling. While our own position is being built up again the Fund is unlikely to offer sterling to drawing members on a significant scale, but when our position is restored we shall repay our recent drawings by repurchasing sterling with foreign currencies and other members will be helping us to achieve the same results because the Fund will be steering drawing members back to sterling again.
That is a reasonable and, I hope, detailed enough description of the effect on the United Kingdom of what has been done, but I should take this opportunity of saying a little more about the world liquidity situation. There is no doubt, in our view—I do not know how far this will be universally accepted—that the great efforts being made by the United States in rectifying its balance of payments deficit which have resulted in a considerable improvement, and also our own efforts, are having the consequence of reducing liquidity throughout the world. I am sometimes asked what my definition of liquidity is. I am sure that no hon. Member would ask me for it; but perhaps I could venture my own off-the-cuff definition. It is the quantity of 2142 owned reserves held by a nation plus those short-term credits to which it has reasonably immediate access. It is this which is being altered by what has been taking place in the world during the last few months.
I sympathise with those who argue the advisability of a world liquidity system which depends on the amount of gold mined. I remember the Prime Minister once saying that there are only three gold mines in the world: one is in South Africa, another in the U.S.S.R. and the third at Fort Knox. If one of those three were to close, we do not know what would happen. First, it is not a very literate situation to be dependent on the amount of gold mined, and, secondly, it is not a well developed system to say that the amount of liquidity should depend on other assets which derive from reserve countries which are in deficit.
Therefore, I think that this country should not hesitate to look at more rational means of organising the world liquidity system. There is, however, no basic agreement as yet on the nature or consequences of the remedies. I think that the French position probably would be that if we reform the mechanism the liquidity position will correct itself. That is not a view that I would hold at this stage.
Then, of course, there is the other point of view, that we need additional liquidity anyway. That view is certainly held by the United States and by the United Kingdom. So it is the need to try to reconcile these two positions which I think is making for a certain amount of difficulty at present. The United States has taken a recent initiative in the matter by indicating its readiness to attend a world conference to try to carry the discussion further. It has not proposed that such a conference should be called immediately. Indeed, Mr. Fowler was careful to say that a reasonable certainty of measurable progress through prior agreement on basic points ought to precede such a meeting. I agree with him about that.
It would be our strong view that discussion should go on in anticipation of such a conference. It might not be ready to come to fruition for some time, but it is far better that we should prepare the ground first before we have a meeting 2143 of this sort. The Ossola report, which will be known to many hon. Members and, I hope, will be published, covers a great many of the technical possibilities and I doubt whether there are many more schemes that can be devised which are not already covered by some of the existing schemes.
It is not a shortage of technical schemes for expanding liquidity that confronts us. That is why I have not felt it necessary to rush in with a new scheme of my own. I am sure that there are plenty that we could amalgamate or merge if we wished to do so if the basic decision is there as to whether reform of the present mechanism is sufficient or whether additional liquidity is needed or whether a combination of the two might help.
I would think that the order for discussion of these problems would be to take no final decision on the first question until we had seen where we got to on the second. I think that there is a substantial case for discussing what reform of the mechanism is necessary and, having discussed it, to put it on one side and then continue with discussion as to whether additional liquidity is necessary. In the light of the conclusions reached on the second, we could decide whether there was any room for moving on the first. But I take no strong view about the method. I think that the problem is too important for anyone to take a fixed view about matters of mechanism.
I think that the discussion will have to roam over a very wide field, including the future of the reserve currencies, and there is no reason why we should not have a discussion about that matter. There are strong views on both sides about it. The present monetary system will only work as long as people generally give their adherence to it. If that adherence is withdrawn from its working that in itself raises basic questions and it is no use hiding from them.
I would not shrink from having a basic discussion about the rôle of the reserve currencies, the possibilities of future development and to what extent, if any—I choose my words carefully here—they need to be supplemented by any other acceptable international unit or drawing right or whatever might be the greatest common measure of agreement between the nations. All this seems to me to be 2144 necessary once the system is challenged, in view of the great need that many of us feel for additional liquidity and the need that others feel for reforming the system.
Alongside this, of course, is naturally bound to emerge a discussion on the rôle of the International Monetary Fund. There are certainly those who feel that the Fund should confine itself to relatively short-term or medium-term deficit financing and that the creation of additional liquidity should be in the hands of a small group. Here again, I would feel, in view of all the work that the Fund has done, that to build on the Fund and try to enlarge and expand its scope should be our first objective.
It has done excellent work in many fields. It is an international institution of 20 years' standing and one should not throw it on one side. That view was being expressed by Mr. Fowler in his speech a week or two ago on the subject.
Then there are more technical questions, such as the distribution of any assets that might be created and the method of voting. Discussion on these, too, could be quite open. Methods of voting could, of course, be quite important in settling any particular problems met in this field.
The next step is the meeting in August of the Group of Ten. I think that it will be possible at that meeting to take further the proposal that discussions along the lines I have been talking about might take place. I would hope that they would take those proposals forward; and it would be the aim of Her Majesty's Government to assist in this in every possible way.
Some time ago, the right hon. Member for Bexley (Mr. Heath) asked me to issue a White Paper. I will certainly consider whether we should table proposals, but I do not think that this is yet the moment. I would prefer to see how the discussion goes in August. There will be no quick or easy solution. Although I am right to express, as I have done today, in general terms, Her Majesty's Government's approach, I do not feel that I wish to join the band of protagonists who are taking up fixed lines in a field where I think there are so many issues. With good will, or, at any rate, a desire to put the world liquidity system on a 2145 more secure basis for the long term, I think that the problems could be solved.
I should not finish without paying tribute to the I.M.F. and to Mr. Schweitzer and his staff. The Fund has fulfilled its purpose and is applying itself to the changed requirements of today. That should not leave the impression that the Fund is merely or mainly an organisation for the developed countries. Although, as I have pointed out, it is not concerned with long-term assistance for development it plays an important part in helping its many less developed members over short-term difficulties. Indeed, the majority of the Fund's normal operations are on behalf of such countries, and in 1963 it decided to make specially favourable arrangements under which countries which rely heavily on exports of a few primary products might have their quotas increased and might draw limited amounts to help them overcome the effects of temporary export short-falls due to factors beyond their control.
I think that what is happening in the world today, quite apart from such things as crop failures or falls in world prices, is due to factors that are beyond the control of developing countries. I have referred to efforts by the developed countries to solve their balance of payments problems. There is, therefore, special responsibility upon the developed nations and, through them, upon the I.M.F. to ensure that the developing nations do not suffer unduly as a result of the steps that the United States and the United Kingdom are taking. There is also, I think, an obligation upon countries which are in credit to play a substantial part in this kind of financing of the developing countries and I hope that they will do so, too.
I therefore commend the Bill to the House. I am sure that it will not be controversial, but I shall look forward to hearing the views of hon. Members who have something to say about a most esoteric and difficult subject, but one, nevertheless, which is extremely important—ensuring that world trade continues at a high level, and introducing stability in our monetary arrangements between the various countries of the world, a stability which is absolutely vital if world trade as a whole is to expand.
§ 11.30 a.m.
§ Mr. William Clark (Nottingham, South)
This seemingly simple Bill, as the 2146 right hon. Gentleman said, covers a very difficult and complicated subject, even as complicated, as he said, as the recent Finance Bill. I am glad that the Chancellor has spoken about the question of international liquidity because as for the Bill there is very little to be said about it and what has to be said can be said in a very few words.
The real subject is the whole question of international liquidity, some countries having a surplus, some having a deficit, and all countries simultaneously trying to get into surplus, and this is where the trouble starts. It is exactly the same as the position between Scotland and London. Scotland is always in deficit so far as London is concerned, but it is covered by capital, taxation redistribution, investment, and so on, and this is done simply because we have a common currency, and there is the question of financial discipline—so nobody will default. This is the nub of international liquidity: how can we get the countries of the world to trust one another sufficiently so that we can increase world trade?
I said that some countries have deficits, some surpluses. I think it is essential, in talking about international liquidity, to differentiate between revenue surplus and deficits, and capital surplus and deficits, and I shall try to say later why I say that. A country can run a deficit as long as it likes—at least, as long as its reserves hold out. Before the war not very much thought was given to this subject. People did not think much about balance of payments, surpluses, liquidity and the rest, but since the war, because of the increase in industrialisation, and nationalistic movements throughout the world, and independent nations emerging, there has been more thought given to this subject.
As the Chancellor says, this was more or less brought to a conclusion at Bretton Woods. This is whence the whole idea of the International Monetary Fund stemmed; the I.M.F. was set up in 1946, and 102 countries belong to it. The Chancellor has rightly said that this Bill is to increase the quota by approximately 25 per cent., rounding up to 2,440 million dollars. As far as I can gather, this means that the capital of the Fund is being increased from something of the order of £5,500 million to something of the order, without the second resolution, of £7,200 million and 2147 this is the extent of the increase in the liquidity; that figure of about £7,000 million is the capital of the Fund.
I do not think there would be any disagreement on either side of the House that an increase in international liquidity is absolutely vital not only for this country but for any other country and particularly developing countries. Of course, this is quite easy here. If one wants to develop a domestic industry one borrows from one's bank, gets an overdraft, and so on. What we have to do here—and we wish the Chancellor all the luck in his talks—is to see whether we can convince other countries that it is essential to increase liquidity. There must be some international financial trust between countries, and, as the Chancellor said, countries which are in surplus must play their part in pumping back into circulation the surpluses which they have gained.
I thought that nobody would disagree that it is necessary to increase world liquidity in view of the fact that in real terms world trade over the past 15 or 20 years has been increasing by about 6 per cent. in real terms and world reserves have not been increasing at the same rate, and that is the root of the trouble, as the Chancellor says. Many people have had a look at this. Professor Triffin, of Yale, put out a scheme. My right hon. Friend the Member for Barnet (Mr. Maudling) put out a scheme, in 1962, the Maudling Plan. There has been the Stamp Plan. We have the Bernstein Plan and the Rueff Plan—masses of plans. Each one of them, I think one can argue, has something good about it, and it is a question of somehow amalgamating all those plans so that we can get the best from them and get international agreement.
Of course, all the plans, as I say, are trying to increase world liquidity, but the one underlying theme in most of the plans is that there must be financial discipline as far as member-countries are concerned. This is where all these plans have in the past, in discussions and debates in the various financial centres, fallen down, because bankers, who are fairly orthodox and conservative people, say there must be financial discipline, and I think that everybody on both sides of 2148 the House would agree with this, because there is one fundamental thing we must remember about increasing world liquidity.
To increase international, world liquidity is no use unless the economy of a particular country is sound. It is exactly the same as having an unsound business, going to one's bank and increasing one's overdraft. What we have to do is to make absolutely certain that each country, including this, belonging to the Fund has its whole economy sound. If we can do this then I think we are in a better position to convince other people that we are prepared to subject ourselves to this discipline. I need not remind the House that we cannot have rising prices and inflation and think we can borrow. This does not only apply to this country but to all countries.
There has been much speculation as to our own position regarding liquidity. I personally think that this has been over-exaggerated. I am not at all pessimistic myself about our long-term position. We have, as we know, the dollar securities, and we have about £4,000 million worth of portfolio investment in private hands and other investments—£10,000 million altogether. This is indicative of the strength and wealth of this country. When people talk of our gold and dollar reserves this is not the last piece of our wealth. This is really a token of our wealth.
If I may, as the Chancellor did, in passing refer to the Finance Bill, I think that the overseas investment which we have, this £10,000 million, is our real wealth, and I personally regret the implications of the Finance Bill that this, on the long-term view, will be reduced. I can understand the argument from the world liquidity point of view and from the reserves point of view that one must stop exporting capital temporarily, if I may put it as crudely as that, but this is no reason for penalising existing capital held overseas.
I should have thought with all the talk about international liquidity and all the arguments and discussions which have gone on that it was high time—I am sure the right hon. Gentleman will agree with this—that something was done about it. There has been so much talk, but very little has happened.
2149 Various suggestions have been put forward. I think that Mr. Rueff's suggestion about this dependence on gold is a little old-fashioned. Gold does not produce anything. It is not a producer of any income at all, and, as the Chancellor said, with gold one is restricted to the two main suppliers, Russia and South Africa. If there is this adulation of gold, the Iron Countries might be able to manipulate it, and it would be a ridiculous position for a grown-up world to accept. After all, why should gold determine how much trade we should have?
The capital of the I.M.F. is very small—about £7,000 million. Our import bill is about £5,500 million. How can we suggest that the I.M.F. can look after the world from the point of view of temporary deficits when the position is that our trade alone—forgetting the rest of the sterling area—is about £5,500 million a year in imports?
I come back to the question of it being essential to differentiate between revenue and capital. Any pressure that there is on sterling and on the dollar is due to the overseas aid provided by both these countries. If we consider the position of the dollar, we find that the visible trade of the Americans is in balance, and that it is only capital and the aid exported abroad that is putting pressure on the dollar. I think that it is to the credit of the Americans that they have not drawn in their horns and said, "Let us stop this", because we can all imagine what might happen if American aid was withdrawn from the under-developed countries. This is a vicious circle. If the under-developed countries do not get aid they cannot industrialise. If they cannot industrialise they cannot buy from the West. If they do not buy from the West there is a run-down here, and so it goes on.
Much the same comment applies to this country. I am sure that the Chancellor would agree that our revenue position, as opposed to our capital position, is very good. Over the past 10 to 15 years the revenue position has been in surplus as I am sure the right hon. Gentleman would agree. We should remember that when we talk about pressure on sterling and on the dollar. I should like to emphasise this question of the pressure 2150 on sterling, particularly with regard to the under-developed countries, because it is essential that the Americans and ourselves should continue to invest abroad.
One thing that should be mentioned is the City of London. It is acknowledged to be the best financial centre in the world, and I should like to read to the House what Mr. Rueff says about it. Mr. Rueff has come in for a certain amount of criticism, but on 13th February he said:I can only say that from the outside I don't have the feeling—it's only an impression—that there is a great financial problem in the United Kingdom. I always live under the impression that Britain is the country that has the highest financial tradition and the best equipment in the field of credit. The London market is a model and for thirty years I have been fighting for the introduction of its practice into France.I think that that is a very good recommendation from somebody who looks dispassionately at our country.
One thing that makes people a little worried about putting money into developing countries is the fact that as yet there is no financial code, no world organisation that will provide a guarantee against confiscation, and so on. This has a tremendous effect on the developing countries. I am sure that a lot of money could go into those countries, but, as the Chancellor pointed out, one of the difficulties is to decide who is going to control this fund, or this bank, or whatever it may be. The key to the problem lies in deciding voting rights, who controls it, and so on.
If we go into any world organisation, be it financial or otherwise, there must be some small loss of sovereignty. After all, we lose sovereignty if we go to a bank to borrow money, because we are dependent on the bank manager, and I cannot see that there is any difference between that and going to an international bank.
With regard to control, I do not think that we should pay too much attention to the fact that we might lose some of our sovereignty, because if our home economy is sound, we have nothing to fear. No country whose home economy is sound has anything to fear. The only person who has anything to fear is the person who will not be able to pay his debts. That is not the position of this country. We are very sound internationally, because we have sufficient 2151 reserves which can be realised if the need arises. I do not think that we should worry too much about control, although I appreciate that when these talks start the questions about control, voting, and so on, will have to be settled.
Many people have put forward different ideas for world liquidity, and I think that the Chancellor is right not to take a firm stand. I think that it is ridiculous to do so, but, on the other hand, I do not think that it does any harm to debate the various suggestions which have been put forward without being too definite about them.
I am sure that there is something that we could get for a world organisation. At the moment the reserve currencies for international liquidity are gold, the dollar and the £ sterling. I am sure that we need a new reserve currency. I cannot say whether the answer is the C.R.U., the composite reserve unit, but one thing that is very encouraging is that on 10th July Mr. Fowler, in a speech at Hot Springs about international liquidity, said that the Americans were ready to discuss international liquidity. There are many economists, financiers, and bankers who say there is sufficient liquidity, and some say there is not. I think that there is not sufficient liquidity, but in saying that I am not one to expect liquidity without the discipline that any financial transaction entails.
§ Mr. Charles Fletcher-Cooke (Darwen)
I do not disagree with anything that my hon. Friend has said, but surely the crux of this is how to persuade the creditor nations that the increase in liquidity is not going to water down the value of their debts? Once that can be done, it seems that all the technical matters fall away like scales.
§ Mr. Clark
I could not agree more. I am not suggesting that I have the answer to my hon. and learned Friend's question. This is what all these experts have been trying to do since Bretton Woods. A country which is in surplus one year may not be in surplus in five years' time. Banking in its widest sense is a matter of trust. If there was a new organisation, and if every country had complete confidence in the stability and the integrity of that organisation, there would be no question of watering down 2152 reserves. I agree that this is extremely difficult.
But I am sure that the Chancellor agrees that Mr. Fowler's speech is encouraging. The Americans are now prepared to talk about international liquidity. Theirs and ours are the two main reserve currencies in the world. We are convinced that we want some increased liquidity. Up till now the Americans have not been too keen. Now they say that they want to talk. I would have thought that this was an excellent opportunity for the two main reserve currencies in the world to probe and reach a world agreement.
Nobody wants to increase money merely to squander it. Everybody would agree that it is extremely stupid, however, to allow trade to be stifled simply through a lack of credit, when so much trade is available in the world. There is much wealth in the under-developed countries. All that is required is the credit to get it out. I know that many strings are attached to the problem, but I have put it broadly. It is a crying shame that we cannot improve the standards of living in these countries although this wealth is available.
I would have thought that a prudent extension of credit was essential, so that all nations could enjoy the benefits of capitalism. This Bill is a move in the right direction, although I am sure that the Chancellor would agree that it is only a small step. We support the Bill, and we shall support any other measures to increase world liquidity. I should like to see world liquidity and credit developed on such a scale that any country which has a sound home economy was able to develop as fast as any other country by being able to obtain the credit necessary for the purpose.
§ 11.53 a.m.
§ Mrs. Shirley Williams (Hitchin)
I imagine that many plans are being hatched on various benches in the Chamber but I do not intend to add the Williams plan to the list. I want to start where the Chancellor and the hon. Member for Nottingham, South (Mr. William Clark) started, by referring to the shortage of liquidity and to the fact that there has been a much greater increase in trade over the years than the increase in liquid resources. But, as the hon. Member said, 2153 the question whether we have adequate liquidity is only part of the problem caused by the growing acuteness of the position as a result of attempts by the two major reserve currency countries—the United States and Britain—to rectify their own positions.
The squeeze which is now being placed on world liquidity resources is growing more acute literally month by month. If we examine the situation in the United States—the main source of reserve currencies in the years since the war—we see that in the last six months she has moved a long way towards putting her balance of payments into balance, and the effect of the new dollar squeeze is being fell in many industrialised countries and developing countries all over the world.
What has been happening in the last few weeks in Japan is not without significance in relation to the sense of crisis that people feel about world liquidity. It is difficult to assess the American contribution to world liquidity. One assessment, which is a little exaggerated, but not too much, was made recently by M. Giscard d'Estaing, the French Finance Minister, who suggested that as much as 30 billion dollars have been poured into the dollar balances held by other countries all over the world between 1951 and 1964. In the last few months we have seen the United States putting this position right by all sorts of methods—by the interest equalisation tax and by the attempts to tie even more strongly—and this relates to what the hon. Member for Nottingham, South was saying—the overseas aid which America is giving, to the purchases of dollar goods. This does not make life easier. In addition, the United States is making efforts to cut down the foreign exchange element in her military expenditure overseas, and is driving an extremely hard bargain in regard to the sale of arms to our allies and other countries.
This does not make the situation easier for us. We fully appreciate why the United States has to do this, but it means that the pressure comes again on the other reserve currency—sterling—and understandably we, too, are taking increasing action to put this right. The difficulty with this double effect of both sterling and dollars moving back to a position of payments balance is that world 2154 liquidity is sharply reduced. When the world position moves from a situation of shortage to a situation of potential crisis, the crisis is likely to be most acute for the developing countries who, although they represent two-thirds of the non-Communist world, have reserves amounting only to about 10 per cent. of world liquid resources—not even as much as 7 billion dollars.
As my right hon. Friend and the hon. Member for Nottingham, South said, one might wish that those countries in credit would carry a larger part of the burden, but we should be optimistic if we supposed that this would happen very quickly. In the last few months we have seen not an increase but a reduction in the contribution made by West Germany to the consortium for aid to India.
Those hon. Members who follow the French Press from time to time will see that pressure is building up against President de Gaulle's aid programme, because it is felt to be far too large a part of French overseas expenditure. There is little sign, except from Japan, that much rapid relief will come to underdeveloped countries from countries in credit. That is why I want to refer to the way in which they and their interests can be built into the world liquidity machinery.
The other fact that I must mention in this situation, because it is crucial, is that the liquidity situation has moved from a technical and economic question to a fundamental question of political power. We must recognise that in the twenty years since the end of the Second World War the reserves position of the world has changed and has not been reflected—in the decision-making power of the great economic countries—in the machinery of liquidity. To put that in rather less jargon terms, what we have seen is a vast increase in the reserves of the European countries on the mainland of Europe, who today hold about 65 per cent. of all claims on the International Monetary Fund. On the other side, we have seen a dramatic drop in the share of world reserves held by the United States. Taking gold and foreign exchange together, there has been a drop from 61 per cent. in 1949 to 24 per cent. today. Neither the voting power in the I.M.F. nor the structure of reserve currencies in any way reflects this change. That is at the heart of the alterations and reforms 2155 which must be made if we are to have a more sensible monetary structure.
How can we go about this? First, I want to say a word about the United Kingdom and then about the machinery of monetary policy. It is quite clear that we have a fairly sound revenue position, but this is only half the battle, because it is not simply the question of our having chosen to invest a good deal of capital overseas or to carry a heavy share of defence expenditure for the West; it is also that our economy is so structured that it is almost automatic for us to behave in this way.
One of the things that my right hon. Friend is trying to do is to restructure the economy in such a way as to change its priorities. The priority of domestic growth and exports has begun to take precedence over the ancient priorities of capital investment overseas, and also, perhaps, the carrying of a defence burden which is rather too great for this country to bear in the middle of the 20th century. I want to quote to my right hon. Friend his own remarks. He said:Without the great burden of overseas defence and overseas aid across the exchanges Britain would have a balance of payments surplus.I agree, but how are we to rectify the structure in such a way as not to create grave damage to a world which today still depends far too much on sterling?
I think that all the measures which the Government have taken in this direction are ones which should have the support of both sides of the House—the attempts made in the Finance Bill, by the modernisation of our export trade and to give incentives to greater exports. This will, I think, be a long-term solution.
Now I want to talk about one of the more immediate solutions. First, I want to suggest very strongly that we need to reach a compromise with the European countries and, in particular, with France. I suspect that we should look closely—and something which my right hon. Friend said recently gave me great encouragement in this respect—at the proposals for some sort of composite reserve unit.
I do not mean a scheme identical with that suggested by M. Giscard d'Estaing, 2156 let alone the President of France. I mean the possibility of a unit supporting the world reserve currencies, one which might be tied closely into the International Monetary Fund and which might have in it elements of the main European currencies outside sterling and the dollar and which might add to liquidity without putting extra pressure on the traditional reserve currencies which cannot take more pressure. I think that it would have the beneficial effect of recognising the growing power of Continental countries in the whole of the world economy field.
Secondly, we want to move towards automatic acceptance of the first credit tranche of the I.M.F. The concern and even panic that can be caused by using what were meant to be automatic powers under the Bretton Woods Agreement—another is changes in the value of currencies—has much to do with the rigidity of the monetary system. I think, thirdly, that an increase in the I.M.F. resources, probably through a composite reserve unit by the non-reserve currencies of the world, might be used for helping the developing countries, which are the countries hardest hit, by the I.M.F. investing part of the newly-created credit in them.
I have only two more points to make. The first is that my right hon. Friend referred to the methods adopted in 1963 to give additional compensatory financing to developing countries to help with a temporary deficit owing to a fall in export revenues. I think that one can put a large query mark against the question, what is meant by "temporary"? When one sees a long-term slide in commodity prices, as at present, I think we need to give serious attention to the whole question of refinancing the debt of developing countries and enabling them at least to offset the fantastic decrease in their balances by having a preferential call on the International Monetary Fund.
The other point is whether at the discussions going forward in August among the Group of Ten and again in September at the International Monetary Fund—and perhaps this is something that only a back-bencher can say—one of the things that might be considered is some widening in the gold points since we have reached the position where we are 2157 virtually solidified in respect of any change in exchange rates. I think that this might give us a greater degree of flexibility while we work out a more rational and sensible system of monetary arrangements.
§ 12.4 p.m.
§ Mr. R. Gresham Cooke (Twickenham)
I, too, would like to welcome the Bill as a step forward towards international liquidity. This, obviously, is extremely important, because it has to grow with the increase in world trade as, otherwise, that trade will be stifled. Our situation in the last year or two has been affected by the dramatic fall in the net resources of America. It fell from 15,000 million dollars in 1958 to about 100 million dollars at present and that has had an adverse effect on this country and, indeed, on all countries.
At Bretton Woods Lord Keynes tried to persuade the world to a wise action. He tried to get Britain and the International Agreement to accept the necessity for creditor nations to allow debtor countries to pay their way by accepting from them goods and services. I should have thought that the lesson of the Versailles Treaty and the payment of reparations after the 1914–18 war would have reinforced that so that the suggestion would have been accepted. But, of course, nationalism is always too strong. The struggle for financial balances by each nation has degenerated into a trade war since the Second World War, and especially in France and Germany. These two countries have favourable balances, and reserves two or three times stronger than our own.
It has been said today that we have three reserve currencies—gold, dollars and sterling. The dollar is confined mainly to financial and monetary functions, but sterling is first and foremost the commercial reserve currency of the world; 45 per cent. of international trade is financed by sterling. Half of the world's gold, wool and manganese is produced in the sterling area. Two-fifths of tin, cocoa and rubber is produced in it.
The question is: how can we increase world liquidity? The simplest and most direct method would be to revalue gold from the 35 dollars fixed in 1934 by the Americans per fine oz. to 45 dollars per fine oz. I know that there are difficulties 2158 and that it would be hard for the American public to accept the idea that their dollar would fall in relation to gold. They believe that this would help Russia and would be difficult to get through Congress. But if the Americans did this it would, by a stroke of the pen, bring out hoarded gold all over the world, and it would increase gold production and greatly assist world trade.
The second step, obviously, which was mentioned by the hon. Lady the Member for Hitchin (Mrs. Shirley Williams) in her very able speech, and as my hon. Friend the Member for Nottingham, South (Mr. William Clark) said, is to bring about a new reserve currency, formed by the Group of Ten. Perhaps the simplest way would be to have a certificate issued at a low rate of interest, not competitive with the dollar and the £ but which would take off the strain from these currencies in times of stress.
I must admit that I am not at all hopeful of either of these things being done and, therefore, unlike other hon. Members, I am pessimistic regarding the outlook for this autumn. As a director of companies with one foot in motors and one in machine tools, I have been desperately involved in the matter of exports and the balance of payments, and I feel very conscious that our position is most dangerous.
Our exports were up in the first six months of this year from £2,247 million to £2,404 million. That was quite good, but we cannot expect any sensational increase. We are struggling to get more. I had some personal experience in the Easter holidays when I went to Turkey and tried to sell machine tools and buses in that country. But Turkey has not the currency, or the import allocations. It is trying to buy a few things from Russia and Eastern Europe, and this is the position all over the world. One comes across difficulties in every country. Our own position is still very dangerous. Despite the surcharge, our imports went up in the first six months of this year from £2,780 million to £2,857 million. It is surprising how they have increased. This has left us with a crude difference for the first six months' trading of £453 million on the wrong side. Taking off the 10 per cent. for freight and insurance which will come back to us, it is still a formidable lack of balance.
2159 Where do these things lie in our country? I was looking last night at our overseas trading account. In the first five months and I see that our expenditure on meat is up from £145 million to £156 million, our expenditure on fruit and vegetables is up, timber and timber products are up very substantially, by about 15 per cent. Petrol is up from £248 million to £264 million; chemicals are up from £40 million to £43 million, non-ferrous metals up from £121 million to £153 million, machinery from £136 million to £147 million, including marine and other types of engines. Road motor vehicles are up slightly from £23 million to £24 million.
Even more important, motor parts and accessories for tractors have gone up in the last six months from £1.7 million to £6.8 million. Why has this happened? We are the greatest exporter of tractors in the world and have been for years, yet the imports of parts and accessories for tractors are showing this staggering increase. Photographic and optical goods, and scientific instruments, have all increased from £26 million to £29 million. This is perhaps why one sees all those cameras and binoculars in Victoria Street. One wonders why we cannot make more of these here at home.
There is no hope of curing our balance of payments troubles—other nations are in equal difficulties—in a month or two. The simple fact is that we can bring our balance of payments troubles into balance only by cutting still further our imports. That is why I am pessimistic about the position. In June, we lost £24 million and we borrowed from the New York Federal Reserve Bank, I believe, about £50 million. Our resources for the autumn are £997 million, of which £950 million is borrowed money Our further overall balance of payments deficit will be about £350 million at the end of the year.
That has to be financed by drawings from the Federal Reserve and the Export-Import Bank. We understand that the Government are converting equity dollar securities into short-dated bonds, so as to have ready reserves which they can use against this emergency. Then there has been the borrowing of Euro-Dollars, 2160 converted into sterling and loaned to local authorities and hire-purchase companies, estimated at £200 million. That is an extraordinary feature of our economy, because the exchange risk has to be covered by selling sterling forward against dollars, which is a future liability. Australia is going through difficulties in deficit, leaning on our reserves. The Middle East countries and Kuwait have sterling balances for the year of £326 million on which they may have to draw.
With all this in mind, I wrote to the Daily Telegraph two or three weeks ago to say that we must warn the Government that, in the autumn, they would have one of six choices in front of them—they could increase the surcharge, put on import controls, raise the Bank Rate to 9 per cent., intensify the credit squeeze, make importers pay cash, or bring about devaluation. All these, of course, are extremely uncomfortable. Since then, suggestions have been made that we might cut down our overseas aid or our military expenditure overseas. Sir Stephen King-Hall followed up my little effort by saying that he thought the position was so dangerous that a National Government should be formed by the autumn, a suggestion which he made in 1939. I cannot see that that will come about. I realise that all these ideas which I have put forward, and which are obvious ones, are all negatived, and that we must try to find some more positive actions to bring this about in the face of this threatening future.
My suggestions for immediate action by the Chancellor are, first of all, that we should serve six months' notice on Germany that payment for our payment of the British Army of the Rhine should in future be in sterling. Secondly, we must make a real effort to persuade the Commonwealth Finance Ministers to set up a sterling area board to show that we are behind sterling and to see that all sterling currencies are put into the pool to be drawn upon in future. If possible, we should try to bring E.F.T.A. into the sterling area board as well and write our policies in common instead of relying on British resources alone. Possibly, as a longer term effort, we should set up a Commonwealth and Sterling Area Payment Union, on the lines of the European Payments Union.
2161 The public and the world do not realise the danger that we are in. They do not realise the dynamic changes which have to take place in the next two months. The sterling area as a whole must be brought to see the danger which we are in, and the danger to our standard of living in this country and throughout the world.
There are two interesting articles in the Statist on the pros and cons of devaluation, which is a possibility. I do not like devaluation, but 1949 did bring advantages to exporters. I was closely connected with the motor industry, which got a boost, and none of the disadvantages was as great as was predicted. I doubt whether we could devalue today without bringing down other currencies, including the dollar, in our wake.
In this country, unfortunately, we still have a need to reduce our imports, and to take positive action in the next few months to bring the sterling area together in an effort to back sterling instead of leaving it to this country to bear the burden a lone. Only in this way can we stagger through the autumn without a crisis on our hands.
§ 12.19 p.m.
§ Mr. Robert Woof (Blaydon)
I must confess that this is an extremely difficult subject for me. I would also confess that I have not the judgment of the hon. Member for Twickenham (Mr. Gresham Cooke), nor his knowledge of the manipulation of complicated financial matters. I think that the House has listened with great interest to what he has had to say.
Realising that the purpose of the Bill is to empower the United Kingdom to discharge its obligations towards enlarging the resources of the International Monetary Fund by paying an increase in subscription of £175 million, I am also sure that the House will be grateful to my right hon. Friend the Chancellor of the Exchequer for the clear explanation which he has given of the details and arrangements embodied in the Bill.
Having in mind the general operation of the International Monetary Fund, it is understood that one of its functions was to make resources available to members to correct maladjustments in their balance of payments, with the objective of economic policies to expand the 2162 growth of international trade. Even though the Fund serves a very useful and important need in the world, its resources have been incapable of coping with adverse balances of payments. Very great amounts have been given in international aid during the past years.
I spent some time this week investigating this in the Library and I discovered that, since 1947, the United Kingdom has drawn 4,761.5 million dollars and has repaid 1,877.3 million dollars. Vast loans of this kind have, in many ways, been used successfully to sustain the standard of living
It was the International Monetary Fund agreed upon at Bretton Woods that made the American dollar the monetary standard for the rest of the world. Having regard to what my right hon. Friend the Chancellor of the Exchequer said about the need for more gold for the Fund, and in the light of this decision and the present economic trends, it is advisable to examine the practical significance of the gold holdings of the United States.
Its gold holding at the end of April of this year was 14,481 million dollars. While its gold holdings are not as large as they were in 1958, when they were 20,582 million dollars, such a vast wealth-value of gold is effectively determined by that of the dollar, and as a consequence the dollar is taken as the standard to which all units are to be referred, and the £ sterling as a money unit is linked with the dollar.
Therefore, one of the main issues before us is the value of the £ sterling in its relation to the American dollar. I believe that when dealing with the complexity of finance one thing is certain. One man's debt is another man's wealth. It seems to me that no one can say with certainty how large a burden of debt an economic system can carry. Anything which will contribute to the stability of the world's currency is to be welcomed and because it is much more than a technical device to facilitate the exchange of goods it is liable to affect in one form or another the welfare of most sections of the community.
In the nature of things, I think that the American economy is balanced in such a way to have been able to permit countries to buy its goods by lending 2163 huge amounts of capital, and that obviously cannot go on indefinitely.
Naturally, in giving support to the initiatives of the International Monetary Fund, our own economic growth is, first and foremost, dependent on increasing opportunities to sell goods abroad, and in this respect I greatly appreciate the efforts of my right hon. Friend the President of the Board of Trade who has travelled a great deal to find ways and means to create new trade that would be directed towards our national economic growth. One cannot overemphasise the importance of his attempts. An effective stimulus is needed to expand our world trade, as without trade we would neither be able to work to produce wealth nor purchase the necessary commodities and food for existence.
Trade fairs overseas are one of the several different ways which prove valuable to our exporters. There is an increasing number in Western Europe and other highly industrialised countries. One of the basic reasons for the International Monetary Fund was to give financial aid to countries in difficulties, especially with their balance of payments. This does not mean just lending money to pay interest on loans and prevent a run on the £. It also means development of constructive production.
In the interests of such production and the need to sell goods abroad, while the Government provide assistance for firms wishing to take part in trade fairs, I would like to see the Government assume a larger responsibility for trade fairs abroad, as I think this would be one way in which we would be able to get an effective display of British goods.
In addition to East and West trade markets, there are trade fairs in the United States where we need to earn dollars, but these are confined to Washington, New York and Chicago. They do not extend into the hinterland of America, where a great untapped market for British goods is available.
It always must be a British function to help to increase the quanity of trade. There is not unlimited time for action. I believe that the real problem in the world today is not to impose or maintain restrictions on the flow of trade. The problem that we must tackle should involve a pattern of trade, whereby the 2164 present under-developed countries will be able to build up industry and agriculture which will develop progressive self-sustaining economies which can be beneficial to peoples in such areas as I have had the privilege on two or three occasions to see for myself in South-East Asia and enable them to take their place with those already highly developed.
What do these people want? They need agricultural equipment, small tractors, and even wheelbarrows. They carry far too much on their backs. Everything they handle seems to have to be carried. It is amazing how much they can carry with their small physique. In every aspect they need to modernise their way of working life to give them the dignity and respect they deserve.
Basically, the origin of the International Monetary Fund was an attempt to discover better ways and means of getting the foodstuffs and the goods which men and women everywhere need into one an-other's hands. There can be no doubt about it: nothing can defend the idea that men and women should go short of the things which would enrich their lives, not because they are not capable of producing them, but because the financial system stands in the way.
The real wealth of any nation does not rest with its stockbrokers, its bankers, or even its moneylenders. It depends upon its productive capacity and the willingness of its people to use that capacity to the utmost. What we should really be applying our minds to, along with the rest of the statesmen of the world, is how to make it possible for the tremendous advances in science and technology to filter down to the poorest nations and individuals within the nations so that they may have a rising standard of living and know greater security than has hitherto been possible, not only for a substantial minority in our own country but for the overwhelming majority of the people of the world. Any monetary system which stands in the way of achieving this will be condemned by history.
I also think that it is appropriate to point out that another important function of the International Monetary Fund is to contribute to the promotion and maintenance of high levels of employment and real incomes and to the development of productive resources of all members.
2165 There is plenty of evidence to prove that cities and cultures have risen and fallen since the beginning of time, but the wheel of change always moves on and as the present absorbs all our energy and time we have to recognise that no question touches more profoundly than what we want in the way of a struggle for a living.
On Saturday last I listened with deep interest to my right hon. Friend the Prime Minister speaking at the annual Durham Miners' Gala, when he said that the only road to higher wages and living standards was through production and more production. His point was well taken, but what is needed is the means whereby British exports can be boosted up as a means of earning foreign exchange. It is encouraging, in a way, to think that the Government have earnestly accepted the imperative necessity to export more because there are plenty of starting points in the formulation of a long-term programme of international trade.
I would even go so far as to suggest that any money drawn from the International Monetary Fund and placed within the control of a nation for the building of new factories, constructions, industries—including new industries, occupations, and so on, in my constituency—would be highly welcomed. There has been a great deal of redundancy through industrial structural changes and the scope and nature of its problems are of great concern, for apart from the inevitable social consequences, it is common to conceive the anxiety that presses so heavily on people. One can judge from the product of the circumstances the fear which points all the way to a chronic lack of industrial development. This cannot be considered as a passing storm, arising out of economic conflict, one expecting it to die down as stability regains its position in the general run of things.
It is a situation which must be reckoned with. Such an issue is in need of the location of new industries in order to secure greater improvement and to sustain the general quality of the standard of life in all its aspects. I submit, therefore, that there is a great vacuum to be filled by building up a powerful economic market in many overseas territories, although we must be continually balancing 2166 our policies and endeavouring to maintain confidence in sterling. I think that I can faithfully bless the Bill with a great desire to spare no effort in improving the standard of living by attempting to succeed in the development of overseas trade.
§ 12.33 p.m.
§ Mr. William Shepherd (Cheadle)
As the hon. Member for Blaydon (Mr. Woof) said, this is a deceptively simple Bill which conceals some of the most fundamental problems of our time on which we are, unhappily, making very little progress indeed. I of course use the phrase "very little progress" in the relative sense, for this must be measured against the enormity of the problem it represents.
I come to the comments made by my hon. Friend the Member for Nottingham, South (Mr. William Clark) and my hon. Friend the Member for Twickenham (Mr. Gresham Cooke) about the possibility, practicability or desirability of devaluation. I preferred the words of my hon. Friend the Member for Nottingham, South to those of my hon. Friend the Member for Twickenham, although the comments of both were realistic. We in this House should be extremely careful about what we say on the subject of devaluation, because psychological factors can have a profound effect on the future of a country which is facing difficulties.
Last weekend I was in Amsterdam. I was not helping Mr. Colin Chapman to get into trouble, because I had some similar trouble myself in Belgium a few years ago. I ran away when I saw what was happening. That always seems the best thing to do in such circumstances. When in Amsterdam I heard a good deal of comment, as a result of which I suggest that it is vitally important for us in this country to take a definite stand and say that there is, first, no need in present circumstances to consider devaluation and, secondly, that it would solve none of our problems.
I will elaborate that point of view. The so-called advantages to our exports which would accrue would certainly be offset by the fact that we would have to pay much more for our imports; and as we import more than we export we would not be likely to gain on that score. But, worse than that, with the urgent 2167 need to make our industries more competitive, the effect of devaluation would be to give more protection to industries which, in many instances, are already far too heavily protected. Devaluation would, therefore, be harmful to the general efficiency level of British industry. This shows that devaluation as a concept for us should be entirely ruled out because it should not in any possible circumstance be necessary with our defensive mechanisms and nor would it be of value in solving Britain's basic economic problems.
I say at once that I do not have any sense of complacency towards the existing situation. The need for urgent measures to deal with our imbalance does not pass my comprehension and I realise that we must do a great number of things. However, in all this I exclude from the range of possibility the concept of devaluation.
Many people who comment on our present economic state of affairs appear to do so with extraordinary sloppiness. Last week I was reading some writings of a very distinguished gentleman, Mr. Stamp. I cite him as an example and not in an attempt to crucify him. However, we should take note of what the so-called informed commentators say and the rather reckless fashion in which they talk about our affairs. Speaking about the difficulties of sterling, Mr. Stamp said, in effect, that pre-war the difficulties of sterling were not very serious because we had assets to meet those difficulties, assets which were sold during the war. Here was an economist saying that our assets were sold during the war when the truth is that one-third of our assets were sold at that time, one-third from the whole leaving two-thirds at our command.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
My hon. Friend must take into account the enormous sterling debt which we accumulated during the war. Our assets went up in smoke and, at the end of the war, we were left with an enormous sterling debt.
§ Mr. Shepherd
I am aware of that and I asked Lord Attlee on a number of occasions to try to secure the cancellation of some of the balances which had been built up against us as a consequence of our war 2168 effort. However, what my hon. Friend says in no way detracts from what I have said in criticising Mr. Stamp for saying when we had two-thirds of our assets left that we in effect actually did not have any assets. I will not pursue that issue, except to say that it emphasises the need not to present the case less favourably than it is.
When we consider the situation of the world today in respect of international liquidity and adjustment—and hon. Members have been speaking about liquidity—we must have regard to the methods of adjustment as well as liquidity. It seems to be a position of almost complete absurdity and it is parallel with thought in the 'thirties. I am convinced that when people look at this situation 30 years hence they will look at it with the same questioning of our understanding as we do now about the mentality of those in the 'thirties who did not understand what it was necessary to do to pump effective demand into a flagging economy.
We think it remarkable these days that individuals in the 'thirties did not realise, in the face of world unemployment and the down dragging of economic activities, that the answer was to stimulate the economy, increase credit and take positive Government action to increase expenditure. But in having this absurdly outdated system, the international monetary mechanism, we are perpetuating something that is really as stupid and out of date as the beliefs of those in the 'thirties whom we condemn.
Our present system of international payments is incredibly naïve. At best, it works only on "stop and go", and it can break down at any time. As the House will clearly recognise, there is no ultimate lender for the dollar. It is not beyond the bounds of possibility for the dollar to get into really serious difficulties, because, as the hon Lady the Member for Hitchin (Mrs. Shirley Williams) has said, there has been a great change in the reserve position.
The reserve position of European countries clearly demonstrates the immense structural changes that have taken place. It is therefore not impossible for the dollar to get into difficulty and, as I say, for the dollar there is no ultimate lender. A situation that requires both the United States and the United Kingdom 2169 to get into balance of payments difficulties before the rest of the world has enough liquid resources to conduct its affairs is not a state of affairs that should exist in the second half of the twentieth century.
I want to be a little more radical about this than some of my hon. Friends, or even some hon. Members opposite, may want to be. If possible, I do not want us to proceed—although I realise the difficulty of progressing quickly—by minor steps such as the introduction of another unit. I should like to see an entirely managed international currency. I do not want to see the world laboriously digging gold out of a hole in one place only to put it into another hole elsewhere. It is absurd that we should involve ourselves in carefully hoarding gold at great cost, even of storage and security, when an internationally-managed system could do the job very much better, and enable the holders to earn a little interest on the facilities offered.
I hope that we shall try to set our sights a little higher, and not have too much regard to the difficulties of making a dramatic change in the present monetary system. Gold as a part of the existing mechanism has little to commend it except that it has been conventionally used for a long time. Mr. Stamp says in his article in the journal of which he is the editor that the only reason one wants to continue with it is that it would be very hard on those who produce it if we ceased to make the use of it to which it is now put. I cannot take the view that we should be deflected from making a substantial change like this because it would be hard luck on those who produce it. The world is full of changes which hit people fairly heavily.
My hon. Friend the Member for Twickenham spoke of gathering the efforts of the sterling area in order to make Britain's position stronger. I did not quite understand him. I believe that we need a substantial change in our relationship with the sterling area as an essential of our surviving as a nation. It is true that, because of fortuitous circumstances, it is possible for us at present to carry the burden of the sterling area, but let us not be in any doubt about how substantial that burden is.
If one takes the balance of the rest of the sterling area's trade for the last five 2170 years with the non-sterling part of the world, one finds that each year a deficit of the order of £550 million has had to be financed by our reserves. When I say that it has had to be financed by our reserves I am obviously exaggerating, because we could not have done it. It was only possible to do it because of circumstances both fortuitous and undesirable.
We have financed this very large deficit on behalf of the sterling area by means of gold sales, which count as a convertible currency for these purposes. But if gold ceased to be the basic backing for reserve currencies, that factor might overnight become of little value. We have also financed the deficit by the large amount of capital and grants in aid which the sterling area attracts from the rest of the world. Neither of these methods—gold sales or capital brought in or aid brought informs a suitable and secure alternative basis for our financing from our gold and dollar reserves to the extent of £550 million, on average, for the last five years.
I believe that the time has come when we should have very serious talks with our partners in the sterling area in order to get them to carry a very much larger share of the overseas defence burden and to get a more realistic trade policy. Britain cannot continue indefinitely to play the fairy godmother to the Commonwealth or to the rest of the world.
The hon. Member for Manchester, Cheetham (Mr. Harold Lever) has referred to the extent to which we should try to use our resources in the United States to fortify our gold and dollar reserves. I have spent many years trying to persuade the Treasury to assess our overseas investments, both portfolio and direct, but it has been extraordinarily reluctant to put a value on them, despite the fact that the United States has done so and so has India.
There is no doubt that when one looks at the British gold and dollar resources against the sum total of indebtedness, including the sterling balances, the position does not look too comfortable, but we have in North America a very substantial investment portfolio, private and public, and there is to my mind no reason why this nation should not mobilise these resources in the interest of the community.
I thought that the hon. Member for Cheetham was claiming some novelty for 2171 this idea, but I assure the House that seven or eight years ago I wrote an article in which I suggested that the British Government should take a lien on the portfolio investment by private individuals in North America, and that this should rank with the gold and dollar resources as a second line of defence. Some hon. Members will think it undesirable that the Government should take a lien on private property held in another country, but we have allowed, in particular, the very astute Scottish investment trusts to invest large sums of money in America over the last 10 years. In order to do that, we have made difficult our own current account situation and long-term capital account situation. In return for this licence—some people would call it rashness in other directions—it is fitting that the British Government should take a lien on those resources so that they could be what, in fact, they are, or appear to be to the world—a second line of defence behind the British gold and dollar reserves. They would like it to be at least twice as much as our gold and dollar reserves.
With other hon. Members, I welcome this small Bill, but I look forward with much more interest to discussions which the Chancellor of the Exchequer will have with other Chancellors in the autumn. I hope that in the next three or four months we shall make some progress towards rationalising this wholly unacceptable situation where world trade, world liquidity and world adjustment are dependent on the capricious state of the trading of two countries working on a system which was not devised by anyone but which grew up and has long since ceased to be able to deal with modern conditions.
§ 12.51 p.m.
§ Mr. Edmund Dell (Birkenhead)
I am very glad to follow the hon. Member for Cheadle (Mr. Shepherd), because I always listen to what he says in this House with great respect. It is always refreshing to find someone so radical on the benches opposite. With much of what he said I agree, but not all. He proposed, for example, that there should be an entirely managed international currency. I would go some way with him, but not all the way, because some of the experience of international financial 2172 management over the years since the war has not been entirely fortunate
I should certainly prefer to see it left, at least to a certain degree, in the hands of countries which might have to call for financial assistance from, say, the International Monetary Fund, to be able to decide for themselves up to a certain limit what they should do. I make the point that the complete management of international currency may require qualities of insight and foresight which are as yet beyond the resources of the bankers who are likely to have responsibility for undertaking this job.
§ Mr. Shepherd
Perhaps I expressed myself badly. I did not intend that we should have a complete surrender of sovereignty. When I said "internationally managed", I meant a reserve currency which was not based on gold.
§ Mr. Dell
I took the hon. Member to refer only to those resources in the possession of some international fund. I thank him for the explanation. He did say that gold had little to commend it. Perhaps one thing which gold has to commend it is that it does not need to be managed. On the other hand, the main thing which does not commend it, and probably the main reason why I agree with the general drift of the hon. Member's remarks on this subject, is that probably too little of the gold reserves in the world at the moment are in the hands of those who most need reserves at the moment. They include the less-developed countries of the world.
Where I entirely agreed with the hon. Member is when he made clear that in dealing with this Bill we are dealing with a Bill of enormous implications. Indeed, it might be said that although we had a foreign affairs debate earlier this week, in a sense we are having another foreign affairs debate today, a rather more important one than the one earlier this week. If we could solve these problems we could make an enormous contribution to developing world trade and world prosperity and to solving some of the other problems discussed on Monday and Tuesday.
The Bill is a useful contribution to solving these problems. We know that it is a very small contribution and that hon. Members of both parties would have 2173 liked the Bill to go a great deal further than it does, but we have to accept the facts of international discussion and that this is the maximum which in the circumstances could be agreed. As has been said, this is a very technical subject, but it is a technical subject with enormous implications. It is said that after M. Giscard d'Estaing made his famous speech at the Tokyo conference last autumn, he was asked about it and he replied:"La diction etait bon, mais pour la reste je n'ai rien compris."Which, freely translated, means "I spoke it well, but I did not understand a word of it." I hope that I shall understand a little more of what I am saying today than he claimed to understand. I did not entirely believe him if he did say that on that occasion.
This is a highly technical subject, but it has enormous implications for the future of the world. The facts are clear but there are the disagreements about the interpretations of the facts. However, one very encouraging sign is that the United States Government during the last few weeks, very largely I imagine as a result of discussions held by the Chancellor in Washington, have come to the view that here is a serious problem to which the world must address itself.
My hon. Friend the Member for Hitchin (Mrs. Shirley Williams) mentioned some of these facts, about the degree to which the United States had contributed to international liquidity. She gave certain figures. The figures I have from United Nations sources show that of the 22 billion dollars by which the reserves of countries other than the United States increased between 1953 and 1962, about two-thirds—half in gold and half in dollars—have come from the United States. In other words, if the United States succeeds in balancing its payments this will reduce by two-thirds the rate at which reserves are being created at the moment. Again, we have the fact, which has some significance, that over the last six years Russia's gold sales in Western markets have contributed more than half the increase in the total gold reserves of Western countries. So we are to a significant extent dependent on the U.S.S.R. for increasing international liquidity.
2174 As the hon. Member for Cheadle said, this is a totally irrational situation. We start with reserves which are almost certainly inadequate. We add to those reserves the monetary gold released by South Africa and what the Russians sell in Western markets. We have to take away from that what is hoarded by private speculators and what is used for industrial and artistic purposes. To that we add the United States and British deficits as represented by dollars and sterling and from that again we take away the amount of those deficits subsequently converted into gold.
In this completely irrational and haphazard way, which has no clear relation at all to the requirements of world trade, we end with the finance which has to lubricate world trade. This is the situation which exists at the moment. The International Monetary Fund has calculated that international transactions are likely to grow by a minimum of 4 per cent. per annum over the next decade, but over the past 10 years liquidity has increased by only 3.3 per cent. And that was the period during which the United States was running this enormous deficit. These seem to be the relevant facts. The question is, what is the interpretation to be placed upon these facts? Is there sufficient international liquidity, is it growing at an appropriate rate, and is the growth properly managed? I believe that the answer is "No" to all three questions.
I start with the United States deficit. There are two things one can say about that. If it is brought to an end, we end one of the main sources, in fact the main source, of the annual increases of international liquidity, the main source of growth of currency reserves for the rest of the world. If, on the other hand, it is not brought to an end, the dollar increasingly loses credibility as a financial reserve. This seems to be the dilemma which the world faces. A currency cannot at the same time be strong—in other words acceptable as a reserve currency—and weak, i.e., in continual balance of payments deficit. That seems to be the first factor we have to consider.
Then there is the burden which all this involves for the British economy. Again and again since the war we have had 2175 to operate, because of our exposed position, rates of interest which have undoubtedly had a deleterious effect on the rate of growth of our economy, and we must try and find some way of solving for ourselves the continual dilemma that the maintenance of sterling as a reserve currency inhibits our own economic development.
The third conclusion which arises out of the facts is the increasingly difficult position in which inadequate international liquidity places the developing countries. The less-developed countries of the world are increasingly facing a situation in which they are short of reserves and in increasing debt, the increasing debt resulting in inability to import sufficient to support their industries and their agriculture. That has an important influence on this country, in that its relations in world trade with the less developed countries are particularly close.
One of the most curious features of the U.N.C.T.A.D. conference was the failure of that conference to take sufficient note of the importance of this problem. Quite inadequate consideration was given to it at that conference, and one of the things that they will have to consider when they meet again in August and on future occasions is the importance of increasing international liquidity for the less developed countries of the world.
There are those who believe that the less developed countries do not need reserves and that what they need is aid. The French attitude is that if they are given reserves, they will be spent on imports and, shortly after being given them, they will be as much without reserves as they were previously. I doubt whether that attitude is justified. They need aid, but they also need reserves—and this refers to what I said earlier in relation to the speech of the hon. Gentleman for Cheadle—because it is important that these countries should have a considerable degree of independence in running their own affairs and that within those countries there should be sources of development finance other than those provided by aid. Therefore, everything that can be done to develop their trade is of great importance.
The fourth conclusion which emerges from the facts is that, owing to the com- 2176 pletely erratic and irrational situation in respect of international liquidity, the main object of the whole exercise is prejudiced—the object of economic growth in the developed countries and in the less developed countries as well.
The question is what is to be done. It seems to me that there are the following specific matters that the Government should bear in mind in its approach to the problem, and I would say right away that I agreed with what my hon. Friend the Member for Hitchin said about the price of gold and that something should be done about it. I also agreed with her when she said that this was in an important sense a question of power. It is a question of power, a question of the relations between the nations of Europe and the U.S.A., and of their places in the world today, and it is necessary to recognise the increasing importance of Europe in the total world financial situation.
I go on from those two very important points to say that it is important in anything that is proposed to ensure that the less-developed countries benefit together with the developed countries. There should be a balanced distribution of economic progress in the world as between the developed countries and the less-developed countries. We cannot rely simply on the effect that speeding development in the developed countries would have in the less-developed countries in increasing their exports and incomes and improving their terms of trade.
I am afraid that one of the dangers in all these negotiations is that the less developed countries may not have the importance of their position adequately represented. I referred to what I believe is the French attitude to the problem. On certain interpretations of the Bernstein plan, it would limit the immediate direct benefits to the developed countries. Although it would be hoped that the less developed countries would gain in indirect benefits, the direct benefits of the Bernstein plan would be limited to the developed countries.
I was very greatly encouraged on that point by reading the reports of the speech made in Paris on 2nd June by Mr. Schweitzer, who stated some very important principles on the subject with which I entirely agree. First of all, he stated the principle that there should be 2177 no "clubbing up" of developed countries as against less-developed countries in the effort to increase international liquidity. It seemed to me that he was prepared to accept that members of the I.M.F. should have an increased right of automatic drawing when they were facing financial difficulties.
It is important to recognise that this is a very encouraging change in the attitude of the I.M.F. which I personally greatly welcome. There was a time when the I.M.F. was not at all popular with the less developed countries, and when the advice which the I.M.F. was giving to them on how they should manage their affairs before they could qualify for aid was unacceptable and, when it was forced upon them, often had very undesirable results.
One can look back, for example, to the experience of Argentina and Brazil in the 1950s, both of whom faced great economic difficulties. Both went to the I.M.F. and both were given more or less the same conditions to fulfil before they would qualify for aid from it. Argentina accepted those conditions, but Brazil refused to accept them. Argentina passed into a deep economic crisis, but Brazilian development went ahead very fast indeed. That sort of memory is one which many less-developed countries have when they think of the I.M.F. I.M.F. thinking on these problems has changed greatly over the last few years.
As my right hon. Friend the Chancellor said in his opening of this debate, it acknowledged in 1963 that it was appropriate for members to draw from the Fund when in balance of payments difficulties due to falling commodity prices. The I.M.F. has improved its internal organisation for dealing with the problems of less developed countries and improving their links with organisations like G.A.T.T. and U.N.C.T.A.D., and improving the quality of advice that it gives to less developed countries. One of the most significant things that happened at the Tokyo conference was that representatives of the less-developed countries actually came forward to express their appreciation to the I.M.F. for the help and understanding they were getting from it. That marks a remarkable and beneficial improvement in the attitude of the I.M.F.
2178 Nevertheless, I do not think that we can entirely forget the past, and that is why I was a little sceptical in my original understanding of what the hon. Member for Cheadle meant and why I believe that it is important that the less developed countries should have, at any rate, a certain amount of autonomy in their relations with the credit facilities which are available from the I.M.F. The I.M.F., however it is, is certainly a better instrument for increasing international liquidity, in my view, than a small group of developed countries would be. Therefore, I am entirely at one with the Government in their insistence that these developments should take place under the wing of the International Monetary Fund.
The conclusion, it seems to me, is that there is a very important problem to be faced. I think that there are sufficient signs in the world for all countries to be warned, even those which fortunately find themselves at this moment in a situation of surplus. The failure of banks in Japan has been mentioned. There is the British deficit and the deficit of the less-developed countries. There is the United States approach to a balance. There is the slowing down in the rate of growth in world trade.
This situation presents a warning to the world, and I hope that the world will be warned and, above all, that the countries who are in surplus today will not forget that they can become the deficit countries of tomorrow and that they might be well advised to negotiate now from a position of strength, because later they may find it more difficult to secure terms which are as favourable to them as can possibly be obtained at the moment.
It may not be possible to solve all these problems at one go, but we must persevere, and the Bill is a beginning. I believe that the negotiations in which the Government will be taking part on this great subject are likely to be the most important negotiations in which they will take part in the whole of our international relations.
§ 1.12 p.m.
§ Mr. Peter Hordern (Horsham)
The hon. Member for Birkenhead (Mr. Dell) is always a great pleasure to follow from this side of the House. If I may say so, 2179 he is one of the few hon. Members opposite who speak on financial subjects with some authority. Indeed, he is one of the very few hon. Members opposite who ever speak on financial subjects.
The hon. Member spoke very clearly and succinctly in his analysis of the problem, and I think that hon. Members on both sides very much appreciated the way in which he dealt with problems of overseas aid and, in particular, of aid to the developing countries, on which he is such an acknowledged expert. I hope that he will forgive me if I do not follow him in those comments straight away, but I should like to deal with them towards the end of my remarks.
Everybody on both sides of the House has welcomed the opportunity which the Bill provides for a discussion on international liquidity and, in particular, on the part which the United Kingdom Government should play. We are invited by Clause 1 to increase the quota of the United Kingdom by as much as 25 per cent. The sum involved is £175 million. The Chancellor said that only a quarter of this is payable in gold. The rest is more or less a book-keeping transaction.
It would be a great comfort if we were able to presume that by granting this sum we should arrange that the international monetary situation would be eased by as much as 25 per cent. Hon. Members know that that is not the way of it at all. Indeed, it could be argued that if all the major countries thought alike about using the resources of the I.M.F. there would be no need to increase the quotas at all. If agreement could even be reached on the rôle of the I.M.F. or the need for international liquidity, there would be no need to increase the quotas. The resources of the I.M.F. could quite easily be increased not so much by an increase in subscriptions, for which we are asked today, as by adopting some form of composite reserve unit based on the existing quotas or by adopting one of the many plans, such as that of Professor Triffin, which already exist. Some form of super gold tranche would be acceptable. This course seems to me to be the path of reason.
It is common knowledge that the value of world trade has increased so rapidly that whereas in 1948 the proportion of gold that underlay the value of world 2180 trade was 46.8 per cent, now it is under 25 per cent. It is quite plain that the margin of error available to any country, and particularly to any with a relatively small gold reserve, has diminished and is diminishing all the time.
Everybody will agree that the expansion of world trade is eminently desirable, and it therefore seems to be blindingly obvious that the funds for its financing should be readily available. If there were one aspect of international affairs upon which everybody could unite, this seems to be it. The call for a world conference on monetary matters by the Secretary of the United States Treasury, Mr. Fowler, seemed to be designed to meet this situation and yet, as far as I can understand it, the French have already turned down this suggestion.
The truth is that this situation, like every other situation with international ramifications, is riddled with national suspicions and interests. However much one may like to think of a spirit of international co-operation being fostered, the plain fact is that international co-operation and thinking are considered only after national interests have first been secured. Whether this is shown by the refusal of the United States to revalue gold or by the French refusal to accept the dollar as a proper form of financing international trade, the evidence leads one to the inescapable conclusion that some nations will embark upon a course of international co-operation only if the penalties for not doing so exceed the advantages of going it alone. Whether this is so in every form of international co-operation I am not disposed to argue, but in international monetary co-operation it is quite demonstrably so.
In considering the Bill, it would be foolish to regard the increase in the national quotas to the I.M.F., even if we get this two-thirds agreement, as an earnest of the general desire for international co-operation. What we must consider is what the effect of such a subscription will be and what are the separate, but in their eyes, quite proper motives which activate the United States and France. The American view, I think, would be that the origin of the I.M.F. lay in the overwhelming dominance of the dollar at the end of the war. In so far as there were any gold and dollars, they lay in the United States, 2181 and no international fund of any description would have been possible without the generosity of the Americans both at the Bretton Woods conference and later under Marshal Aid. I think that the Americans could argue with some justice that if the dollar at that time had not been acceptable in every way as a suitable backing for world trade, the expansion of trade to its present level would not have been possible at all. This is a perfectly tenable proposition. But while the French were prepared at that time to accept dollars as a means of reviving their own economy, while the dollar was readily convertible into gold, they are not prepared to accept an increase in the supply of the dollar and, to some extent, of the pounds, as a means of increasing international liquidity without a corresponding increase in the price of gold.
§ Mr. Robert Maxwell (Buckingham)
Would the hon. Member agree that the very strength of the United States in 1945 enabled the Americans to dictate the rules of the I.M.F. and as a result the I.M.F. was able to impose discipline on other nations in their balance of payments, whereas by using their rights in the I.M.F. the United States and the United Kingdom have been able to make ample use of the Fund and to run large deficits at the expense of other nations under the pretence—and a quite useful pretence—of helping to finance an increase in trade? But 20 years have passed. The United States is no longer dominant in trade, and the nations of Europe and elsewhere are quite justified in insisting that the United Kingdom and the United States should no longer run balance-of-payments deficits in that way.
§ Mr. Hordern
I am grateful to the hon. Gentleman. I take his point. I am about to deal with what action would be in the French interest and to consider the outlook.
It seems to me that the correct view is that if the dollar and the £ are to be used as international currencies they should not also be used as a means of financing deficits. The French object to the difference in standards of monetary discipline between the United States and Great Britain, on the one hand, and the rest of the world, on the other. In particular, they object to Great Britain using her borrowing powers to finance, for example, the Public Works Loan 2182 Board, and, through that Board, the local authorities, at an artificially cheap rate of interest. The occupants of the Treasury bench would, I am sure, recognise this point very well. Many years ago, when Dr. Dalton was Chancellor of the Exchequer, the Government had a policy of cheap money. Now the policy is very much easier—that is, to get other people's money to work for us. That is the cheapest way of all.
The attitude of the French seems to be a valid complaint about the system, and it must be admitted that the Government would speak with a good deal more authority on the need for international monetary reform if they were not already using and, indeed, abusing the system. The French further object to the degree of influence which the Americans are able to exert over French industry because of the dollar's special position. The Machine Bull affair is, I am sure, known to hon. Members opposite and is a good example.
The hon. Member for Hitchin (Mrs. Shirley Williams) mentioned M. Giscard d'Estaing, who estimated that between 1951 and 1963 the accumulative payments deficit of the United States amounted to 30,000 million dollars, of which only 7,000 million dollars had been financed by the gold outflow from the United States. What M. d'Estaing is asking for in a quite mild way is reciprocity in this form of external flow.
If it is accepted that this diagnosis is accurate, it seems to me that the Bill may achieve nothing except a minor degree of public relations. This would be a good Bill, indeed an exemplary Bill, if there were universal agreement on the special position of the £ and the dollar. There is no such agreement. The sooner we accept this the better, for it is a delusion to think that time is on anybody's side. Secretary Fowler's initiative, which had the President's personal backing, has already been rebuffed by the French. We must, therefore, ask what is the Government's present attitude. The Chancellor of the Exchequer was in Paris yesterday. He has been unable to tell us the Government's attitude. I hope that the Financial Secretary, in answering the debate, will reveal the Government's attitude.
The Chancellor of the Exchequer, in reply to a Question which I put to him before he went to Washington, seemed 2183 to favour expansion of the International Monetary Fund in the way that the Bill suggests. We should like to know whether he still thinks that this is possible in the light of the visit which he has just concluded. I doubt whether he feels that there can be general agreement between the French, Americans and ourselves about this. The Chancellor of the Exchequer knows that time is not on our side and that if there is to be a battle between the French and the Americans on this issue nobody will win and that we shall lose more than most. If the French persist in their attitude, the Americans will have no alternative but to repatriate their dollars.
The effect of this battle is already being felt all over the world, and not least in this country. American firms are being asked to pay out high dividends and are being encouraged to raise money locally. I have heard of an American bank in the last day or two which is 'prepared to offer 6 per cent. for two-day money. Western Germany is worried by the rapid growth of her imports. In Germany, India, Pakistan, Australia—wherever one looks—the barriers are going up, money is becoming tighter and restrictions are rife. Not since the Spaniards started to bring in gold from the America of the Incas has there been such a naked scrabble for gold. It could at least be said of those times that the Spaniards were improving international liquidity. There is no such prospect of that now.
Whether one favours an expansion of the International Monetary Fund as proposed in the Bill or the creation of composite reserve units on existing gold reserves, which is the French position, the struggle between the United States and France is joined. It is no use therefore thinking in terms of academic plans, whether the Triffin plan, the Stamp plan, or any others. If we are realists we should accept that no plan would be acceptable to both the French and the Americans until the stage has been reached that not to negotiate an agreement would have worse consequences than carrying on the conflict. That position has not yet been reached.
Nevertheless, I am convinced that there is an initiative which the Chancellor of the Exchequer can take at the Inter- 2184 national Monetary Fund Conference in September. It would be a modest initiative. I do not think that a grand plan would, in these circumstances, have the remotest chance of success. Suppose that we were to concede that there was a good deal of justice in the American position and in the French position. Both positions are thoroughly defensible. Let us not argue about the justice of either cause; we are in no position to do so. Let us withdraw from the examination of the strength of the American defences and the power of French defences and let us consider instead the no man's land between. Let us have no imprecise academic plan, but let us draw attention away from the periphery and to the centre where the damage is being done.
Could not we in this way get at least some measure of agreement that grave damage is being done? Could not we agree that the poorer countries, the developing countries, are bound to get hurt in this conflict and that that will happen sooner than anything else? Is it not in everybody's interest that they should not get hurt? What chance have these territories of getting any aid except from the Communists if this conflict continues, as I foresee it will?
If that is agreed, surely we can get some form of agreement that aid from the United States, France, Western Germany and ourselves should be excluded from this argument. Aid from these four countries alone amounted to £1,935 million in 1963. Let it be agreed that aid should be maintained at least at this level and that the contributions from these four countries should be placed in a separate fund. I have in mind the creation of an organisation akin to the Asian Development Bank mentioned by Mr. Eugene Black the other day.
I need not refer to the need for economic development about which the hon. Member for Birkenhead spoke so eloquently. What is needed is a new credit mechanism based on a fund for which there is already agreement. It is the pragmatic solution to the problem which has the greatest chance of success. Once the fund was set up, it could be expanded later and by agreement.
The Bill therefore, as far as it goes and as far as it will have any effect, has my complete support. But if the Government take no other initiatives, the 2185 certainty is that no agreement will be reached until intolerable damage has been done.
§ 1.30 p.m.
§ Mr. Derek Page (King's Lynn)
As an exporter I have constantly experienced the tightness of credit in a number of Continental markets which has been referred to several times in the debate, and the Bill is, therefore, welcome as a means of increasing international liquidity and helping to free trade. But there is one aspect which causes me a little concern. That is the slight danger of inflationary pressures which will come from an increase in international liquidity unless there is a corresponding increase in productivity.
The Government have already taken a number of anti-inflationary measures, the importance of which is emphasised if we are to increase international liquidity. But the long-term answer must lie in increased productivity. It is very clear, if one analyses the factors of the costs of production, that the real difficulty in Britain's lagging productivity has been the need for a much greater volume of fixed investment and much greater efficiency in its use.
Although we deplore strikes and restrictive practices we have not a bad record compared with many of our competitors. Many of them, however, such as the United States, have a better record of increased productivity with a much worse strike record. It stands out that there is a very close correlation in the vast majority of countries between the level of fixed investment, calculated as a percentage of gross national product, and the increase in their productivity.
Tremendous credit is due to my right hon. Friend the Chancellor of the Exchequer for the introduction of the Corporation Tax because, over a number of years, this will have a very great impact in increasing the volume and efficiency of investment which will help us to finance the increase in international liquidity which everyone agrees to be necessary. But I believe that this will take some time to bite and for that reason I have joined 74 of my colleagues in calling for a much stricter control of arms expenditure, for otherwise I believe that we shall be in very serious trouble in the short term over the next two or three years.
2186 Such a restriction on arms expenditure is by no means the end of the direction of investment which we shall need. The fact that we restrict investment in that direction does not mean that we do not use the money. It is desperately needed for investment elsewhere. I believe also that, no matter what we do immediately, we may well find ourselves under pressures in the autumn. An increase in the volume and efficiency of investment is vital to increasing our productivity and I ask my right hon. Friend to consider carefully the alternatives which will be at his disposal.
The hon. Member for Twickenham (Mr. Gresham Cooke) named six methods that he believes available for controlling possible pressure in the autumn. Amongst these was an increase in the Bank Rate to 9 per cent. This would be completely intolerable—
§ Mr. Page
—because, of course, it would cut at the roots of productivity and the need for new investment. I come back to a theme which I advanced in the first few days of this Parliament. I believe that we shall be driven back, however unwillingly, to the need for physical controls in the autumn and I hope and trust that the Chancellor will be ready when the occasion arises.
§ 1.35 p.m.
§ Mr. Peter Bessell (Bodmin)
I have no intention of making a long speech, first, because I feel that the subject has been covered more than adequately, and, secondly, because, like many others, I was up all night and I cannot pretend that my brain is working at its best. Nevertheless, I would not like this occasion to pass without comment on my behalf and on behalf of my right hon. and hon. Friends who, I am sure, are with me in spirit if not in person.
I welcome the Bill, which is a quite important if moderate step forward in resolving the major problem of international liquidity. I find it difficult, however, to follow the argument of the hon. Member for King's Lynn (Mr. Derek Page) that the Corporation Tax in its present form will assist in solving the problem because I believe one of the great difficulties of that tax, however 2187 commendable it may be, is that it will tend to discourage overseas investment, and it is upon overseas investment that a great deal of our future liquidity in terms of international money will depend.
§ Mr. Derek Page
The point I made was that, although there might be need for many other measures in the short term, the long-term answer to the problem of increasing liquidity without increasing inflationary pressure is to increase productivity. I believe that the Corporation Tax in the long run will be of very great help towards that.
§ Mr. Bessell
The hon. Gentleman may be right, but I would like to reserve judgment. I am sure that many others feel the same.
§ Mr. Maxwell
Surely the hon. Member for Bodmin (Mr. Bessell) will recognise that the Corporation Tax will be helpful in increasing productivity in the United Kingdom. The Corporation Tax is not an element that is a disincentive to investment abroad.
§ Mr. Deputy-Speaker (Dr. Horace King)
Order. The House will appreciate that I heard the debates on the Corporation Tax in their proper place. A passing reference to the tax is all right, but it must pass now.
§ Mr. Bessell
Perhaps the hon. Member for Buckingham (Mr. Maxwell) and I might have a cup of tea afterwards and discuss this at greater length.
The purpose of the International Monetary Fund was set out very clearly at the time of the Bretton Woods Agreement. It comes under three basic headings. First, it is necessary to provide necessary assistance to countries which are in temporary difficulties. These difficulties may arise from a variety of sources. They may be due to trade recession over which they have no control. They may be due to trade recession over which they have control in the sense that their planning has been bad. Amongst other things under this heading which frequently cause the Fund to be used are crop failures and similar occurrences in countries which are much dependent upon their agricultural produce.
The second purpose for which the Fund exists is to assist countries which find 2188 themselves in difficulties because of loss of confidence in their currencies. It would not be unfair to say that one of the reasons that the Government made such use of the Fund in recent months was a sudden lack of confidence in sterling which I hope and believe is to some extent being recovered.
Thirdly, the Fund was designed to give assistance to developing countries and, finally, of course, to world trade through liquidity and the provision of credit.
It might be worth while, in looking back over the past 20 years, to see how far the Fund has fulfilled these intentions. I think that we would all agree that, in its assistance to countries in temporary difficulties, it has done remarkably well. We have had to depend upon it ourselves on more than one occasion and no doubt we shall make use of this reserve again in future. There is no need for us to feel any shame in doing so.
As for its assistance to the developing countries, I am not certain it has fulfilled the high intent which was behind the original Bretton Woods Agreement, and I think it quite important, as has been stressed on both sides of the House this morning, that we should not disregard, in our future negotiations on the Fund or any part which the Chancellor may play as one of the governors of the International Bank, our obligations to the developing countries but make certain that the future of the Fund is developed in a way which will enable it to play a full part in giving assistance in those areas.
As to the final point behind the Bretton Woods Agreement, namely, assistance to world trade through liquidity and credit, I think it has been more than apparent that a great deal of the prosperity which is enjoyed by countries in the Western world is in no small measure due to the working of the International Bank.
Therefore, we can say this. We are not the only borrowers, we are not the only nation which has provided other nations through the Bank with means of retaining stability or increasing their own prosperity. We have, I think, played a useful an valuable part in the whole of the activities of the International Monetary Fund. The fact that we have derived great benefit from it ourselves does not 2189 in any way lessen the contribution which the United Kingdom has made, and the importance which has been placed upon it by successive Governments. Indeed I think it can be said with truth that the first article, at any rate, of the Bretton Woods Agreement has been fulfilled and that the aims have been very largely carried out.
I should like to pay a tribute to the Chancellor of the Exchequer and to the hon. Gentleman the Member for Nottingham, South (Mr. William Clark) for—shall I say?—stimulating us to think particularly this morning in terms of international liquidity and the much wider implications of the Bill than would be apparent upon the first glance at it. In particular, I think that the hon. Gentleman the Member for Nottingham, South was wise to emphasise the fact that this is a difficulty which is not going to be resolved quickly or by any simple means; there is no easy solution to this problem and it is not one which will be solved in the lifetime of this or the next Parliament, or, indeed, perhaps within the next two decades.
We are, as the hon. Gentleman the Member for Nottingham, South, said, in a situation where a great many countries are trying to get themselves out of a debit position and into a credit position, and where we have that kind of competition going on international monetary matters it inevitably presents difficulties for each of the competing countries, not least of all to ourselves.
And, too, it has been pointed out by—I think it was—the hon. Gentleman the Member for Birkenhead (Mr. Dell), in what I thought was a most thoughtful speech to the House this morning, that we are not going to resolve these difficulties either by means of borrowing or lending but basically, in the end, by making a sensible use of the natural resources of our country, increasing productivity, making certain that we control our spending overseas, and that we do everything within our power to increase our exports and to ensure that Britain can stand on her own feet, making less use of the credit facilities which are available to her.
I agree, also, that what has been said both by the Chancellor this morning and by the hon. Member for Nottingham, South and the hon. Member for Cheadle 2190 (Mr. Shepherd) that Britain's position is far stronger in the fiscal sense than we have been led to think by some of the sensational stories not only appearing in the British Press, but particularly the overseas papers. I was in the United States a couple of weeks ago, and the discussions which I heard there on the question of devaluation I regarded as being quite extraordinary, without any foundation, and certaintly having no origin in this House or in any statement which has been made by members of Her Majesty's Government or indeed of members of the Opposition parties.
But of course, this does not mean, even though our relative position is still strong, and we are capable of looking forward with confidence to the future, that we can be complacent. It is true that the United States has recognised the need for Britain's sterling position to be protected if only in order to protect the position of the dollar, and for that reason I think, apart from all others, that we can discount the question of devaluation.
If we have to lean more on the United States in the future than we would like to do I do not think that we need be ashamed of this, because it is a two-way bargain. Any benefit which accrues to us as a result of this agreement to maintain each other's currencies is one which will accrue equally to the United States in the long term, because if the dollar finds itself in difficulty there is no doubt at all that the whole of world trade and indeed the whole economic position of the free world will be gravely in danger and would make nonsense of many of the aims and objects which our countries are trying to fulfil at this time.
But in spite of all these facts, and the fact that the hon. Gentleman the Member for Nottingham, South, who, like myself, discounts entirely devaluation for practical reasons as well as for any other, I do not think that we can afford to be complacent. We have to face the fact that we are a country which has had to live on borrowing. We may have to live on borrowing for many years to come. At the same time, we have to take the problem by the throat and determine to overcome it at whatever cost of the nation as a whole. It might involve a great deal of sacrifice in the years that lie ahead. I hope that the Government or any successive Government will not 2191 hesitate to face this frankly and be prepared to take unpopular measures if necessary, with the purpose of strengthening our financial position and consequently our sphere of influence in the world.
In simple terms it might be said that no nation can afford to be buying from the salesman at the front door while the bailiff is on the way to the back door. To a very large extent that has been our problem in recent years. We have been prepared while a nation in debt to spend far more than we were able and consequently this has led to the difficulties with which we are faced at present.
The Bill has, I believe, great merit, great value. It is another step forward towards helping not only ourselves, but also those other countries of the world which are dependent upon the International Monetary Fund for development and to maintain their general economic stability. As has well been said, this debate this morning, although it is a brief one, and has not attracted anything like the attention which our foreign affairs debate earlier in the week attracted, could, in the long term, prove to be much more decisive for our future, and I am very glad indeed that we have had the opportunity of this discussion.
§ Mr. Deputy-Speaker
I hope it will be possible, as I should like to do, to call everybody who is sitting through the debate. It will be possible if hon. Members keep their speeches as brief as they reasonably can. So far we have done very well.
§ 1. 49 p.m.
§ Mr. Robert Edwards (Bilston)
I shall do my very best to comply, Mr. Deputy-Speaker, with your very wise—
§ Mr. Deputy-Speaker
I hope that the hon. Member will not think that I was making any personal reference whatever.
§ Mr. Edwards
I think it may be deserved so far as my remarks in earlier debates are concerned. However, I shall make the points which I have in mind very quickly indeed so that other hon. Members can participate in this very important debate.
I decided to take part in this debate only because I was appalled at the pessimism of the hon. Member for Twicken- 2192 ham (Mr. Gresham Cooke). He talked about the alternatives facing this country—the need to increase the Bank Rate to 9 per cent.; the possibility of devaluation; the need to increase the price of gold, and so on. How can an elected Member take such a pessimistic view of the efforts of the people of this country?
§ Mr. Peter Walker (Worcester)
In fairness to my hon. Friend the Member for Twickenham (Mr. Gresham Cooke), who is not here at the moment, perhaps I might point out that he did not say that these things should be done. He said that there were various alternatives, and he listed some of the bad ones, as well as the good ones. It is a little unfair to suggest that he was arguing that those things should be done.
§ Mr. Edwards
I listened carefully to the hon. Gentleman's speech, and that is my interpretation of it. His only constructive contribution was that we should cut defence expenditure and reduce the cost of the Rhine Army. Apart from that, he was saying quite clearly, and HANSARD will prove it, that we are moving into a crisis this autumn. That was the burden of his contribution, and it was his pessimism which provoked me to make a modest speech in this debate.
It seems to me that until we solve the conflict between sterling, the French franc, and the American dollar, we will have real trouble in the world, because the conflict between the great Powers leads to the victimisation of the emergent countries who are in the greatest need of our assistance. For example, in 1958, when a minor recession hit the United States, they immediately proceeded to cut back stocks, and they stopped purchasing primary goods. We followed suit, and the price of primary goods fell in that year by more than 2,000 million dollars. In that year we gained £300 million at the expense of the poorest people in the world. The result is that the emerging countries which need our assistance are becoming poorer because we are failing to solve the problem of the recurring crises that hit the Western World.
It is my considered view that we will always have economic crises. We will always have a balance of payments problem. We will always be troubled with the conflict between the dollar, the franc, 2193 and the £ while the world is bedevilled by the mounting cost of defence, which is reaching ridiculous proportions and bankrupting the economies of the world. This mountain of wealth, these billions of dollars which are sweated out of the toil and intelligence of the peoples of the world, is spent on defence without creating any defence whatsoever. How can a country like ours, with a population of 50 million increase productivity and give our people incomes which have a real purchasing value and at the same time avoid a crisis when we have to find £2,120 million a year for defence which gives us no defence at all.
We live in a world in which the revolution in weaponry outmodes and makes ridiculous and farsical the money that we are spending. We spend £200 million on the Rhine Army. We employ 35,000 German civilians and pay their wages and social insurance contributions in German currency. How can we maintain such a situation? We spend £150 million a year in the Persian Gulf, supposedly to defend our oil interests. The Americans take a larger proportion of oil from the Persian Gulf than we do. The French take about 20 per cent. of their oil from there. The Japanese take about 20 per cent. of their requirements, yet they do not spend a penny-piece on the defence of the area. Is it not time that we had a reorientation of the terrific mounting costs of defence?
Our defence costs are increasing while the great nations of the world are reducing theirs. Last year German defence costs were cut by 6 per cent. They cut their defence budget by £120 million, while ours went up by £110 million. Their social benefits were increased by £180 million because they cut back their defence costs. Last year Canada cut her defence costs by 6 per cent., and even the Americans cut their defence costs by 2½ per cent. in spite of their commitment in the Far East.
We shall start to solve our economic problems only when we have a new approach to the whole problem of defence costs, and we bear in mind the fact that we cannot continue to police great areas of the world, and that in any case we cannot afford to do so. What is more, this defence expenditure is unnecessary because the world today is dominated by intercontinental missiles 2194 that can travel 10,000 miles at 16,000 m.p.h.
§ Mr. Deputy-Speaker
Order. The hon. Member is in order when he talks about the financial implications of defence policy, but he cannot discuss defence policy itself.
§ Mr. Edwards
I apologise Mr. Deputy-Speaker. I allowed my thoughts to run away, but I was relating this increase in defence costs to the economic position and to the Bill that we are discussing. However, I shall conclude by making a few remarks about the International Monetary Fund.
I do not know what kind of financial check we have on this Fund. As far as I know, there is a small committee of three, called the Audit Committee, which checks on the Fund's expenses. The Chairman of this Audit Committee seems to be the controller of banks and currency from El Salvador, and this apparently is the only check that there is. The International Monetary Fund seems to be the most expensive international organisation in the world. Last year its administrative expenses amounted to 10 million dollars, and staff wages amounted to 9 million dollars. Every year it spends more than one-third of its income on administration, and I do not know how it can spend the money that it does on communications. According to its last report, it spent £100,000 on communications in the one year. That is about £400 every working day. It has a staff superannuation fund with a market value of 15 million dollars, yet it has a staff of only 594. The average salary per person is £5,000 a year, and its superannuation fund for retirement averages out at about £9,000 per person. I think that this is an international organisation in which we need some kind of international estimates committee to probe its expenditure.
§ 2.0 p.m.
§ Mr. J. Bruce-Gardyne (South Angus)
We listened with interest to the speech of the hon. Member for Bilston (Mr. Robert Edwards) and to his suggestion of methods of reducing expenditure on the organisation of the International Monetary Fund. I will not follow him in that, but I want to make one comment on his remark about the possibilities of solving our problems by reducing overseas defence expenditure. I sympathise 2195 with his line of thought as it affects this country, but to the extent that we are discussing international liquidity, and to the extent that several hon. Members have pointed out that this problem is becoming acute precisely because the United States is attempting to eliminate its balance of payments deficit, it should be pointed out that it is the United States own overseas defence spending which has played a major part in producing this deficit—but which has helped to finance the international monetary system.
I was struck by a remark made by the hon. Member for Birkenhead (Mr. Dell), who suggested that the debate today was more important and relevant in terms of foreign policy than that which we had at the beginning of the week. I agree wholeheartedly. Sometimes I am distressed by the amount of time that we spend here arguing about our attitude towards international problems which we are quite incapable of influencing because, above all, of our own balance of payments situation. If we get our balance of payments situation right and are able to solve the problems of international liquidity many of our other discussions would be a good deal more relevant.
Although we have had a very interesting and valuable debate, I am slightly concerned at the fact that to some extent we have tended to speak rather as if our views about the solution of international liquidity problems were bound to prevail—as though there were no others to take into account. I except my hon. Friend the Member for Horsham (Mr. Hordern) from that remark. He made a valuable contribution, drawing attention to the alternative views that have been expressed. My only comment is that when we consider those views we do so on the basis that there is an American position and a French position. This is an over-simplification. I suggest that the French position is essentially shared by other Continental countries.
In that context, I want to point out one rather interesting figure. Complaints have been made about the way in which President de Gaulle has announced his intention of cashing French surplus dollar holdings in gold. We have not heard of the extent to which other countries—and particularly the Federal Republic of West 2196 Germany—have been doing precisely the same thing.
I want to draw to the attention of the House the movement in the reserves composition of Western Germany and France. Whereas in 1963 France held 70 per cent. of her reserves in gold and only 30 per cent. in foreign currencies—mostly dollars—today she holds about 79 per cent. in gold and the remainder in foreign currencies. During the same period West Germany's reserves of gold have increased from 54 per cent. to 62 per cent. and, on top of that, her holding of "Roosa bonds", which are denominated in deutschemarks and therefore, to all intents and purposes, avoid the exchange risks exactly as do gold holdings, have increased from 4 per cent. to 10 per cent. of her total reserve holdings. So, in effect, the extent to which the Germans have run down their willingness to hold uncovered dollars has been greater than that of the French Government. This is an indication of the fact that while some of the other Continental countries do not always like the General's bark, they tend to be sympathetic to his bite. This is not the only problem in respect of which this attitude can be seen.
We have had a wide measure of agreement today that the problem facing the world arises from an inadequacy of liquidity. The mere fact that the ratio between national reserve holdings and world trade, which was approximately one-to-one in 1937, is now approximately one-to-five, is a fair indication of the in which the liquidity to finance world trade has been reduced.
Further, we have to recognise that the way in which available liquidities are distributed has also changed. Whereas in 1948 the United Kingdom and the United States between them held 54 per cent. of free world reserves, the figure today has fallen to 28 per cent. while, during the corresponding period, holdings of Western European countries have risen from 12 per cent. to 40 per cent. Those countries which have increased their reserves, however, do not have an adequate capital market to enable those reserves to be properly used, so that the considerable reserve additions in continnental Europe are in effect, being frozen and taken out of the world liquidity circuit.
2197 As my hon. Friend the hon. Member for Horsham pointed out in a very interesting contribution, we have an essential conflict of political wills behind the argument whether we are suffering from too little liquidity, as we would argue, or too much liquidity, as the Continental countries would tend to argue.
The argument of political wills is that there is a feeling in continental Europe that the increasing status of European currencies has not been reflected in the liquidity system based on the I.M.F. and on the Bretton Woods agreement, and that the dollar and pound have essentially retained a privileged status to which their credit standing in the world no longer entitles them. On the other hand, the United States and we believe that the reform of the international liquidity system must be so worked out as to maintain the special position of the pound and the dollar; indeed, only the other day the United States Secretary to the Treasury said that the purpose of reform must be to ensure that the status of the dollar is maintained. It is my contention that reform on these lines is today and is likely to remain unacceptable to the continental creditor countries.
That is why I believe that the French Government were probably right to reject the call for an international monetary conference. A conference which failed—as I suggest a conference in the near future would fail—would be far more damaging than no conference at all. I was somewhat relieved to feel, in listening to the Chancellor, that he appreciates perhaps more clearly than he did before—perhaps as a result of his visit to Paris yesterday—the real obstacles to such a conference, and the danger of having one prematurely. I hope that the Minister who replies will be able to give us some indication of what transpired as a result of the Chancellor's visit to Paris yesterday.
Although I do not believe that we can yet hope for a fruitful international conference on liquidity, it is quite clear that the clouds overhanging the international financial scene are gathering ominously. We have had references to the situation in Japan and the effect of the American measures to attempt to correct their balance of payments deficit on Australia, Western Germany and Italy, to 2198 some extent and, above all, on the British payments situation.
We now have a position in which the United States is determined to bring her payment into balance, while we have a reserve composition made up as to over 90 per cent. of borrowed moneys, which will start falling due for repayment in two years' time.
This is indeed a very ominous situation. What positive steps can we take about it? I feel that there are one or two palliatives. One was mentioned by the hon. Lady the Member for Hitchin (Mrs. Shirley Williams). It is the possibility of widening the parity margins. This seems to be a logical step because at least it makes the game of the international currency speculators somewhat less attractive. Up to date the central banks have been playing this game on grounds of the currency speculators' own choosing.
Secondly, I would have thought that there was a great deal to be said for encouraging all countries to include at least their I.M.F. gold tranches in their published reserves. The I.M.F. does this and it seems illogical that countries do not do it themselves. Might we go even further and include the first credit tranche as well?
Thirdly, it seems to me astonishing that over the years we have never contemplated invoking the "scarce currency" clauses of the I.M.F. Agreement. There is a curious morality about our approach to international monetary problems. The debtor country is, after all, creating many more jobs by definition in foreign countries than others are creating in the debtor country itself and is, therefore, behaving in a highly unselfish manner. I have never understood why the debtor has to be put in sack cloth and ashes, while the creditor is regarded as having a halo above his head.
I think that the time has come when we should consider invoking the scarce currency clauses against the perpetual creditors on the Continent of Europe. But these are only palliatives and can only be palliatives. I am bound to say that I am, like one or two other hon. Members on this side of the House, pretty pessimistic about the prospects of actual progress on the plans that have been advance—from Triffin through Stamp and Maulding to Posthima and Bernstein.
2199 I have an ugly suspicion that however antedeluvian, however mechanistic and inequitable it may be, the only answer is an increase in the price of gold, and on this I would make one point.
I believe that in this country we have a singular opportunity for an effective national initiative. I realise that I am going to enter dangerous ground here, but I think that this has got to be done. My hon. Friend the Member for Cheadle (Mr. Shepherd) said that we had to be very careful when we started talking about devaluation. Of course, I entirely agree with him, but I am appalled at the way in which this seems to have become the last unmentionable word in the English language. It is ridiculous that we cannot discuss this proposition seriously, particularly when we know that it is being widely discussed in countries beyond these shores.
I feel that if we could put together a radical programme of reform, something on the lines of the reform introduced by General de Gaulle in December, 1958, involving a very substantial degree of devaluation coupled with a slashing of tariffs and a determined attempt to get a greater sense of productivity into industry at home and a modest degree of deflation, we should then achieve one of two things. We should see either a great increase in our competitive position abroad, if others did not follow us into devaluation; and if they did, then we should have the revaluation of the price of gold, which I do not think we shall get in any other way.
This may strike some hon. Members as almost a counsel of despair. But I put it to the House that if we have to choose between this solution and the solution of competitive deflation and monetary stringency all over the world and, as a result, an increasing level of unemployment and unused resources, then, surely, this solution has a good deal to be said for it.
§ 2.16 p.m.
§ Mr. Robert Maxwell (Buckingham)
I welcome the Bill. As is well known, it arose out of a very heart-searching compromise between the United States and the United Kingdom, on the one hand, and the Group of Ten on the other. The United States and the United Kingdom would have preferred a larger tranche in 2200 the borrowing powers of the I.M.F. The Group of Ten rightly resisted the demand because it felt that if it merely perpetuated the rules of the I.M.F. which not only overlooked the reality of the trading conditions and reserves of the Group of Ten vis-à-vis the United States dollar and sterling, but it would continue to allow the United States and the United Kingdom to carry on exporting inflation into these countries, throwing their weight about all over the world without the United States and the United Kingdom really paying the bill.
We complain that General de Gaulle has started a movement of world deflation by insisting that he will no longer accept United States I.O.U.s and by converting a great deal of his dollar holdings into gold. It is important that the House should bear in mind that the United Kingdom has never used dollars as reserves. Every time we acquire a dollar we convert it into gold.
I agree with many hon. Members who have said today that this debate is far more important than the foreign affairs debates, except that they seem to attract the attention of many more hon. Members. The reason why this debate is much more important is simply that foreign affairs are largely about war or trade, and, since we are at peace, trade is much more important. Our debate today is of the greatest consequence to international trade.
I only wish that the skill of the Gallery staff and their imagination would make it possible to bring home to the millions of their readers, listeners and viewers in the country what international balance of payments is really about and how it is that the standard of living in this country, which has risen enormously in the past 10 years, has largely been financed by borrowing from abroad.
At this moment, millions of people are enjoying their holidays and their jobs, with pockets full of money, without realising that all of this can only continue to be enjoyed not by the will of the United Kingdom Government or industry alone, but only with the support of the international banks. It is not a situation that I particularly relish our country being in. I know that our Government are tackling this as a matter of the utmost priority.
2201 I want now to come back to a point made by the hon. Member for Bodmin (Mr. Bessell), on behalf of the Liberal Party. He rightly said that the Government will need to take some drastic and unpopular measures to put our balance of payments right. I hope that when the time comes he and his hon. Friends will not hesitate to support the Government in these actions. They should not make any impossible conditions of a political nature about changes in the electoral law or any other kind of condition. I am delighted to have their offer because I feel sure that we will need to call on their help, if it is given without any conditions.
The other point to which I wanted to draw the attention of the House is that this country, as a borrower, as a debtor, has no right of initiative. Owing, as we do thousands of millions of pounds, we cannot tell the lenders how they are to arrange world liquidity to suit us. The Chancellor of the Exchequer is achieving remarkable results, considering the tight position in which he finds himself internationally. The fact that the American business community and the United States Government have the utmost confidence that Her Majesty's Government will not devalue is due largely to the Prime Minister's statement to the Economic Club and the recent visit to that country of the Chancellor of the Exchequer. I hope that he has been as successful during his recent visit to Paris in persuading M. Giscard d'Estaing, and the members of the Group of Ten, as he was in the United States.
Another point to which I should like to draw my right hon. Friend's attention is that, obviously, this increased tranche of borrowing from the I.M.F. allows a breather. There will be discussions in Tokyo and elsewhere about how the international monetary system is to be reformed. Obviously, the Group of Ten are not prepared to live under the rules made at Bretton Woods which they were not invited to help frame.
I wonder whether my right hon. Friend has considered the possibility of inviting the U.S.S.R. to participate in these discussions. Not very long ago, this would not have been a sensible suggestion, but I am sure that it has not escaped hon. Members' notice that, only recently, the World Bank and other United States 2202 authorities invited the U.S.S.R. to participate in an Asian Development Bank. The Russians should be approached with an invitation to participate in these discussions, because it will be a long time before any new I.M.F. rules come into existence.
In the meantime, the income of the developing countries is falling. The amount of money which they have been getting for their raw materials from the developed countries has been falling because the price has been falling. The aid which the Western nations have been providing, including the U.S.S.R., has not equalled the fall in the price which the developing nations have been getting for their primary materials. This is a problem of world dimensions and should be tackled on a global scale. Probably the best forum would be the United Nations and, certainly, since the Russians are now contributing so immensely to the pool of aid to the developing countries, this may be one way where the interests of the United States, the United Kingdom, the Group of Ten and the U.S.S.R. could merge.
We all do wish to continue to sell our goods and services to the developing countries—
§ Mr. Hordern
What evidence is there for saying that the Russians are contributing to a pool of aid, as opposed to direct aid to countries in which they are interested? Would the hon. Member say what prospects he imagines there are of the Russians providing support to bolster up the currency of the United States and the United Kingdom.
§ Mr. Maxwell
The only evidence that they are now interested in international co-operation is that fact that they have now, with alacrity, agreed to the reconvening of the United Nations Disarmament Conference. Bearing that initiative in mind, it follows that they might also be amenable to start discussing pooling of aid through the United Nations. They are becoming a highly industrialised nation which wishes to sell its exports. They, like us, will not be able to sell their exports to the developing countries unless the income of those countries is commensurate with the surplus production which we have available to sell them and their capacity to absorb it. This may be 2203 something in which the Russians will be interested—
§ Mr. Bruce-Gardyne
Would the hon. Member not agree that, at the U.N.F.E.D. conference last year, the Russians, though pressed time and again to agree to the allocation of 1 per cent. of their gross national product to aid, flatly refused to do so?
§ Mr. Maxwell
I agree, but we have learned, in our negotiations with the Russians, that we must never take no for an answer.
I would remind the House how long they took to grant Austria a peace treaty and how often they have threatened us over Berlin. The Russians, who are a highly industrialised nation, are gradually coming to the conclusion that they are interested in world stability and in increasing world trade. For these reasons, I believe that the time has come when they might be interested in participating in framing the rules of the International Monetary Fund.
I was taken by the fact that the United States should have thought it useful to extend a public invitation to the Russians to participate in the formation of the Asian Development Bank. This may be tied up with Vietnam and it may not be, but this is the first time that such a thing has happened. I wonder whether the Chancellor of the Exchequer would not see in this an opening and an opportunity.
I am very concerned that our people are not aware of the considerable economic problems with which we are faced over our balance of payments. None of our constituents understands what the problem is, or even believes that there is a problem at all. In the final analysis, we shall get the foreign bankers off our backs and have our self-respect, our standing and our power restored both at home and abroad only if we start paying our way. We cannot do this unless everyone is willing to make sacrifices.
This is why, for instance, for the whole of last night and this morning, many of us felt that the introduction of the Judges' Remuneration Bill—
§ Mr. Deputy-Speaker
Order. I am very tolerant, but I will not tolerate any 2204 reference to the long debate which we have completed. I am very happy that it has been completed.
§ Mr. Maxwell
I am sorry. What I was referring to is the need to implement the national incomes policy. It is incredible that everyone seems to say, "I am a special case; I am entitled to 20 per cent., 7 per cent., 11 per cent., 28 per cent. and any other percentage" although, if they are told that there is a national problem, they say, "We agree that sacrifices should be made" but always by somebody else, not by the person who is being asked to make the contribution.
This is very short-sighted of everyone who is involved in these negotiations. [HON. MEMBERS "Hear hear."] Hon. Members opposite say, "Hear hear," but they have not been very helpful in assisting us in the implementation of the national incomes policy. Their attack on the Minister of Technology for the things he is trying to do in modernising our industries and the carping attitude they have adopted is all most unfortunate.
It is time that Britain woke up to the fact that nobody owes us a living and that we can pay our way only by being competitive. If we keep on pushing up wages, salaries and incomes we are merely making ourselves that little bit more uncompetitive and we are merely delaying the time when we shall be able to pay our way. The time available to the United Kingdom is now very short indeed.
I hope, indeed I am sure, that my right hon. Friends will succeed in waking up the country to the reality which faces us and that before very long they will be tabling Measures which will bite and will make everybody aware that we mean business, whether they are in private industry, in the nationalised industries, or working in the Government. The time is more than upon us when we should call a halt to spending what we do not possess.
§ 2.32 p.m.
§ Mr. Donald Box (Cardiff, North)
The hon. Member for Buckingham (Mr. Maxwell) and I do not often see eye to eye, but I agreed with a number of things in his speech and certainly with his statement of the need for the public at large to realise how much we all owe to the 2205 international bankers for the level of prosperity which we enjoy in this country.
The hon. Member emphasised the need to balance the books. Like many other hon. Members who have taken part in the debate, he offered a certain amount of advice to the Chancellor of the Exchequer. I will not add to that advice, and for that I am sure that the Chancellor will be duly grateful. But many speakers have already emphasised in some respects the fact that the need to increase the I.M.F. quota is attributable to a number of causes. One of the two main causes which has already been mentioned is the increase in world income and trade. The second is a general increase in the inflationary tendencies over the past few years.
The 25 per cent. increase which we are discussing today follows a 50 per cent. increase in 1959, when perhaps the rate of inflation was not quite as acute as it is at present. The increase which is now suggested is essential if the I.M.F. is to perform its two functions—to use the words of the 1959 White Paperof promoting international monetary co-operation and exchange stability as a basis for the balanced growth of world trade.As sterling is one of the reserve currencies of the world, its stability is essential not only to the I.M.F., but also in our own selfish interests as bankers to the world. It is, therefore, essential that any additional stability which is given to the I.M.F. to carry out its functions of stabilising and modernising and assisting convertibility, and overcoming temporary balance-of-payments problems, must in turn help us in our rôle as international bankers.
We are all familiar with the pressures which occur on sterling from time to time. As we know, these are precipitated by sudden withdrawals of funds by foreign investors from their balances in London. Sometimes these withdrawals can be categorised as seasonal, but if these pressures occur in a wide variety of sources and all at the same time, the strain on the funds of the I.M.F. could become very considerable. The pressures may arise for a multitude of reasons. It may be because of a balance-of-payments problem, it may be because of external conditions in the country concerned. But third, and 2206 more likely, is the more basic reason that more attractive rates of interest are obtainable elsewhere. These fluctuations and variations, I am afraid, are part of the price which we have to pay if we are to continue in our rôle as international bankers.
I suggest that this rôle is of supreme importance both to the country and to the world. It has been built up on many years' experience and on the good will and integrity of generations. Equally, it contributes substantially to our invisible earnings, both directly and indirectly. It is impossible to put an exact figure on how much these invisible earnings amount to, but estimates vary, according to the level of the trade, between £25 million and £150 million per annum. It is thanks largely to the high technical skill and the wide experience of the bankers in the City of London, who enjoy a special confidence in banking circles throughout the world, that this is so.
Perhaps the most outstanding example of that is to be found in the efforts of the Governor of the Bank of England during the financial crisis of last November, when he was able, virtually by picking up the telephone and ringing banking circles throughout the world, to raise a very large sum of money at a very short lime. Despite the fact that that prompt action undoubtedly saved the country, and incidentally the Government, at the time, there is still a tendency on the part of some hon. Members opposite to treat bankers with the deepest suspicion. I detected it, I think, earlier in the speech of the hon. Member for Blaydon (Mr. Woof). There is a tendency to label them with such impolite names as "Gnomes and villains".
Undoubtedly, this view is to some extent supported, though wrongly in my view, because the sudden and irresponsible withdrawal of foreign funds from London have occasionally forced the Government of the day to adopt policies which slow economic expansion and which result in restrictions, shortages and even unemployment. This inevitably brings a certain amount of unpopularity to the Government, which is something which no Government likes. But I think that it also betrays that our Parliamentary system encourages us to take a shorter rather than a longer view in these matters.
2207 We are also inclined to forget that foreign investors do not owe any special loyalty to us and that, therefore, it is up to us to retain the confidence of our foreign investors and to discourage them from withdrawing their funds at short notice. When pressures arise from matters quite outside our control, obviously the existence of the I.M.F. should provide a stabilising factor. For example, I understand that the three largest holders of sterling in the world today—or they were until recently—are Australia, Kuwait and the Royal Dutch Shell Group. It is to their eternal credit that the Royal Dutch Shell Group, who were never very enthusiastic about the Chancellor's recent Measures, never took evasive action to avoid the possible effects of devaluation.
I do not know how the Australians see this matter, but I suspect that because of their natural friendliness and loyalty to this country they, too, would hang on to their sterling. But Kuwait is a somewhat different kettle of fish; with a sniff of devaluation in the air it is liable to reduce its sterling holdings, and we know from the Press recently that it has been steadily reducing its sterling holdings over the past few months and that the level of the holding is probably lower than it has been for a very long time. Kuwait has also arranged to liquidate the balance at fairly short notice if it thinks that that is required.
If action such as this were to cause a run on sterling—I do not think that it will, because this has been done over a considerable period—then, obviously, the liquidity of the I.M.F. and the efforts of the Bank of England would both have to play an important part in restoring confidence in the £ sterling. If more stringent measures to defend sterling became necessary, because of an adverse trade balance, I do not think that we could blame the bankers if that were to happen. It would, after all, be the Government who were ultimately to blame for not having taken the necessary action to deflate the economy and put things in order.
If the withdrawal of short-term funds exaggerates the effect of these adverse trade balances, then obviously an increase in the Bank Rate becomes necessary. It must be raised sufficiently to attract foreign funds back into the coun- 2208 try and so offset the import surpluses. Unfortunately, we are all familiar with the side effects of a higher Bank Rate. It affects each one of us in one way or another, whether or not we like it—in rates, rents, mortgages or overdraft rates—but we must remember that the basic reason why we have increased the Bank Rate to a high level indicates some fault or weakness in our domestic economy. All that we can expect from the I.M.F is that it will provide a breathing space for the deflationary measures to take effect.
It has been suggested from time to time that we could and should insulate ourselves from these adverse effects by giving up our rôle as world bankers, but this is a fallacy. Apart from the adverse effect on our invisible earnings, the proposition is hardly feasible for a number of reasons.
At the end of 1954—these are the latest figures I have—the balances of short-term sterling held by residents outside the United Kingdom amounted to about £5,000 million. Three-fifths, £3,000 million, of that was held by sterling area countries. That is likely to remain in safe hands because they still trust London as the banking centre of the world. The other two-fifths, £2,000 million, was held by foreigners, either in an official or private capacity, and they would have to be repaid if we were to cease our rôle as bankers.
We must then ask ourselves, if that were to happen, how those balances would be repaid. Would we repay them in gold and dollars? It is fair to say that we are not likely to have the gold or dollars available for such a purpose. Could we use the alternative of paying them off in sterling? This, in turn, would present a number of additional problems because if the foreigners continued to hold their sterling we would continue to act as their international bankers.
If, on the other hand, they decided that they had to dispose of their sterling, then I am afraid that this would be liable to cause a run on the £ sterling once more, with the consequence that the Bank of England would be more or less forced to support the £ and, as a result, lose gold on a large scale. I have seen one informed estimate recently that we would require as much as 4,000 million dollars 2209 of long-term loans from foreign Governments to repay the foreign holders of our sterling balances—a proposition which most people will agree is not feasible at the moment.
It has been suggested that there is need for a new international currency to help out the liquidity of the I.M.F. One hon. Member referred to Mr. Maxwell Stamp, who referred in his excellent booklet to such a currency as "the fourth medium" and suggested that it should be created either by the I.M.F. or a new institution. This suggestion carries the rare distinction that it is one of the projects which has the approval of General de Gaulle. Despite that, and although it might have a superficial appeal for a number of people, I understand that some experts think that there are serious doubts about its validity. They first challenge the colossal size of the new currency, which it is suggested might have to be of the order of 45 billion dollars, and, secondly, it is submitted that as it would be a synthetic currency, unsupported by gold or dollars, it would be unacceptable to many foreign investors for that reason.
It does not need a lot of imagination to visualise that even some foreign holders of sterling would be unwilling to exchange their sterling for a new and unknown quantity in the currency world. It seems, therefore—whether or not we like it—that we are destined to remain bankers to the world. It is in our own best interests to give the strongest support to the I.M.F. which, in turn, gives stability to our rôle as bankers. If it is agreed that we should continue as bankers it is, therefore, in our interests to carry out our banking service as efficiently as possible. It is, therefore, doubly important—as has been emphasised during the debate—that the Government should give the highest priority to tackling the adverse trade balance. After some hesitation they now appear to be doing this and although some may disagree with their methods, I am sure that we all agree with the targets they have in mind.
The Government must also resist any pressures and temptations, whether from the Right or Left wing, to take further measures which are hostile to capital, because such measures tend to frighten foreign investors away. As has been stressed by the Governor of the Bank of England on at least two occasions this 2210 year, it is necessary that the Government should reduce expenditure wherever possible, although I appreciate the fundamental difficulties that lie in that solution.
It therefore remains to be seen whether the Government have the courage to carry out these measures, because they are quite certain to bring them a great deal of unpopularity in their wake if they do so. However, on the credit side, I think that if they take such measures a new strength will be brought to sterling which will help to banish the fears of devaluation, encourage greater world liquidity and give greater significance to the powers which, I hope, we will be granting to the I.M.F. today.
§ 2.47 p.m.
§ Mr. Terence L. Higgins (Worthing)
There has been general agreement on both sides of the House that the principle involved in the Bill is to be welcomed. It has also been recognised that the Measure will provide only a temporary and partial relief to the problems we face in creating international liquidity. Indeed, this was stressed by the right hon. Gentleman the Chancellor of the Exchequer in his opening remarks.
It has been pointed out that this debate is in many ways as important, if not more important, than the debates we had earlier in the week on foreign affairs. It is equally necessary to point out that the problems which we are discussing today, and which we must solve, are of vital importance to everyone in this country, because unless we can solve them the prospects of maintaining and raising our standard of living at the rate achieved in recent years will be jeopardised. For this reason we are grateful for this opportunity to discuss the main problems of international finance which we face.
Time is short and in being brief I will merely summarise the various aspects of the problems before advocating some proposals which might provide a possible solution. The main point to consider is the increase in world trade in the postwar period. It has been rising more rapidly than the increase in the means of exchange, backed up by gold. We have therefore financed the increase in world trade largely by adding to the overall deficit of the United States and this country. 2211 This has provided the means of credit creation. However, it has become abundantly clear that we are rapidly approaching the limit to which we can increase credit in this way, because the liabilities which the United States and ourselves have incurred are now so great in relation to the reserves which we have that speculative movements in our economies are likely to lead to a run on sterling whenever confidence in our economy is shaken. This means that we have too often had to take measures to restore confidence by restricting production and so on at home and following a policy of stop-go, which all hon. Members rightly stigmatise. The second point is that both the United States and ourselves, seing the vast size of our commitments in relation to our reserves, have felt it necessary to call a halt to this further credit creation by expansion of dollar/sterling deficits and there is a danger that this may result in a general deflation of world trade.
Speculative movements have also been accentuated, because countries' fluctuations in balance of payments have been increasing in size in recent years, and, finally, because of the generally uncertain situation this country and other advanced countries have been inhibited from giving aid to the less-developed countries because they feel that in doing so they may be increasing their commitments to the point where confidence in the currency is affected, and that may shake the structure to its foundations. There has therefore been an intensive search for a solution of these vitally important problems.
The suggestion of certain continental countries recently that we must get away from the dollar and into gold is much more a form of protest than an attempt at a solution. It will not solve our problems at all. We simply cannot go back to the kind of golden age which some people imagine to have existed, perhaps in the inter-war period, when one had an automatic gold exchange system which led to automatic equilibrium in the balance of payments; the outflow of gold being matched by a restriction in credit and a rise in the internal rate of interest and general deflation, or the reverse process if there was a favourable balance of payments.
2212 We cannot go back to such a gold age, first, because it means we would give up all control of the domestic economy, and today no Government can say that it will let the level of unemployment or inflation depend on some purely arbitrary mechanism. Secondly, because, if one looks at the facts of history, it is apparent that this so-called automatic system never really worked as it was alleged to work. Therefore, any idea of going back to the gold exchange system must be rejected.
This is still true if the policy suggested from both sides of the House of increasing the price of gold is adopted. This proposal has a very considerable attraction, but when deciding whether it provides a solution, we must look at the actual process by which it could be implemented. It would have to be adopted by the United States Congress, and the kind of speculative movements which would take place while it was being debated are fairly easy to guess. Therefore, it is not a solution, quite apart from the argument that it would very much increase the strength of the two major gold-producing countries which, for political reasons, people might not think was altogether to the good.
So we come to the argument that we should create a fourth reserve, in some way, in addition to gold, the dollar and sterling—that we should find some further means of creating international liquidity. A great many plans have been put forward with this in mind. Two things should be stressed before considering them. The first is that the I.M.F. should be the single centre of any such credit creation; a multiplicity of centres would be undesirable. The second is that any fourth reserve should be in addition to the existing reserves, and not a substitute for them. That would meet the point made by my hon. Friend the Member for Cardiff, North (Mr. Box), who stressed that the kind of plan which Stamp has been putting forward would involve a vast creation of credit, which would be difficult.
I turn now to consider two particular plans put forward for increasing credit, because it seems quite clear to me that we must move towards a fourth reserve such as has been suggested. The Chancellor has said—and he was, of course, choosing his words carefully—that we 2213 must consider to what extent, if any, it is necessary to supplement present measures. That is a justifiably cautious statement but it verges a little on the reactionary, and from the back benches, at any rate, one may suggest a rather more ambitious solution.
Two plans deserve particular consideration—the Stamp plan and the French C.R.U. plan. To appraise them we have to ask ourselves two questions. The first is: who is to gain from the credit created? When we create credit, as banks create credit and as the Government create credit, in a sense the creators gain by getting an interest-free loan. Secondly: who will control the amount of credit that is created? One must have some limit.
The point that Stamp makes is very valid. The Stamp plan involves the creation of credit certificates which would be distributed, presumably on the same basis as that on which international aid is given at the moment to various undeveloped countries, which would use them to purchase aid from whomsoever they chose. It would mean that the credit created would, in the first place go to the under-developed countries, but would also help the world as a whole because the certificates would eventually be held as reserves and this would increase international liquidity. Such a scheme has considerable advantages, because it is obviously far better that certificates should be used to encourage the purchase of real goods and services rather than that resources should be devoted to producing gold. The plan has that advantage.
Secondly, the aid will presumably be given, anyway, so if these certificates are distributed to the under-developed countries and are then used to purchase assistance from the developing countries we create an international liquidity, which is of advantage to the world as a whole without increasing in any way the burden on the developing countries.
The other extreme is the kind of C.R.U. plan of the French, which suggests that one should give the whole of the certificates initially to the developing countries creating the credit. It seems that this is probably a much less desirable scheme.
The second crucial question seems to be who controls the amount of currency and additional liquidity created. Mr. 2214 Stamp, in putting forward his proposal, is in many ways making an assumption that there is unemployment in the developing countries participating in the exercise, but in the post-war world that is not valid. Typically the aid given in this way will involve the reallocation of real resources and provision from the developing countries to the under-developed countries not the utilisation of excess capacity.
I put forward to the Chancellor as a possible suggestion that perhaps the best way in which we could control the amount of credit created is to adopt something like the Stamp proposal but limit the amount of credit created in this way to the estimated amount of aid which the more developed countries as a whole are prepared to give in any period. This would mean that we would have the initial advantage of helping the developing countries and increasing liquidity without there being a disadvantage to the developed countries. At the same time it would put an effective limit on the extent to which credit is created, which would overcome the kind of thing that has been worrying many hon. Members on both sides of the House: namely, that we might create an inflationary situation internationally when confidence in the world currency would depreciate.
There is a possible solution to be found on these lines although clearly, as has already been pointed out, this subject is complicated. Although there has been some objection on this side of the House, I look forward to the Chancellor's discussion in August and hope that there will be a wider conference of this subject in future.
§ 3.0 p.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
This is a very short Bill, but I cannot say the same about some of the speeches we have heard in connection with it. We have had a wide-ranging debate covering most facets of the economic field. I hope that the Chancellor will not be too disappointed if I confine my remarks to what the Bill is about.
We have been indulging in a tour of the stratosphere of financial problems but I, perhaps as a somewhat humble labourer in the vineyard where these fine vintage wines are produced, wish to contribute my view. We have two separate problems, 2215 international liquidity and sterling. They are quite different problems. The fact, as the Chancellor and his colleagues know very well, is that sterling has no reserves. The exact figures quoted by Mr. Triffin are that we have 5,000 million dollars less in reserve than we owe to the International Monetary Fund and other foreign monetary authorities. These figures are quoted by Mr. Triffin and I presume that they are reasonably accurate.
I have a feeling that there is very little foreign money in London. It is not a question of keeping the confidence of foreign investors, because I cannot think that there are foreign investors here. In the banking world, 30th June is an auspicious day, because it is a dey when very large numbers of foreign institutions withdraw their money for balance sheet purposes. There seems an exact parallel with the Sherlock Holmes story of the dog which barked in the night, for nothing happened on 30th June. It was the quietest day that the market had known for a long time. It went by without withdrawal of funds, the suggestion being that there were no funds to withdraw.
Another example was the extraordinary position of the American Bank, which has a very large sum of money in the foreign exchange market by being long of sterling. It took a large position in sterling on which it should have made money, but in fact this meant that having bought sterling forward it found it was unable also to hold a sufficient sterling cash balance. Because it could not hold sterling it was forced to borrow on day to day terms at extravagant rates. There were times when foreign banks had to get accommodation from among themselves and to pay interest of as much as 25 per cent. a day. This is the measure of how little foreign-held sterling there is in London.
It is not a question of how we can keep foreign investment in London, but a problem of whether there is any foreign money at all outside Government agencies. The fact is that the so-called gold exchange standard has ceased to operate as far as this country is concerned. The gold exchange standard is based on the confidence that holders of sterling have in their unqualified right and ability to convert their balances into gold metal on 2216 sight and at will. They have not got that right, and they know the right does not exist. The same situation is developing in America, where American reserves have gone down from 15,900 million dollars in 1957 to almost nothing today. The expansion in world trade has come from the willingness of the Americans to run down their reserves.
The use of sterling and dollars as world reserves has interfered very much with the use of those currencies as the key currencies for private trade and investment. The fact that they are under pressure as reserve currencies results in what might be described as "creeping" exchange regulations coming in, in both dollars and sterling particularly. I refer, for example, to the very proper advice sent out by the Governor of the Bank, at the request of the Chancellor, that banks should limit their lending this year to 5 per cent. over the previous amount.
That has also applied in America. What is the net result that I have seen? I had a perfectly creditworthy client who wished to expand, but, as a result of the Chancellor's request, I was unable to provide the funds. However, my client was very persistent, and I was able to put him in touch with a bank in Switzerland that was willing to advance him the money, and that applied for exchange control permission to take up a loan from Switzerland. Although the rate of interest struck me as outrageous, and the loan was to be repaid in two years, which is a very short time, the Bank gave authority for the borrowing over the exchanges of what was a quite modest sum.
That is the sort of business that probably ought to have been done in London and, as far as I was concerned, would have been if it had not been for the Chancellor's request. That is the inhibiting effect on the use of sterling as a key currency for business of what I have described as "creeping" exchange restrictions. I do not think I want to say any more about sterling, because it is a problem that we have to live with, but it is one about which we do not want to have too many illusions.
A point which has been brought out by hon. Members on both sides is that the I.M.F. system is one which rewards with equal voting powers the obligation to lend and the right to borrow. At 2217 the moment, the borrowers from the I.M.F. include the United States and the United Kingdom. Between them, they have twice as many votes as all the E.E.C. countries put together. These are the chief providers of funds, and the situation has arisen where it is a bank being run by the borrowers, and that is the situation that no bank manager likes to contemplate, with the affairs of his bank being governed by the people taking money from it. The present I.M.F. situation is not just the result of a fit of obstinacy by the French. It is something that has to be considered very fully.
That brings me to the point that is clear to us all, and that is that there is a major problem coming for sterling and international liquidity, because the Americans are not willing to increase their lendings any more, and these will have to be met. All these plans were discussed—the Triffin plan, the Bernstein plan and the Stamp plan—but, against them was the fact that as long as people can get their money over the counter, they are not going to take delayed payments of any sort.
Now that they are beginning to realise that they have lost that right, I think that the atmosphere is slightly more favourable. I suspect that this is one of those matters which should not be dealt with piecemeal. I do not think that the full support of the trading nations of the world will be secured until they see a crisis looming which will hit them and until they see the possible failure of one of their most important customers to meet his obligations. Only in those circumstances shall we get sufficient conviction among the trading nations that they must do something to help. Sacrifices will have to be made all round.
The state of sterling surely is like that of one of the engines of a four-engined plane. If that engine shows signs of overheating, although I am not a pilot I understand that the pilot's natural reaction is to try to take the pressure off that engine and give it a chance to cool whilst carrying the extra burden on the other three engines. There comes a moment when the dead weight of that engine is something the pilot must reckon with if the engine does not start to pick up again. This is the Chancellor's problem. If the engine does not 2218 pick up, the pilot, in his wisdom, must get home on the remaining three engines and he wonders how long it is worth carrying the dead weight of the fourth.
This is the problem we have today. The Bill deals with 490 million dollars which are to give us additional drawing powers on the International Monetary Fund. I remind the Financial Secretary that only two days ago he was discussing the sum of £470 million, a rather larger figure, which is being required by the local authorities this year. Many people will think that we are not showing a very good example to the people whom we are adjuring to tighten their belts and make sacrifices to keep us going if we spend. For the best of motives, no doubt, £470 million represents to a very large extent the drawings that we have made from the I.M.F. over the last year.
I will conclude by quoting a sentence from Mr. Stamp which, to my mind, sums it up completely:If Britain ever does devalue it will not be because the mechanism for helping us not to is inadequate, but because our Government refuses to do what is necessary to bring our payments into balance—i.e. avoid inflation.
§ 3.13 p.m.
§ Mr. Peter Walker (Worcester)
All hon. Members who have been present will agree that we have had an interesting debate and, I hope, from the Chancellor's point of view a useful one. We have heard many cogent speeches and many ingenious ones. We always listen to my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) with interest. I admire his Parliamentary skill in starting by rebuking us for not discussing the Bill and not mentioning the Bill himself until the last few minutes of his speech.
I also admired the speech of the hon. Member for Blaydon (Mr. Woof), who in a very interesting speech gave us his views on this subject. I thought that the hon. Gentleman would end up by an announcement that the Blaydon Borough Council was to ask for a direct loan from the International Monetary Fund.
We have heard many cogent and interesting speeches from both sides of the House outlining the very real and important problems connected with the Bill. The interesting remarks in a very fine speech by the hon. Lady the Member 2219 for Hitchin (Mrs. Shirley Williams) giving the background to this problem should constantly be borne in mind by the House. She referred to the effects of the underdeveloped territories of the world, forming as they do two-thirds of the non-Communist world. She also mentioned the financial fact that 65 per cent. of the real moneys in the International Monetary Fund come from the credit positions of the two Common Market countries.
These are two fundamental facts behind the many problems we are trying to tackle in the overall problem of world liquidity. But I appeal to the House and other people not to be taken in by the general jargon of this subject. I have a nasty feeling that the word "liquidity" is being used by all fashionable speakers on all subjects. Before the war the great thing was "rationalisation". I have a nasty feeling that the two major parties will fight the next election on "more flexible liquidity", or some other awful jargon of that type.
We are dealing with the problem of ensuring that the world's monetary systems enables economies which are developing from rational and reasonable minds to have the maximum scope for development. It is a long time since Bretton Woods. Many people are commenting that it is time that we had another conference to reassess the position. This type of comment fails to recognise the considerable changes and improvements which have been made in the world monetary system since Bretton Woods. The position over the last 20 years has not been static; many considerable improvements have been made.
We saw in the recent crisis in sterling that the world's monetary system worked surprisingly effectively, speedily and quickly, with the International Monetary Fund playing its part, but certainly with the central bankers playing a very considerable and speedy part in solving the problem. We make a mistake if we tend to dwell on this as primarily an International Monetary Fund situation. We must consider the whole of the World's banking structure. I would speak in praise of the manner in which that structure has worked over the years and has developed and dealt with problems as they occurred.
2220 Much has been said of the basic problems connected with the existing attitude of the American Government and the position of the dollar, described in his cogent speech by the hon. Member for Birkenhead (Mr. Dell) as the kind of dollar dilemma which continues adverse balance of payments which generally affects other countries. This in turn weakens the basis of their own currencies, and if they try to strengthen their own currencies by solving the balance of payments position this causes problems abroad.
I am more optimistic of the American view about the forthcoming period because the speed with which they have been able to tackle their adverse balance of payments position will have a long-lasting effect on the general strength or the dollar and will enable them to run a future adverse balance of payments with possibly less fear of the future weakness of the dollar. The balance of payments position of the Americans has been dealt with in a very imprecise manner. The speed with which they dealt with the situation has been strengthened. This would, I hope, enable them to be far more flexible and far less fearsome in their attitude. This was illustrated recently in the American Government's attitude. Mr. Fowler suggested that a conference should take place, and a conference did take place, on the problems of world liquidity and the general monetary structure. The reasons which he gave for calling that conference are interesting. The first was that the dollar position was in balance; secondly, that he thought that the methods could be improved; and, thirdly, that the American Government's technical studies had been completed.
I urge the Chancellor of the Exchequer and the Treasury to make absolutely certain that our technical studies are completed. I understood from the Chancellor this morning that he was not particularly anxious to commit himself, that he was looking at the position and that he did not want to make proposals of his own. But we must make clear to him that, although this is a tenable position at present, as Chancellor of the Exchequer and as the person responsible for one of the great reserve currencies of the world, it will not be good enough in future for him to wait to see what 2221 various sides say and eventually come to conclusions. Britain should make a much more positive contribution and decide what the view of the sterling area should be of the solution of this problem. It may be that our view will not be accepted and that we shall have to alter it according to the views expressed by others.
The meeting in September of the International Monetary Fund will be crucial for many reasons and we should not go to it with the idea that we listen and do not propound a view of our own. The world must expect us to have a view of our own. Thus it is important that our technical studies of the general structure of the I.M.F. and its usage and the general co-ordination of central bankers should be completed. We must know the view of those partaking in the sterling area and of others who are connected with us, be it through European banking arrangements or the I.M.F. But it is important that having discussed the matter, as the Chancellor has, with our friends in Washington and in Paris, he should come to a view that will be Britain's view on the subject before the September meeting.
Many hon. Members have referred to the general disciplines involved and the effects upon internal economies. Whatever system emerges or whatever developments take place we shall continue with the disciplines of the banker, and quite rightly so. Any system of world liquidity that enabled economies to develop on an irresponsible inflationary basis would meet a quick doom quite inevitably. There is no magical method whereby one can create a situation of easy world credit without all the disciplines that go with credit. We all know, after all, in our business and personal transactions, that our bank manager gives us a severe talk and tells us how careful we must be. He tries to provide a little wisdom to us.
Bankers discipline there must always be although, of course, there must be certain flexibility for the countries concerned. Under the present system we have discipline. The Fund makes its suggestions and eventually its conditions for future borrowings but a great deal of flexibility on internal policies is left. However, I must warn some of my hon. Friends who have been advocating what 2222 they call an internationally managed currency that, in the ultimate, this means, if taken to the fullest extent of the term, internationally managed economies and that would probably not be acceptable to either side of the House.
The Chancellor made it clear that he considers it perfectly right that, when we come to future discussions, we should be willing to discuss the basic position of the reserve currencies. It is right that we should do so and it would be nonsense to enter any form of discussion where this did not take place. But it is not enough to say that we are merely going to discuss things. We as a country have gained immense benefit throughout the years from being bankers to the sterling area and from sterling being one of the great reserve currencies.
It is difficult to measure exactly what this position has gained and it has also, of course, created problems and difficulties from time to time. But I am certain that, on balance, the advantage has been heavily with this country and therefore we must see what ever proposals come forward for the future of the reserve currencies are well thought out in terms of their effects upon our own country and upon the Commonwealth countries in general.
This has been a useful debate. Many excellent speeches have been made by distinguished economists like the hon. Member for Birkenhead, and my hon. Friend the Member for Worthing (Mr. Terence L. Higgins). There was also the very cogently argued speech of my hon. Friend the Member for Cardiff, North (Mr. Box). Surely there must be some club in Cardiff where the right hon. Member for Cardiff, South-East (Mr. Callaghan) and my hon. Friend the Member for Cardiff, North could constantly meet and discuss these involved problems, and then perhaps we could have a "Cardiff settlement" aided by another form of liquidity apart from the monetary one.
I hope that this has ben a useful debate and I want to say how much we on this side of the House support the Bill and hope that it will be a step, though not perhaps a very important step, in the right direction to a steady improvement of the world's international monetary system.
§ 3.24 p.m.
§ The Financial Secretary to the Treasury (Mr. Niall MacDermot)
I understand that any reputation for brevity I had in this House became very tarnished during our proceedings on the Finance Bill. I shall seek to restore it a little on this occasion. I have learned, as Financial Secretary, that one spends a lot of time getting ready to answer questions which nobody ever asks. I have burned a lot of midnight oil trying to prepare myself for a host of technical questions in case anybody should ask them, and I have been asked none at all.
The hon. Member for Nottingham, South (Mr. William Clark) began by saying that there was really nothing to discuss in the Bill at all, but only general questions of liquidity. I would assure him that if he would like to have a cup of tea with me afterwards I can enlighten him as to a host of matters which might have been debated.
The debate has ranged, as was said by the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), over two questions, one being the problem of sterling and the other the general question of inetrnational liquidity. The Bill itself is concerned with the second and the first is relevant because of our need for greater liquidity. I propose to confine my remarks to the general question of liquidity.
A number of constructive suggestions have been put forward by hon. Members on both sides of the House in this very interesting debate which we have had. Some of them have proposed fairly radical solutions, and I think that some of the hon. Members themselves, in proposing them, have realised that there is not any great prospect of reaching early agreement upon them. I would remind the House that this is a field where, if we are to proceed at all, we can only proceed by agreement, and, therefore, what we have to seek is the practicable measure of agreement which we have a chance of reaching at the next stage.
My right hon. Friend the Chancellor, in opening this debate, elaborated again what is the position at the present time. In spite of encouragement from the hon. Member for Horsham (Mr. Hordern) and others I do not think it is for me to try to paint the lily by improving upon what my right hon. Friend has said. It would ill become me, particularly since he has made it clear 2224 that we do not wish at this stage to take up, or to be thought to be taking up, any fixed position.
This is a matter which has been commented upon once or twice during the debate. We have made clear what are the general principles which we believe should guide us in seeking further progress, but we do not think it helpful or right to try to put forward a detailed scheme. After all, our friends the Americans are proceeding on the same basis, and they have published no detailed scheme. It is only from France, I think, that such a scheme has been put forward, and it is one to which the Government themselves have made it clear that they are not committed.
What we have said, of course, is that we consider that the present situation is one where we need—that is, the countries of the world need—to rethink on suitable machinery to increase liquidity, both for the general reason that there is an increasing volume of trade, which, whatever may be the temporary position from time to time, must over the years lead to a need for increased liquidity and also, more immediately, as my hon. Friend the Member for Hitchin (Mrs. Shirley Williams) said—and I should like to join with the hon. Member for Worcester (Mr. Peter Walker) in congratulating her on the quality of her speech, because we now have a situation where the United States has taken strong corrective action in its own balance of payments position, and that, combined with the action we are taking and our determination in this matter, certainly is bound to lead to an increased demand for liquidity and increased reserves, though there is not universal agreement even on that.
We have also made it clear that we do not believe that a solution is to be sought by means of revaluing gold. I have been surprised at the number of suggestions which have been made on this subject during the debate. I think it right to say, as I understand it, that even the French Government do not appear to be pressing that as the solution to the present problem.
The hon. Member for Cheadle (Mr. Shepherd) was looking forward to a time when the workings of the I.M.F. would be what he called wholly managed, meaning that there would be no requirement 2225 for part of members' contributions to be paid in gold. Again, I do not think that that would be a constructive suggestion for us to put forward at this time.
We have made it clear that we favour building on what exists, in particular on the I.M.F. We believe that it contains adequate machinery for obtaining that measure of discipline for which a number of hon. Members have pressed, and which is an essential feature of any workable system of international liquidity, but we do not take a rigid position on that. We know that there are some who have anxieties on that score, and we are ready to discuss and consider means, whether through the Group of Ten or otherwise, whereby the fears of those countries can be relieved. Also, there is the point made by the hon. Member for Worthing (Mr. Higgins), that we favour seeking a solution in the form of finding some addition, some supplement, to the existing credit facilities, rather than seeking to substitute something for those that exist.
I do not propose to seek to answer the more general comments which were made during the debate on the state of economy, but I must comment briefly on the reference that was made by the hon. Member for Nottingham, South to the relevance and effect of our Finance Bill proposals on this question, and once again deny the heresy which keeps being repeated from the other side that we are seeking to bring overseas investments to a stop. That is not what we are seeking to do. We are seeking to adjust the tax system in a way that we think will tend to correct what we find to be a lack of balance between the amount of our overseas investment and our earnings on current account. After all, we as a country must face the fact that we cannot expect other countries to go on allowing the situation to continue, in which we are borrowing short from them to invest long. This is an essential part of the whole process of getting our overseas payments position into proper balance.
There have been a number of references to the needs of developing countries. In his opening speech my right hon. Friend stressed the great amount of assistance which the I.M.F. has given to developing countries, but it is important to remember what is the true scope and function of the I.M.F. It is to assist in dealing with problems of short-term difficulties 2226 in overseas payments. It was never designed to be an instrument for longer-term aid. There is, as it were, the Bretton Woods twin of the I.M.F., the International Bank for Reconstruction and Development, whose function that is, and I do not think that it would be helpful to put forward proposals which would seek to confuse those functions and make it appear that we were trying to turn the I.M.F. into an instrument of overseas aid.
I was asked questions about my right hon. Friend's visit to Paris, what the consequences of it were, and what possibility there was of constructive talks in view of the wide differences of opinion which have been expressed in France and in the United States. Obviously, I cannot assist the House to any great degree about this. All I would say is that my right hon. Friend tells me, as one would expect, that the conversations he had were of a most frank and friendly nature. My right hon. Friend firmly believes that these discussions are useful and must, and will, continue. The door is by no means closed.
There is, of course, a considerable difference between the opinion and outlook of the French Government and of the Americans, in particular. But we believe that with these discussions continuing, we will be able to assess the position more accurately by the time that we have the important discussions at the end of September, at the I.M.F. meeting, and that that will be the time, in the light of the present discussions, for us to bring forward any proposals in order to make a further step forward towards a practical solution. Meanwhile, the House has agreed that the Bill is a modest step in the right direction.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Committee of the whole House.—[Mr. George Rogers.]
§ Committee upon Monday next.