£ STERLING (SUPPORT ARRANGEMENTS) (Hansard, 14 June 1966)

§ The Chancellor of the Exchequer (Mr. James Callaghan)
Yes, Sir. Some months ago I authorised the Bank of England to join in discussions with other central banks to see if new arrangements could be made that would offset the difficulties to which sterling is subjected from time to time as a reserve currency. These new arrangements have now been concluded and were announced yesterday. I am circulating the text of the announcement in the OFFICIAL REPORT.
They supersede the arrangements of September, 1965. Their purpose is not to finance the United Kingdom balance of payments deficit. I would not have welcomed such an arrangement, for this is a task we must achieve ourselves. The new arrangement is important because it signals a recognition by other central banks that pressure on sterling may arise because of its position as a world trading and reserve currency and because of fluctuations in the sterling balances held by overseas countries.
The new facilities will offset the effect of such fluctuations and I welcome them as a practical step forward in the efforts to achieve greater co-operation in world monetary stability.
I should like to acknowledge the part played by all countries that have joined in these new arrangements, and particularly by the United States authorities, whose part in this new form of central bank co-operation is in addition to the standing bilateral swap facility for 750 million dollars.

§ Mr. Hughes
In addition to giving thanks to the United States, is it not timely that my right hon. Friend should say a few words of thanks to our old friends the French, who have come along with a very welcome gesture when we are very hard up? Is my right hon. Friend aware that the French have been able to do this because they are in a sound 1253 economic position since they have abandoned their costly overseas commitments in North Africa and South-Eastern Asia?

§ Mr. Callaghan
The fact that the French have joined in these arrangements is, I think, welcome to all those who value monetary stability throughout the world as being a necessary lubricant to world trade. Therefore, I am very glad indeed that they have joined in.
As for a comparison of domestic policies, I would point out to my hon. Friend that the French have had great success in regulating increases in wages and other money incomes in accordance with production in recent years, and that, also, is an essential element in our policy.

§ Mr. Grimond
I welcome the agreement, but does not the Chancellor agree that the seriousness of the economic situation is not reflected in the attitude of the country nearly severely enough? Would not he also agree that, while we have so far bought time, we have unfortunately not been able to use it to the full? Does he think that for the leadership of the country to put on at this moment a deliberate display of luxury and idleness at Ascot will encourage people to exercise wage restraint and to work harder?

§ Mr. Callaghan
I find this question of morality or moralising very difficult indeed. I am bound to say that there are times when I feel that, although the Government and other responsible leaders throughout the country are pointing out to people in every walk of life the consequences of wages and other incomes increasing faster than production, it seems that we are talking to those who are deaf. In the end, the Government cannot achieve success; only the country can do it. At the moment, we have a lower sustained level of unemployment than we have ever had in this country in my lifetime. We have a greater number of people at work. In those circumstances, it is doubly important that people should regulate increases in incomes by reference to increases in productivity.

§ Mr. Bellenger
May I ask my right hon. Friend whether the terms given to Britain yesterday by the international organisation are on a three-monthly basis—that is to say, to run for a definite period, but can be given every three 1254 months? If so, what is the meaning of the rider made about heavy Government expenditure and the high cost of wage increases? Does he think that that is a warning that at the end of three months there may not be a repetition of the support?

§ Mr Callaghan
My right hon. Friend is confusing two things. There was first the Bank for International Settlements' annual report, which is produced every June. It was produced this June in accordance with the normal practice under which strictures are passed on practically every country for the conduct of its economic policy. Like a great many other countries, our country did not escape. The arrangements concluded yesterday have nothing to do with the annual report made by the staff of the Bank for International Settlements.
There has been some confusion about the three-month facilities. Drawings on swaps in international banking circles are always concluded for 90 days. Therefore, drawings on the swaps come to an end and have to be renewed every 90 days. But the arrangement, as an arrangement, is a continuing arrangement. That is the essential protection.

§ Mr. Tapsell
May we hope that the Chancellor of the Exchequer will take a little more seriously than his last replies seemed to indicate the very serious criticisms of Government policy contained in the annual report of the Bank for International Settlements? Will he take steps to meet those criticisms, in particular the pressure on resources and the great degree to which prices are outstripping increase in production, which, the report says, lies at the root of our national problems?

§ Mr. Callaghan
I do not think that the hon. Gentleman can have been following Government policy. [Laughter.] In that case, I will enumerate the criticisms and the position. The first criticism was of the public sector being financed too much by monetary means. The hon. Gentleman seems to have overlooked that this year, because of the small size of the overall deficit, I hope to finance it entirely from National Savings, which are doing extremely well.
Secondly, there was the need for a reduction in wage increases. This is but echoing the sentiments which I and many of my colleagues have expressed on many 1255 occasions. Thirdly, the report sympathises with our effort to break away from stop-go, which is what we are trying to do. Fourthly, it states that action is needed to increase the rate of saving: this we have taken. Finally, the Bank found the Budget to be broadly consistent with these requirements.

§ Mr. Cant
Do these arrangements represent a step towards the funding of sterling balances? Does the Chancellor believe that this country can support a situation in which sterling is a world reserve currency?

§ Mr. Callaghan
I think that this is going rather wider than I want to go this afternoon, except that I think that the creation of any additional international monetary facilities to stand alongside gold, the dollar and the £ are by their very creation bound to lessen the weight that falls on the reserve currencies. Therefore, it has been and remains the policy of the Government to encourage the creation of additional facilities. I should not want to go as far as my hon. Friend has asked me to go this afternoon.

§ Mr. Heath
Is the Chancellor not being unduly complacent in trying to distinguish between the problems of running a reserve currency and the balance of payments? Is it not true that when the balance of payments is healthy then the problems of a reserve currency do not arise, and, should they arise in some temporary form, can easily be dealt with? Is not the real fact that what the Chancellor has now accepted as an institutionalised form of support is really to that extent a mark of the Government's failure to handle the inflationary situation in the country?

§ Mr. Callaghan
I thought that the right hon. Gentleman would try to get his party point in somewhere, but I do not think that his analysis is altogether sound or fair. The basic difficulty of this country is that we have short-term debts of a very substantial character, because of the sterling balances, without sufficient short-term credits to enable us to discharge them when someone wishes to withdraw them. If we were more liquid, there would not be the same need for these facilities as, for example, in the case of the United States of America.
1256 Of course it is true—and I do not think that anybody can accuse me of complacency about this—that the health of our economy is reflected in the nature and the flow of short-term money to and from it. But it does this country no service—here I am not complaining about the right hon. Gentleman—to assume that when there is a run on sterling this is necessarily the result of something that is ill or wrong with the British economy. I could refer the right hon. Gentleman to occasions where the two things have not gone together.
It is important that the world and the country should understand this difference, for otherwise we might theoretically be driven into deflationary courses that have no reference, or little reference, to our own internal needs, but have great reference to what is going on in the rest of the world.

§ Mr. Stratton Mills
What estimate was given by Her Majesty's Government in the Basle negotiations as to when our balance of payments is likely to move out of deficit? Could the right hon. Gentleman say whether any undertaking was given by the Government for internal measures, either directly or implicitly?

§ Mr. Callaghan
None was asked for, and, therefore, none was given. There were no requirements by the Basle central bankers in this connection. They were dealing with a different problem. I hope that I have made this sufficiently clear.

§ Mr. Dickens
Will the Chancellor remind our friends the foreign bankers that the conduct of economic policy in democracies is a matter for Parliaments, and especially for this House, and not for them?

§ Mr. Callaghan
I should have thought that everything that I said this afternoon was making that distinction quite clear. I do not understand what my hon. Friend is getting at. Of course, the conduct of economic affairs in this country is our responsibility and it is for us to take these decisions. On the other hand, no one can ignore the fact that other countries choose to hold a large part of their reserves in sterling and that, therefore, we have a responsibility to them also.
As I said at the weekend, frequently what other people are saying about sterling is just as important to its health as 1257 the very truth of the matter. This is a conclusion from which no one can escape.

§ Sir A. V. Harvey
Is the Chancellor aware that the country is today expecting a positive lead from the Government? They are fearful that every few weeks measures will be brought before the House to deal with the situation. Why does he not follow the example set by some of the larger industries which are making themselves more efficient and start by reducing the number of civil servants and thus bringing about definite 'Government economies?

§ Mr. Callaghan
If that is the extent of the lead which is standing between success and failure, then I should say that it is a rather over-simplified analysis of the situation. We have to pay due regard to these considerations, but I assure the hon. Gentleman that there is much more than that at stake and that much more than that has to be put right.

§ Mr. Heath
Will the Chancellor face up to the fact that it is not enough to travel the country, however well-intentioned his speeches may be, displaying the sentiments which he has expressed this afternoon and hoping that all will be well, when every signal, especially those today, with the trade returns and the fact that the adverse trade balance for this year is now running at exactly the same rate as last year, points in the opposite direction? The only way to deal with the situation will be Government policies to remove the inflationary pressure. Until the Chancellor and his colleagues face this realistically, our difficulties will remain.

§ Mr. Callaghan
I have no doubt that we shall be debating this matter, but I have not noticed much sign of support, except by cheering, from hon. Members opposite, whose only contribution to the Budget was to recommend me to spend a lot more money on Government-financed projects—[An HON. MEMBER: "No."] The hon. Gentleman is not sitting on the Front Bench yet—and not only in the Budget but also during the course of the last General Election campaign, as I am sure the right 1258 hon. Gentleman will remember. If it is said that more deflationary action is needed, the right hon. Gentleman should spell it out a little more clearly. Is he saying that I should now deliberately create a measure of unemployment?

§ Sir G. Nabarro
Reduce over-full employment.
Following is the text of the announcement: The arrangements entered into last September with the central banks of Austria, Belgium, Canada, Germany, Holland, Italy, Japan, Sweden and Switzerland and with the Bank for International Settlements, will shortly expire. The Bank of England announce that new arrangements have now been made with this group. During the last nine months exchanges of views have taken place at the Bank for International Settlements. As a result, new swap facilities, renewable every three months by mutual agreement, have been arranged, in which all the banks mentioned above are participating. The object of these facilities is to relieve pressure on the official reserves of the United Kingdom that may arise from fluctuations in the sterling balances of overseas countries, whether held by monetary authorities or privately, and thus to give added strength to the sterling system. All these central bank facilities will be channelled through the Bank for International Settlements, which is also participating in its own right. The Federal Reserve System of the U.S.A. and the Bank of France also participated in the discussions. The facilities arranged in September last with the U.S. authorities (which are additional to the standing reciprocal swap facility with the Federal Reserve System for 750 million dollars) have not expired and therefore continue alongside the new arrangements. The Bank also announce that the Bank of France has concluded a three months' credit facility with the Bank of England, renewable by mutual consent.