ECONOMIC SITUATION

HC Deb 21 November 1967 vol 754 cc1140-271

Mr. Speaker

Before the debate commences, I should announce that so far 71 right hon. and hon. Members have indicated that they wish to speak in this two-day debate. I would again urge that, when the general debate begins, those who are called will think of those still hoping to be called and will make their contributions reasonably brief.

I also announce, for the guidance of the House, that I have not selected the Amendment standing in the name of the right hon. Gentleman the Member for Devon, North (Mr. Thorpe) and the names of his hon. Friends.

Sir Harmar Nicholls

On a point of order, Mr. Speaker. May we hear from the Leader of the House why he is not allowing the Prayer on the expansion of Peterborough to be taken tonight? It is a matter of some importance. I believe that it could be taken tonight without interfering with the main business of the day.

Mr. Speaker

That is a matter not for the Chair, but for the Leader of the House.

3.34 p.m.

The President of the Board of Trade (Mr. Anthony Crosland)

I beg to move, That this House approves the Statement of 20th November by the Chancellor of the Exchequer on the measures in relation to the economic situation. We are discussing this afternoon not merely a short-term economic crisis. We and discussing, also, the effects of a long-term deterioration in Britain's trading and payments position. During the last 10 years, we have had on recorded transactions three years of balance of payments surplus and seven years of balance of payments deficit.

What has been most disturbing has been our apparent inability to combine a surplus with rapid economic growth. Every time we had a boom, we ran into a deficit. And, worse still, the deficits grew bigger with each successive boom. During the two years 1954–55, the deficit was £350 million. In 1959–60, it was £550 million. Over 1964–65, it grew again to over £1,100 million—of which £800 million was, of course, the bill for 1964 left behind by the right hon. Gentleman the Member for Barnet (Mr. Maudling)—a point which received singularly little attention in last night's broadcast by the Leader of the Opposition.

We could only earn a surplus in periods of recession; and, again, with each recession the surplus grew smaller. During the two years 1957–58, we had a surplus of £280 million. In the next stop period of 1961–62, we were just in balance. And in the last two years we have been in deficit despite the severe measures of July, 1966.

The last time we had a surplus of over £100 million was in 1958. Since 1960, the cumulative deficit on recorded transactions has by now reached about £2,000 million. The monetary movements have been less than this, but most of this £2,000 million has either been lost to the reserves, or borrowed, or financed by liquidating assets.

Part of the explanation for this trend, but only part, is to be found in the current account. As the Economist said this week: time and time again it has been proved that Britain's exporting structure is too weak and its propensity to import too strong". During each of the last 11 years Britain's exports have grown less than those of its main competitors; their average rise has been—in value—4.8 per cent. a year, compared with the world's average of 8–9 per cent. At the same time, imports of manufactures have risen sharply as a proportion of national income.

On top of this, the burden of overseas expenditure until very recently has grown steadily, due to such things as the loss of support costs in Germany, increased overseas aid, and the confrontation in Malaysia. This needed an even larger favourable balance on current account if it was to be paid for. It is not so much that we have been uncompetitive. But we have not been competitive enough to compensate for the burdens of our indebtedness and the responsibilities that we have been carrying in the world.

This has been the trend—a balance of payments problem which has increasingly overshadowed our economic life for more than a decade past. Successive Governments have tried to deal with it in various ways. It is interesting to remember, in view of the self-righteous language now being used by the Opposition, that the Conservative Government in 1955, having run into one of their innumerable deficits, seriously considered letting the exchange-rate float downwards.

We then had the two periods of severe "stop" associated with the names of Mr. Peter Thorneycroft—as he then was—and the right hon. and learned Gentleman the Member for Wirral (Mr. Selwyn Lloyd). Then the Conservatives went into reverse, and we had the so-called Maudling strategy—really, grit your teeth and hope for the best—which landed us in the disastrous deficit of 1964, with which this Government have been struggling even since. [Interruption.] I am trying to give the right hon. Member for Enfield, West (Mr. Iain Macleod) some facts to chew on in his speech.

None of the Tory policies worked. All were a disastrous failure. So this Government, on coming to office in October, 1964, facing the largest peacetime deficit in our history, needed to find fresh policies. We could have devalued then. Some commentators have suggested, and some suggested then, that we should have devalued as soon as we came into office. At least, we should then have pinned the responsibility fairly and squarely.

But there were overwhelming arguments against it. The economy was overheated and so the additional exports would not have been forthcoming—there were no spare resources to produce them.

If we had devalued under those conditions, the effect would have been frustrated through internal inflation. Moreover devaluation at that time would have been regarded as an aggressive act on our part by other countries. And if we had devalued without general acquiescence for the move, it might have been followed by retaliation and devaluations by other major countries.

This would not only have lost us the competitive advantage. It would also have seriously endangered the position of the U.S. dollar which, whether we like it or not, was and is the key prop to the monetary system of the world. We all want—or most of us do—to create a new international reserve unit which in time could take over the rôle which the present reserve currencies perform. But this is a very slow process as my right hon. Friend the Chancellor of the Exchequer knows only too well, and in 1964 a serious threat to the dollar could have had the most damaging effects on the world economy.

So we rejected devaluation, and adopted first the import surcharge and later the painful measures of July 1966. We also introduced a succession of longer-term measures to improve the underlying competitiveness of the economy.

These policies for a time looked like achieving success. Excluding the import of U.S. military aircraft, which is offset by a corresponding credit on capital account, as hon. Members know, our current balance improved from minus £400 million in 1964, to minus £98 million in 1965, and minus only £18 million in 1966.

We also took far-reaching measures, much criticised by the Opposition in some cases, to improve the balance on longterm capital account, and I am glad to say that this year the capital account for the first time for many years will be in full balance, or even show a small surplus—a remarkable achievement. We also made strenuous efforts to improve the balance on invisibles, and on Government expenditure overseas we at last halted the steeply rising trend of recent years. As a result, we achieved a surplus both in the last quarter of 1966 and in the first quarter of 1967.

But the surplus was not large enough considering that we were in a period of recession. Exports were growing slower, and imports faster, than we had hoped. And then, on top of that underlying cause, we had the economic recession in Germany and the United States which set back world trade, and hence our exports, and the outbreak of the war in the Middle East and the closure of the Suez Canal.

It became evident that we should not attain the surplus in 1967 which we had confidently expected at the time of the April Budget; indeed, we faced a balance of payments deficit this year considerably larger than last year. Still more serious, our forecasts showed that we were likely to be in deficit again in 1968.

Mr. Michael Shaw (Scarborough and Whitby)rose—

Mr. Crosland

I will give way very gladly when I have got into my argument and made at any rate some part of the case which, I take it, the House wants to hear from the Government.

It therefore became clear that continuing with our existing policies involved too great a risk. A change of policy was needed. We considered various alternatives. One we rejected instantly—a further stop in the stop-go cycle. The country has had enough of that.

We considered putting on import controls. We rejected them because they would not have given us as large an improvement as we needed, because they are a once-for-all device which does nothing to improve our long-run competitiveness—indeed, they make things worse by protecting uncompetitive industries—and because they are inconsistent with membership of the E.E.C., and would have wrecked any chance of negotiations starting.

Another alternative might have been a further massive long-term loan, designed to give us the extra time required for our longer-term policies to work. But there were two over-riding objections to this course. First, it would almost certainly have been accompanied by unacceptable conditions as to our domestic policy, and these we were not prepared to accept. Secondly, more and more borrowing cannot be a permanent substitute for a policy to eradicate the root causes of the balance of payments problem, and for that reason we rejected the possibility of further long-term borrowing.

Whether the Leader of the Opposition approved of our rejection was not made clear by him in his broadcast last night. The tone of his broadcast was in very marked contrast to the dignified tone of my right hon. Friend the Prime Minister.

Mr. Edward Heath (Bexley) rose—

Hon. Members

Sit down and take it.

Mr. Speaker

Order. I hope that the debate can go on in a dignified way. While we can have demonstrations of mass enthusiasm or mass protest, mere shouting by individual hon. Members to each other is not worthy of them.

Mr. Heath

Will the right hon. Gentleman kindly tell the House which Government offered Her Majesty's Government a long-term loan? What was its size, its rates, its period and conditions?

Mr. Crosland

The right hon. Gentleman cannot have been following my argument at all closely. As I said perfectly clearly, this was an alternative which we might have chosen to adopt, but rejected.

Mr. Heath

In fact, then, no offer of a loan was ever made to Her Majesty's Government?

Mr. Crosland

No offer was made, because, as I have explained, this was a course of action which the Government chose to reject.

The next thing which the House will want to know when the right hon. Member for Enfield, West speaks is whether the Tory Party would have asked for such a loan and, if so, how far right hon. Gentlemen opposite might have been prepared to jeopardise our social progress in the interests of our creditors.

So, having weighed the evidence which I have given to the House of a long-term deterioration in our trade and payments position, having faced the fact that our hopes of a substantial surplus in 1967 and 1968 were no longer realistic, and having rejected, for the reasons I have given, more deflation, import restrictions, and adding to our long-term debt, we were led inevitably to consider a change in the exchange rate.

In his broadcast last night, the right hon. Gentleman the Leader of the Opposition criticised not only the policy but our method. He said it was done in the worst possible way at the worst possible time. I fancy that in a year's time many of his party will not want to remember those words. Certainly, the right hon. Gentleman is in danger of getting himself into a very lonely and isolated position. I do not know whether he has read the comments of the central bankers, the governors of the I.M.F., and of foreign Governments on the way in which this was done, but if he has he cannot conceivably use words like that.

In fact, this devaluation was carried out in exactly they way laid down in the International Monetary Fund, and the technicalities of it have been very much applauded by a great number of experienced bankers. Proof of this lies in the fact that the dollar, the franc, the mark and all these other major currencies have held firm just because we did consult our friends and did not act unilaterally.

Before I come to the consequences of this decision, I must deal with the argument held, I think, by some hon. Members that devaluation is unacceptable under any conditions and that there is something immoral or dishonest about changing the exchange rate—unlike other solutions, such as deflation, or borrowing, or import controls, or what you will. On the contrary, the fact is that a change in the exchange rate is the only long-term solution to a fundamental disequilibrium that is universally acceptable to the international monetary community and is enshrined in the rules of the International Monetary Fund.

If, as some hon. Members appear to suggest, it is sinful to change the exchange rate, then the advocates of sin include the governors of the I.M.F., the distinguished members of the Radcliffe Committee, appointed by the Tory Government, the many Governments and the central bankers who have publicly applauded our decision, and even some right hon. Members opposite.

I do not think that many of us would go to the other extreme and treat the whole matter in a frivolous way. I do not think that many of us would agree, for example, with a statement which I should now like to quote: Look at that great national totem, the pound sterling. It is a matter of great national honour, we declare, to uphold the decree of Providence that the pound was created equal to two dollars eighty, give or take two cents. If the equation is fixed, and the behaviour of one side of the equation, the economy of the outside world, is not in our control, it follows we must be ready to adjust the other side, our own economy, to fit. We are not willing to face this. It is difficult to describe, without using terms derived from psychiatry, a notion having so few points of contact with reality. That comes from a speech made by the right hon. Member for Wolverhampton, South-West (Mr. Powell), in May of this year. [Hon. Members: "Where is he?"] I imagine that most of us would not go so far as that.

The fact is that the pattern of world trade and demand is continually changing, so that it would be absurd to expect that a given set of exchange rates will remain suitable for all time. Other countries, often under the most respectable, or sometimes less respectable, Right-wing Governments, have found that a change in the exchange rate should not be ruled out as an instrument of economic policy that can, and occasionally must, be used to reconcile external balance with internal growth and full employment.

During the last decade, countries which have had to align their exchange rates one way or the other in the interests of external balance include France, Canada, Germany, Holland, India, Finland and others. It is true that none of these countries operates a reserve currency, whereas we have the responsibility of the sterling balances. But these sterling balances have been earning very high rates of interest over many years, and these cumulative earnings much more than offset the loss involved in the 15 per cent. devaluation.

It would not have been right to think in terms of a "large" devaluation of the order of 30 per cent. or so. It would have been quite unnecessary. It would have been self-defeating, since it would have forced almost all other major countries to come down with us; and it would have been an irresponsible blow at the still distinctly fragile structure of international monetary co-operation.

The new rate has been chosen with great care. We judge that it will be wholly adequate to stimulate exports and check imports and so put the balance of payments on a strong footing. Yet it is not so large as to place other countries in an unduly weak competitive position, or to endanger the stability of the world monetary system. This is confirmed by the fact that hardly any other major countries have changed their rates.

But we must be utterly frank about what we are doing by devaluation. Import prices will rise relative to export prices, and so we shall need a greater volume of exports to pay for any given volume of imports. It is no good blinking these facts. This is the price we pay for not having had enough output at the right price at the old rate of exchange. This is fundamentally the sacrifice involved in turning the terms of trade against this country. But the Government are willing to accept it in the conviction that all the alternatives—deflation, more borrowing, import controls, or what you will—would also have involved a sacrifice, but none of them would have offered the hope which we now have of continuing growth and expansion with a healthy balance of payments.

We are determined to get the growth. The measures announced by my right hon. Friend the Chancellor to restrain demand are not designed to cut back growth. This is not a return to the traditional stop-go policy. This is not, as the Leader of the Opposition suggested last night a policy of deflation, for the reason which I will now explain.

On present estimates, demand will grow over the next 12 months, not just by the 3 per cent. to which the Government are committed, but probably by over 4 per cent. There will be a progressive reduction in unemployment over the same period. The cuts in demand are not intended to reduce this growth or increase the unemployment. Their purpose is to switch resources, within this rate of growth, from home spending to exports and import substitution. The growth will continue. But because devaluation means more exports and more import-substitutes, we must release the necessary resources. That is the sole purpose of the cuts in demand which have been announced.

Mr. John Hall (Wycombe)

Would not the right hon. Gentleman agree that on previous occasions when a policy of devaluation has been successfully applied in other countries it has been accompanied at the same time by a deflationary policy?

Mr. Crosland

I think that the circumstances in which other countries have done it have varied enormously. Whether it requires deflation depends upon whether one starts from a position of full employment. We are starting from a position where we have excess capacity at the moment. We have idle men and idle machines. We think that because of the growth which we shall get anyway we shall need to restrain that demand. This is a policy of switching resources from one use to another and not of cutting back the rate of growth to which the Government are committed.

The rise in import prices will of itself free some of the resources that are needed, by making goods dearer and so reducing consumption. The rest depends on action by the Government. We have tried to match that action to the pace at which we expect to see the balance of payments improve. Some of the measures will have relatively little effect over the next six months. For example, the cuts in public expenditure will take some time to take effect, but will become steadily more important over the year. This is in keeping with our expectation that the shift of resources into exports will also take some time but will gather momentum as the year goes on.

Other measures we have taken will tell at once, such as the restrictions on hire purchase and on credit and the increase in Bank Rate.

I must say a word about the motor industry. It is already a major contributor to our export trade; in terms both of the proportion of its total output and also in absolute terms. Devaluation gives it an immediate opportunity to do even better. To ensure that the industry can take full advantage of its new export opportunities, the hire-purchase restrictions on cars have been intensified with the object of restraining demand in the home market. We cannot afford the larger increase in domestic sales which would otherwise occur. The industry must now seize its export opportunities.

As a result of these immediate measures there could be in the very short run a slight check to industrial recovery, but we shall have, as I have said, a rapid growth of output over the next 12 months. That is the answer to the question about deflation. The difference is that expansion will now be export-led and its speed will be governed largely by our success in export markets.

What we want is a transfer of resources, not a damping down of output. The first condition of success is that we actually obtain the switch of resources—that we release the resources needed to exploit this opportunity for higher exports. If the measures announced by my right hon. Friend the Chancellor prove inadequate for this purpose, we shall not hesitate to reinforce them.

Mr. R. Gresham-Cooke (Twickenham) rose—

Hon. Members

Sit down.

Mr. Crosland

That is a responsibility on the Government. Then there is a responsibility on both Government and industry to ensure that we exploit the export opportunities open to us now.

The individual exporter has now been given a clear price advantage over his major foreign competitors in all the growth markets of the world. He can, and must, aim at a big increase in sales. We shall have a flow of inquiries from overseas for our goods, which will now be very attractive. But I cannot stress too strongly the urgency with which we must pursue this advantage.

I intend to have urgent discussions with the C.B.I. and the British National Export Council on how best industry and Government should proceed together to follow it up. The Board of Trade and other sponsor Departments will also discuss with the various trade associations how we can jointly secure the maximum benefit. It is my responsibility to ensure that the Government services at home and abroad, all our export services, are fully staffed and deployed in support of the effort by industry. Our export services have been considerably strengthened during the last few years, but I shall see whether any further strengthening is necessary in this new situation.

There is one further point on export prices. It has been suggested that we should not have withdrawn the export rebate. But we really could not justify keeping the rebate, which was intended to make our exports more competitive, when we are taking this much larger step which makes it unnecessary.

Similarly with the S.E.T. premium, which is now no longer necessary in view of the much larger effect of devaluation. But we are not removing the S.E.T. premium from manufacturers in development areas. They will receive the same amount as before, and so gain a greater advantage over manufacturers in the rest of the country.

Mr. John Peyton (Yeovil)

From what date is the export rebate being withdrawn?

Mr. Crosland

April, probably, as far as we can tell.

Hon. Members

Of which year?

Mr. Crosland

April, 1968.

One effect of devaluation will be an increase in profits. So far as this means higher profits on exports, it is all to the good. One reason why we have not had enough exports is that they have been often less profitable than production for the home market. But there is no reason why other manufacturers should increase their profit margins, and we think it reasonable to ask that some part of the sacrifices for which we are asking should come from profits generally. This is why we propose to increase Corporation Tax in the next Budget by 2½ per cent.

This raises a more general point. There is a cost involved in improving the balance of payments, by whatever methods we choose to do it. Our standard of living at home will be lower than otherwise, to the extent that the balance of payments is improved, by whatever methods we choose to do it. The crucial question is how the burden is shared.

Mr. Victor Goodhew (St. Albans) rose—

Hon. Members

Sit down.

Mr. Speaker

Order.

Mr. Crosland

The Leader of the Opposition, in his TV performance last night stressed that real wages must fall. At the same time, he gave us his solution to the balance of payments problem which his party failed to solve in 13 years—more incentives. His answer is clear—lower real wages, and higher real salaries.

Our answer is that the burden must be fairly and equitably shared. That is why we think that corporations should make their contribution. And that is why my right hon. Friend the Chancellor made it clear that we intend to take measures to protect the worst-off sections of the community.

I turn briefly to import prices. Devaluation will mean higher prices. It did not need the Leader of the Opposition's broadcast last night to tell us that, but prices will not rise by anything like the full 14.3 per cent. The bulk of what we consume is produced at home. Imports represent only about one-fifth of what we consume. We estimate that devaluation by itself may add 24½–3 per cent. to the retail price index. My right hon. Friend the Secretary of State for Economic Affairs, when he speaks this evening, will tell the House of the crucial part that our prices and incomes policy must play, with the full co-operation of the T.U.C. and C.B.I., in ensuring that movements of costs and prices are confined to what is fair and justifiable.

Devaluation is not, and nobody pretends it is, the easy way out, as some have suggested. On the contrary, it is in some ways the hard way out, since it involves turning the terms of trade against us. That is the measure of the additional sacrifice—and I do not seek in any way to minimise it—required of the British people. But I am certain that any other than the hard way out would be merely a palliative, merely a short-term alleviation, whereas we want a long-term cure. It will be well worth the extra sacrifice to get the problem off our backs once and for all.

Nor is devaluation by itself a cure-all or a panacea. We could "fritter away" the advantages it gives us—

An Hon. Member

And you will.

Mr. Crosland

The Opposition cannot have it both ways. Last night the Leader of the Opposition told us that terrible sacrifices would be involved. That would not happen if we frittered it away, so the Opposition had better make up their minds which side of the argument they are on.

We could "fritter away" the advantages either if, as a nation, we insisted on inflationary wage-settlements, or if, as a Government, we failed to free the resources needed for higher exports and import-substitution. It is not, by itself, a complete solution. We still need action on many fronts to increase our efficiency. But it is, I am convinced, a necessary condition of finding a complete solution.

Moreover, if it is accompanied by the other measures which we all know to be necessary—a rise in manufacturing investment, a responsible attitude to prices and incomes, a more aggressive sales effort by management in markets abroad—then we shall find the solution. And it will not, as some fear, be a merely short-term advantage; it will be a long-term benefit for years ahead.

In 1952, 1956, 1961 and again in 1966 the country had to accept stop-go and deflation because of our balance of payments difficulties. I believe that the country is sick of this policy, and the loss of production and wealth which it entails. We have been nagged and harassed for too long by the balance of payments constraint. The country now wants a new strategy—more successful than any it had during those long 13 years—based on expansion and export-led growth: a strategy which offers hope and opportunity, instead of endless bouts of stop-go. Last Saturday's decision offers this opportunity. It is now up to all of us to seize it.

4.10 p.m.

Mr. Iain Macleod (Enfield, West)

I start with two small points on the small change of the President of the Board of Trade's speech. First, on the export rebate, I was somewhat surprised to find that he did not know the answer and had to ask it from his right hon. Friend the Chancellor. It is a matter of the first importance to know exactly when the export rebate comes to an end. Export contracts, in many cases for long periods ahead, have taken it into account. If it is not clear, perhaps the Secretary of State for Economic Affairs will add something on the point when he comes to wind up tonight, because it is of the greatest interest to industry in this country.

My second point is one on public expenditure. In his statement yesterday, the Chancellor of the Exchequer said that he was cutting the rate of growth by £400 million. Is this a new figure? If I could remind the House of the position, the National Plan laid down public expenditure figures of 4¼ per cent. and, even though the growth targets have been abandoned, those targets for public expenditure still remain, because the Chancellor has said that they will be 7.8 per cent. in the first year and 3 per cent. afterwards.

Those are at constant prices, and the point is that, on the base of 1966–67 expenditure, 7.8 per cent. is £974 million and 3 per cent. is £375 million. That is a difference, roughly, of £600 million, so the Chancellor's £400 million is either less than we have already been promised, or it is a new figure and we are to have them both. I should be grateful if the Secretary of State for Economic Affairs would clear up the point, and perhaps the Chancellor might wish to return to it, because, clearly, it is a matter about which we should have no doubt.

I hope to make a reasonably short speech today, Mr. Speaker, bearing in mind what you have said. If the House will permit me, I think that it would be courteous to concentrate on the Prime Minister and the Chancellor of the Exchequer.

There was no hint at all in the President of the Board of Trade's speech that we have, after all, been here before. This country has only had three Socialist Prime Ministers, and each of them has devalued the £. This is no coincidence, except the coincidence of incompetence. There is only one man living who has sat in two Cabinets which have devalued the British £, and that is the present Prime Minister.

Yesterday, to cries of astonished delight, the Chancellor produced a new red herring about a man who came to see him a month after he took office. The right hon. Gentleman proved too much. If I could recap, we know that, immediately after the General Election, the Chancellor, the Foreign Secretary and the Prime Minister considered devaluation and rejected it, in my view rightly. We know from the Prime Minister's speech on 23rd November that speculation only started a week before that; that is to say, a month after the General Election. There was no speculation at the General Election, nor in the weeks afterwards.

It was when the November Budget was known, when the breach of faith with E.F.T.A. was known, and when the financing of prescription charges was known that this unnamed man came to see the Chancellor, and he doubted the financial competence of this Government, not that of the past one. To that extent he was right, because there have been three wasted years of freeze and squeeze. There have been years of inflation and debt followed by years of deflation and debt, and if this wise man foresaw it all at least the Chancellor did not.

I want to recount to the House the story of the mismanagement of these past few days. It is a horrifying story of bungling incompetence at a brutal cost to our reserves.

First, there were the two increases of a ½per cent. in Bank Rate, which were useless and which were swept away. There was the ridiculous episode of the £37 million loan from Switzerland, now £44 million, which started so many people wondering. There was the complete muddle over the loan of £90 million-odd. In fact, this was for purely technical reasons. There was nothing sinister about the loan. It was to cover repayments to the I.M.F. in December. It was easy to explain, and we did not even put down a Private Notice Question about it.

However, by the time that the facts had been dragged out of the Treasury and the Bank of England, it was presented in a very different light. This is what was said on radio at 10 o'clock on the 14th: The spokesman for the Bank of England said that the initiative for this loan came from the Bank of International Settlements. Britain herself had not asked for it. Apparently the foreign bankers offered this loan because they felt that Britain was in need of help at a time when the pound was under pressure. Not surprisingly, as a result of this ham-fisted performance, there was further uncertainty and further pressure.

But all this pales to insignificance against the really criminal delay in announcing devaluation once the Cabinet had decided upon it. Few people know the exact extent of the loss. My own estimate agrees fairly closely with many that I have seen. I calculate that, from the Chancellor's moment of decision which was at least a fortnight ago, about £1,000 million was spent in supporting sterling. I calculate further that, from the moment of Cabinet decision at lunch-time on Thursday to the announcement, about £300 million was spent in supporting sterling. Of course, following devaluation, the money comes back, but we have to pay the cost of the devaluation, and perhaps we have lost for good about £150 million; and it may be more.

There can be no excuse for such ignorant negligence, and this stems from the Chancellor's statement on Thursday in response to a Private Notice Question from his own side of the House. Again, we did not put it down and I am certain that the Prime Minister and the Chancellor did not want one put down. The Chancellor gave an answer which was petulant and abrupt. As a result, sterling went virtually through the floor that afternoon. It would have been easy for him to have given a reassuring answer which would have held the position.

Yesterday, the right hon. Gentleman read a tribute from a Brussels commentator. There are other tributes on the same page of a very different sort which he could well have read. I calculate that, at about £10 million a word, it was an extremely expensive tribute that he got from Brussels.

Mr. Robert Maxwell (Buckingham) rose—

Mr. Macleod

I will give way in a minute. I am concentrating here.

If a Socialist Government had set out to prove that they were incapable of understanding how the financial world reacts, they could not have given a more convincing demonstration than they have done during the last few days.

Mr. Maxwell

Will the right hon. Gentleman give way now?

Mr. Macleod

I will in a minute.

I will make one point to the Chancellor about Bank Rate. I think that raising Bank Rate to 8 per cent. is a blunder. It will bring "hot" money into the country, particularly into local authority borrowing and into short gilts. It is not desirable money. There is no need for the extra interest now that the necessity to provide forward cover for sterling is removed. No doubt it will come down presently, but I see no reason why it should be imposed at present.

Now I will give way to the hon. Member for Buckingham (Mr. Maxwell).

Mr. Maxwell

Even assuming that the figure given by the right hon. Gentleman of the net cost to the reserves for good is £150 million, which I do not accept, my right hon. Friend the Prime Minister and the Chancellor of the Exchequer have succeeded in negotiating a devaluation, with most of our competitiors still at their rates of exchange, thus giving us a benefit and thus giving us a trading advantage. At the same time, they have succeeded in obtaining loans to enable us as exporters to obtain export orders—[HON. MEMBERS: "Too long."] This is surely—

Mr. Speaker

Order. If the right hon. Gentleman allows an hon. Member to intervene, it is not for the purpose of making a speech.

Mr. Macleod

I will respond briefly to the hon. Member. He is making the same point as the Chancellor made when he said that consultation was, in effect, worth Friday. I do not agree. I estimate that cost at about £300 million. A more intelligent answer on Thursday afternoon, followed by swifter action, could in my judgment, and in the judgment of everyone to whom I have spoken, saved the country an enormous amount of money.

The Chancellor of the Exchequer (Mr. James Callaghan)

The right hon. Gentleman has told us about unnamed spokesmen to whom he has talked on this issue. There is no one that I know of concerned with this particular brace of affairs—which I should be very glad to discuss tomorrow night—who does not accept, and, indeed, has repudiated the words of the Opposition Leader yesterday, that this affair has been conducted in a manner which has done the minimum of damage both to this country and to the international monetary system. I would like to know who are these unnamed people to whom the right hon. Gentleman has spoken.

Mr. Macleod

I, too, would like to know the unnamed gentleman yesterday, who came to see the Chancellor of the Exchequer

Mr. Callaghan

If the right hon. Gentleman will tell me his names I will give him the name of my man. Will he do that?

Mr. Macleod

The answer, of course, is "No". Both the Chancellor and myself talk to a wide range of people—

Hon. Members

Name them.

Mr. Callaghan

I rise, not on the 1964 point, but to refer to the Leader of the Opposition's broadcast last night, in which he referred to the bungling manner in which this operation was carried out. Immediately after his broadcast the B.B.C. commentator put to Dr. Emminger, in Bonn, who has been at the very centre of these affairs and is Chairman of the Deputies of the Group of Ten this phrase—[Interruption.] I have been challenged on something I have said about the cost to the country of £150 million. This is what the commentator said: Mr. Edward Heath, the Conservative Opposition Leader here, you may have heard at the beginning … before this programme, said that this deflation had been done in the worst possible way and the worst possible time. Do you agree with him? Dr. Emminger:"— and remember the reputation of this man—[Interruption.]

Mr. Speaker

Order. We ought to leave this to the two Front Bench debaters.

Mr. Callaghan

The question was: Do you agree with him? Dr. Emminger replied: No I wouldn't, because I think as concerns the manner in which it has been carried out, it has been done in a very orderly fashion. There has been no chain reaction in the world's exchange markets, and there has been enough concerted action, advance consultation, so as to ensure that the other currencies, the major currencies, have stayed firm And I think if you compare this devaluation with the one in 1949, there is a great contrast and in favour of the present one…. It has been a much more orderly process and I think this has been very much to the advantage of the £. This is the man to whom I was referring. [Interruption.]

Mr. Speaker

Order. Noise does not help either side at all.

Sir Henry d'Avigdor-Goldsmid (Walsall, South)

I would like to be able to enlighten the House a little. I spent the entire morning in the City, the exchange markets. I, too, estimate that there was an absolutely unheard of turnover amongst the clearing banks, all based on undoing transactions which had been entered into on Friday. Various sources gave me their estimate of anything up to £500 million changing hands today as a result of undoing transactions in foreign exchange made on Friday.

Mr. Ted Leadbitter (The Hartlepools) rose—

Mr. Speaker

I would remind the House that none of this noise does either side any credit. A point of order, Mr. Leadbitter.

Mr. Leadbitter

On a point of order. On a number of occasions previously, when questions relating to sources of information have been brought to the notice of Members, when quotations were used or information given implying a source, it has usually been a matter of courtesy to indicate the source. When the Chancellor has complied with the normal courtesy in indicating his source of information, why does the right hon. Gentleman not do likewise?

Mr. Speaker

That is not a point of order.

Mr. Macleod

I hope that the Chancellor when he winds up the debate tomorrow night—I am not on the point of names here, I am on the point of fact—will tell us whether my hon. Friend's estimate or mine, or any other, was right and then we can judge what the actual loss was.

I turn to the Prime Minister's broadcast on these grave developments for the nation. It is clear who he thought was to blame, I have the script here. First, the Tories. Secondly, foreign speculation—people who dared to doubt the Prime Minister's words and, tragically, were right—third, the war in the Middle East; fourth, the dock strikes and the unofficial strikes; fifth, the National Union of Seamen; sixth, some provocative councils. These were, presumably, Tory, because, largely thanks to the Prime Minister, almost all councils are now Tory. Everyone was to blame except himself. Yet it was he who won the 1966 General Election on a bogus prospectus. It was his Ministers then who said, "There are no alibis left." It was he himself, on 20th July, who took the full responsibility for all action, and it was he himself, only a short time ago, who assumed personal control of the economy.

The country is sick to death of this whining and whimpering from the Prime Minister. The Broadcast itself it would be polite to describe as a series of half-truths. The Prime Minister said that the £ in the pocket and the purse had not been devalued. Has it not put up the prices of bread, meat, tea and petrol? Is it true that programmes are unaffected? As far as London alone is concerned every 1 per cent. on the Bank Rate means £1 million a year.

There are those who say that it is pointless to bring charges now of bad faith. I personally hold the view that if the Prime Minister breaks his word it should not lightly be forgotten. I say this for the record. This is what the Prime Minister said in 1963: Devaluation, whether of the dollar or sterling, or both, would be a lunatic and self-destroying operation. In 1964, speaking in Guildhall, he said: My Lord Mayor, I want to take this opportunity tonight, in the heart of this great financial centre, to proclaim not only our faith but our determination to keep sterling strong and to see it riding high. In 1965, when he spoke abroad, there was the headline about the Prime Minister's unalterable determination to defend the £. In August, 1965, he spoke at home, and the headlines read: Decision not to devalue sterling 'permanent'. Prime Minister's categoric statement in exclusive Guardian interview. In 1966, again at Guildhall, that graveyard of so many of his speeches, the Prime Minister said: More than once when the Chancellor and I were discussing the severity of the attack we were facing, I had occasion to quote the words of the Duke of Wellington at Waterloo, 'Hard pounding this, gentlemen. Let us see who will pound longest'. The world now knows.

In 1967, on television, talking about devaluation, the right hon. Gentleman said: The first thing you do of course is, you've got to export more to pay for the imports we need. However we're able to cut back on manufactured goods imports, well; we still need our raw materials, we still need our food. It simply means that every British worker has got to produce more, has got to work harder and longer, to send more exports abroad to buy the same quantity of imports that we need.

Mr. Jack Ashley (Stoke-on-Trent, South) rose—

Mr. Macleod

Not now, if the hon. Gentleman will forgive me.

I would remind the Prime Minister of the ending of my speech on 27th July a year ago. I had commented on the actions of the Chancellor of the Exchequer and of the First Secretary, who is now the Foreign Secretary. My last words were: The charge we bring against the Prime Minister is a simpler and a graver one. It is that, as long as he sits in this House, on whichever side he sits, my hon. and right hon. Friends do not feel that we will ever be able to trust him again."—[OFFICIAL REPORT, 27th July, 1966; Vol. 732, c. 1846.] It is not only on this side of the House. Will other countries who kept their money with us do so still? I think that they will, but they have suffered cruelly. Countries in Africa, Asia and the Caribbean, some of the very poorest countries, are poorer today as the result of the action of the Prime Minister. There was not a word about them in the Prime Minister's broadcast.

But this matters to the Chancellor of the Exchequer, as he has proved over and over again, and it matters to us. I do not want to hark back to that speech of 24th July except for one sentence. It must haunt the Chancellor of the Exchequer. He said: So far, I have been talking about the domestic consequences, but we live by international trade and finance as well, and we must have regard to the international consequences of what we do. We should break faith with Governments and private citizens overseas."—[OFFICIAL REPORT, 24th July, 1967; Vol. 748 c. 100.] So, if we had not taken—

Mr. Ashley rose—

Mr. Macleod

I will give way in a minute. I promise that I will do so, and I will not break the promise.

Let us take that marvellous country, Australia. For the very first time now she is not taking the same action as we are. In theory, this means that her key exports—our imports—will cost more. It means, also, in theory, that we have a splendid chance to increase exports to Australia. But I fear very much that at least in the medium and the long term it will not work out like that, because the fact that we are now separate on a matter of such importance from Australia means that she will surely move nearer to America and especially Japan, and that is a tragedy.

Mr. Ashley

I am most grateful to the right hon. Gentleman for giving way. In his condemnation of the Chancellor and the Prime Minister's statement is he asserting that the Chancellor or the Prime Minister should have given notice to the world that they were about to devalue?

Mr. Macleod

It is their claim that that is precisely what they did.

Every time since October, 1964, that I have heard an announcement of Government measures I have had exactly the same fear, and I have it today. I fear the irresolution of the Prime Minister. I fear what I have called before the "soft shoe shuffle". We have seen it already in the suggestions "these measures will not hurt you", "some people are going to be insulated from them", "we will cushion some of these". As people read the small print abroad and at home confidence may well slip away again.

The Prime Minister will be backed tomorrow as solidly by his party as he has ever been. They will march into the Lobby to support devaluation of the £, just as the same men and women marched into the Lobby on 24th July to support a passionate plea to maintain the parity of the £. Devaluation of a party could scarcely go further than that. The Prime Minister—he must know this—has no authority and no credit left. Every promise he has made has been broken. He now offers to the country as a new and exciting challenge a policy which he has denounced as lunatic, as a flight from reality and as a betrayal of trust. Yet, of course, he will cling like a limpet to the Treasury Bench.

Yesterday, in the House, I spoke to the Chancellor with respect and on a matter which seemed to me to touch his honour, and I was content with his answer. I use no such words to the Prime Minister today. I have no respect for him, and I will not weary him with talk of honour. For him there is a simple message. He has not only devalued the £. He has devalued his own word, he has betrayed his high office, and it is time for him to get out.

4.40 p.m.

Mr. Michael Foot (Ebbw Vale)

The House has debated this question, and, no doubt, will continue to debate it today and tomorrow, in an extremely heated atmosphere. I do not complain on that score. I merely remark that, perhaps, a part of the heat is due to what some of us have felt to be a misfortune in discussing the exchange rate. Some of us believe that questions of the exchange rate are technical economic questions, but, very often, they are transformed into deeply moral and passionate questions as the right hon. Gentleman the Member for Enfield, West (Mr. Iain Macleod) has treated them.

I do not believe that this is the wisest atmosphere in which the country should make up its mind whether it is right for us to hold the old exchange rate, with all the perils which it had for us, or whether it is right for us to move to the new exchange rate, with all the perils, and with the advantages, too, as some of us have believed for a long time. Therefore, whatever may be the uproar in the Chamber, about which I make no complaint, I hope that the House and the country will discuss this question as one of profound economic concern to the whole country but not solely one which can be debated in the kind of moral terms which the right hon. Gentleman has invoked, especially as we do not regard him or his associates as the best authorities on such moral questions.

It is right that the Government should be under severe test—I shall have something to say in criticism of them a little later—but, if the Opposition Front Bench are asking the Government to resign, which, if I understood him aright, was the purport of the right hon. Gentleman's last remarks, one of their main aims in this situation should be to present themselves as the alternative Government.

Not only today, but over the past few months, none of us has regarded the Opposition as the alternative Government. During the past months, they have looked to me much more like a row of political vultures waiting until the previous policies of the Chancellor of the Exchequer had screwed the last drop of life from the carcase of the Labour Government. That is what they wanted, and that is what they looked like—much more like that than like an alternative Government. We have often seen the right hon. Member for Enfield, West anticipating his feast. We saw him do it, not so much today, but a week or so ago, when he was pursuing the previous policy. He could hardly get to the Dispatch Box, in anticipation of his feast, without rubbing his claws and licking his beak.

Why is the right hon. Gentleman so angry today? We have not seen him so angry for years. The reason is that the platter has been snatched from him. He should contain himself better. When it comes to slinging mud about, we all know that he is one of the masters. He should never rely on nameless experts again.

To change the metaphor, I remember the debate which we had a few weeks ago, a much more disagreeable debate, in my opinion, when there was a consensus between the two Front Benches and the right hon. Member for Enfield, West could not contain himself in tributes to the Chancellor of the Exchequer. How eager he was that the Government should continue right to the very end of the rocky deflationary road. That is what he wanted, and we all know why—because he knew that that road ends in the electoral ditch. This is the temper of his patriotism, and I am glad to see it clearly displayed.

Some of us who have been urging the Government all along to escape from the road leading to the ditch are very pleased. I am considerably more cheerful when I see the Front Benches quarrelling than when I see them embracing one another. It makes it much more convenient in the Lobbies, for one thing.

Some of us, I say, are relieved. No one, so far as I know, has said that devaluation is a solution to all our problems. Nothing of the sort. But what some of us have argued for a long time has been that, partly on technical grounds, our exchange rate was wrong and our £ was overvalued, as it was overvalued so disastrously for the country after 1925. When the right hon. Gentleman makes such play of the argument that under Labour Governments there have been devaluations I remind him that there have been some things in the economic history of this country much more deadly than any devaluation. I refer to the massive deflations which he and his party imposed upon the people, raising unemployment to 2 million and beyond. The right hon. Gentleman was the biographer of Mr. Neville Chamberlain. If the choice is between a policy of devaluation and growth and deflation and mass unemployment, which he and his right hon. and hon. Friends stood for, no one should doubt what the reply should be.

Mr. F. A. Burden (Gillingham)

The hon. Gentleman refers to the unemployment in the early 1930s. If what he says is right, and it was the result of Conservatism, why did the people in 1931 return a Conservative Government by a massive vote, even the people of Jarrow returning a Conservative Member?

Mr. Foot

Even the British people can make serious errors, as they did in 1931—as no one has described more brilliantly than the late leader of the Conservative Party, Sir Winston Churchill. It is not a very telling point for the right hon. Member for Enfield, West to try to identify devaluation with disaster for this country and, presumably, the policies of heavy deflation which he and his party have pursued so persistently as somehow associated with prosperity. That is a very crude way of conducting the argument, and it will not assist the right hon. Gentleman in the country.

Many of us have argued for a long time, in the newspapers, in the House and elsewhere, that one of the measures which should be taken to try to escape from the old stop-go cycle was to refuse to allow the exchange rate to have paramountcy in our thinking. We have taken this view not only because we believe that a change could have a dramatic effect, if we exploited it properly, on our balance of payments during the next 12 months and the years to come, but, even more, because it was becoming freshly evident, as we should have learned over many years past, that, when we were dependent on borrowing huge sums abroad and whenever we started to move towards a boom situation, we ran the risk of a run on the £.

One could never tell what might cause a run on the £. The right hon. Gentleman referred to 1964, and gave examples of some of the factors which might have started the run on the £ then. Many people believe, and I think that the right hon. Gentleman may have argued it at the time, that the proposed increase in old-age pensions set it off. I also remember the right hon. Gentleman describing to us once what he thought might have set off the run on the £ in 1966. He said that it was because of the publication of the Iron and Steel Bill.

That conjured up for me a remarkable scene amongst the gnomes of Zurich: a gnome comes down to breakfast one morning and says to his wife, "They are going to nationalise the steel industry". But it had all been announced years before. Apparently the word flashed very quickly around these emiment gentlemen, so skilled in the operation of money, and before we knew where we were there was a run on the £.

It may be said that that is a laughable illustration, but it is a true illustration of how runs on the £ may start. Some are started by speculation. It is no good the right hon. Gentleman saying that speculation has nothing to do with it. It has a great deal to do with it, and it maximises and multiplies the danger at every crisis. That has been a further reason why some of us have wished to escape from the dependence on the appalling whims of the financiers.

Over and above that, it has been evident not merely in the present crisis, but in previous crises, that when the Government seek to reflate they cannot do so at the pace which would be in the interests of our economy, because we must take into account what is thought about the economy by many people from whom we borrow money. Some bankers—I do not say all, and I hope that my own bank manager is not listening—are very stupid people. To impress stupid people, one often has to adopt stupid policies. That is what deflation very largely is; it is a stupid policy designed partly to comfort the people from whom one has borrowed money. The best thing is to escape that situation.

One of the main reasons why I am strongly in favour of the action the Government have taken is that I trust that the pace of our escape from the recession will now be guided by the interests of our economy, and not by the esoteric calculations of those unnamed persons as to what might be the effect.

Sir Cyril Osborne (Louth) rose—

An Hon. Member

A little gnome.

Sir C. Osborne

Does the hon. Gentleman think that he is doing the country any good, or helping the Chancellor of the Exchequer, by sneering at what he calls the gnomes of Zurich, to whom the Chancellor has paid tribute for the help they have given our country in its time of need?

Mr. Foot

I do not always agree with my right hon. Friend the Chancellor in his choice of friends, even when I am supporting him, and certainly not when I am going to criticise him. I want to keep my audience.

The pace at which we shall escape from the recession is a governing factor, particularly because there was growing evidence of heavier unemployment which, of course, has caused grave concern on this side of the House, and, I dare say, among many hon. Members opposite. Many of us were deeply concerned about the statement by the Governor of the Bank of England a few weeks ago and the apparent acceptance of that policy by my right hon. Friend the Chancellor. I do not believe that one could wrench words from their meaning so far as not to imply that the Governor of the Bank of England was talking about a permanent pool of unemployment. He was talking about a larger margin of unused resources of manpower, and that means more permanent unemployment, in my opinion.

But the Chancellor and others told us, "You must not interpret it in that way, because this is a proposal solely concerned with the comparison between employment in the regions and the other parts of the country." I do not believe that a single hon. Member imagines that the Governor of the Bank of England was referring to regional policies. Certainly, he did not mention it to the bankers in Buenos Aires. They were not interested in regional policies, and if they were not interested why mention a point solely concerned with such policies?

The idea of a bigger pool of unemployment has been knocking around the City of London, the Economist and papers like that for the past 20 years. I remember Lord Woolton advocating it in 1947. Some of us have been bitterly opposed to it all the time. What outraged us was that the stamp of approval by a Labour Government appeared to be given to this new idea, which the Governor said had been courageously adopted by the Government, and some of us were not prepared to tolerate that. I was very angry. One of our considerations in believing that the Government had moved towards that policy, to put it no higher, was that it appeared that they had felt it necessary to adopt this measure to carry through their general deflationary policy. That is another reason why we are glad to see now that policy in the process of being buried.

One of the arguments used by the Chancellor at that time referred to the development areas, about which many of us are deeply concerned. The Government took a series of measures to protect those areas in the old deflations. I would be the last to deny that. If it had not been for the measures taken by the Government to protect development areas the results in my constituency and the areas around it would have been catastrophic. The Government are taking further steps of great importance; no one should minimise their importance, for that would do a great disservice. But that does not alter the fact that a fierce deflation hits the regions worse than the other measures the Government put forward could protect them. It is no good the Chancellor arguing with me about that.

I know that in Wales the situation is slightly different. In Scotland and elsewhere—and good luck to them—they have suffered from the deflation, but not quite as badly as last time. In Wales, unemployment has gone up since the squeeze on this occasion more than it did in the squeeze instituted by the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd). In my constituency and some places around it, each deflation hits the people harder. When the storm blows, it naturally hits the weakest hardest. That is another reason why I am desperately anxious to escape from the deflation policies, which hit the regional areas harder, whatever steps the Government may take to protect them.

Mr. John Hall rose—

Mr. Foot

I have given way several times, and I must proceed.

A policy of real permanent assistance for these areas can be carried through only in a time of buoyancy, boom and expansion. It is only by operating severe controls in the interests of the regions at such a time that we shall divert a sufficient number of industries to them, and that is why the sooner we get expansion the better. I believe that the chance of getting to the expansion is brought immeasurably nearer by the measure the Government have taken.

However, like the Government, I wish to add these important addenda to their proposals. Of course, it is necessary that we do not dissipate the advantage. We must take every precaution. It could be dissipated by a huge, wild inflation throughout this country. Nobody could deny that, but it could be dissipated in many other ways as well. It could be dissipated by sustaining, or trying to sustain, the huge military expenditure that we still have. Indeed, the devaluation almost wipes out the £100 million cut in military expenditure about which we have been told, and about which I am very glad to hear. I seem to remember that every time we have an event like this we hear about a £100 million cut on military expenditure. I am not quite sure if it is the old one or a new £100 million. Healey's £100 million turns up like a free coupon in every package. I want to make sure that not merely is there a new £100 million cut, but that there are many more, cutting much deeper.

I hope that the Government will recognise that the argument which we have presented on this aspect is extremely valid. However ingenious and diligent the Minister of Defence may be, it does not make sense to say that we shall make big cuts in military expenditure unless we change the commitments, too. Many of us have argued for a long time that we should cut the east of Suez commitment, which I am glad to say we are doing, although I think that we must do it faster. I hope, also, that we will review the proposal to take on new commitments in the Middle East, which would be absurd.

I hope that, over and above that, we will consider making a cut in the biggest military burden which this country, most unfairly, has to bear, namely, the huge expenditure on the Army in Europe. The most foolish pledge ever given by a British Government was that given by right hon. Gentlemen opposite that we would keep four divisions in Europe until the end of the century, whatever the costs, whatever the circumstances, whatever the difficulties. It was a hopeless pledge which has meant that this country has started on every effort to deal with its economic position with a burden not borne by any other Western European country. I therefore hope that that will be reconsidered, too.

There are other matters on which 1 should like to speak, because there are many items in the policy which must be examined with the greatest care, but I have gone on for too long. There is the deflationary package itself and the proposals which the Government are to bring forward to assist those who will be hit hardest by these proposals. Nobody can deny that some people will be hit hard and the Government are right to take time to think out carefully how measures to shield them should be applied. But do not let anybody mistake it: the Government are committed to bringing in major proposals for increased expenditure on the social services in order to deal with this situation. That is how I would interpret the undertaking.

Finally, I come to a matter on which the House has argued, debated and voted on previous occasions and has appeared to reach a decision. I hope that the Government will reconsider it. I do not expect them to decide on it this week. One conversion a week is good enough for me. I hope that in the new circumstances, they will consider afresh very seriously—I do not suggest that they did not consider it seriously before—the question of Britain's application to enter the Common Market.

If the Government's plans for escaping from our balance of payments burden succeed, which I believe is possible, what utter madness it would be to thrust us back into the same difficulties again. The speech of my right hon. Friend the Member for Battersea, North (Mr. Jay), the previous President of the Board of Trade, made on this matter in the House a few weeks ago, has never been answered by the Government. They should answer it in detail.

I am as good an international Socialist as any of my hon. Friends on the Front Bench, and I am in favour of the best possible relations with countries in Europe. It may be a kind of favouritism, but, in particular, I am in favour of closest relations between this country and France. I do not think that it makes sense for this country to be quarrelling permanently with our nearest neighbour with whom we have had to associate, and gladly associate, most closely in the biggest trials which have ever faced us.

I therefore hope that there will not be any feeling of bitterness and spite towards France left over from the events of the last few days. It is foolish for anyone to speak in such terms. Indeed, I would renew the proposal which I made to the Government when we debated this matter. If the Government wish eventually to get into the Common Market on acceptable terms they will never be able to do it by trying to outmanœuvre President de Gaulle. If they try to do that, they will drive not merely de Gaulle but the mass of France into exercising their veto powers, which undoubtedly they possess, not only to injure Britain's attempt to get into the Common Market, but to injure this country's position in the kind of financial extremities which we have experienced in this past week or two.

Nobody can deny that some of our difficulties have arisen because of the dispute between ourselves and France. If we were to withdraw the application, if we were to say that we recognise what President de Gaulle and others have said about this matter, some of my hon. Friends might wish to renew it later, others of us might not wish to do so. But it is not merely an unwise course but a futile course for the Government to persist in believing that we can get into Europe in defiance of France and of what are considered by a large number of French people to be deep and genuine French interests. I therefore ask the Government to reconsider that policy, too.

The Government have a lot to reconsider. Over the past two or three years, many of us have been extremely critical of Government policy. But I think that many of us are more hopeful today than we have been throughout that period, because, whereas previously we were travelling along a road which led to darkness and catastrophe, we are now on a different road, and if we use the opportunity to the best advantage, we can place the people of this country on the road on which they should be.

5.5 p.m.

Mr. Jeremy Thorpe (Devon, North)

The hon. Member for Ebbw Vale (Mr. Michael Foot) will not expect me to agree with his remarks about Europe. I believe that the effect of devaluation will be to make it easier for this country to join Europe, because one, although by no means the only, obstacle under Article 108 has been removed.

However, the hon. Gentleman and I can at least share the pleasure of having converted the heathen to various policies which have long been advocated to the Government Front Bench and which have been resolutely rejected. If the decision to devalue means anything, it means that the Government have been forced to change their priorities and they are no longer prepared to sacrifice economic growth and full employment to maintaining the £ at its previous rate in squeeze conditions. That is something for which we must be profoundly grateful. Not only have the Government been forced to change their priorities, but they have had to admit that in trying to sustain them they have failed. At last, in their economic policies they have, for the first time, departed from the priorities of their Conservative predecessors.

In my view, the two greatest failures of the Government have been in clinging to the two Conservative symbols of the £ and the bomb. It is very difficult to know what is the Conservative position from the speech of the right hon. Member for Enfield, West (Mr. Iain Macleod). Are the Conservatives saying that, given the present situation, they would not have devalued? Is the Leader of the Opposition suggesting that a loan could have been successfully applied for? Or are they saying that if they had been in power there would never have been circumstances in which it would have been necessary to devalue? If they are saying the latter, they are certainly entitled to that view, but I think that, on the evidence of 1964, they would have had very great difficulty in convincing the electorate. When the right hon. Gentleman told us about his unnamed experts and then found himself unable to give any indication as to who those people were, he showed himself I think too clever by 14.3 per cent.

Mr. Peter Hordern (Horsham)

Would not the right hon. Gentleman agree that his party's policy on the £ and the bomb is very simple to understand. It is to devalue the £ and to drop the bomb.

Mr. Thorpe

If the hon. Gentleman will wait, I will develop my case.

We have always taken the view that there is no case for an independent nuclear deterrent. That is the view to which the Government were temporarily converted, but they have now gone back to the classic Conservative line. Although there have been people, and in our party, who as far back as 1964 advocated devaluation, we did not advocate it as a party. What we said, and what we continue to say, is that if a nation has a high rate of spending and a low rate of growth, the currency is bound to be weakened, and if one is then faced with devaluation it must be planned rather than forced in emergency conditions. I am sure that that is right As it is, we have in the present devaluation the worst of both worlds. The £ has been defended at excessive cost and suddenly devaluation has been sprung upon us.

I believe that devaluation in the circumstances was necessary. We have not heard today from either the Leader of the Opposition or the right hon. Member for Enfield, West whether, if they were inheriting the precise economic situation of today, they would have devalued. If they would not have devalued, it is clear that they wish to perpetuate the old priority of sacrificing economic growth and full employment for the sacred cow of the £. The Opposition must answer this question, but so far they have not done so.

If there is any doubt about the Government's lack of planning, it is shown by the reflation of the Government in June by relaxing the regulator, only to bring it back with a bang in November and then to choose that as the moment to devalue. Had this decision been taken earlier, we could probably have saved £300 million in gold guaranteed debts and certainly we need not have prolonged what has been a period of wasteful unemployment.

What has depressed me has been the lack of direction about what should be the package accompanying devaluation, what are the opportunities which present themselves and how we should make best use of them. This is only a temporary opportunity. I think that every hon. Member would agree that, unless we take full advantage of those opportunities, the future of the country will be very grave indeed.

On 23rd October this year, I said in the House Devaluation—almost a dirty word in this House—on its own achieves very little. It can give a temporary feeling of wellbeing, but it is no good lowering the fence three inches if the horse has not been properly fed in the stable in the first place. That feeling of wellbeing is dissipated if there are not proper tariff cuts and other measures immediately following devaluation."—[OFFICIAL. REPORT, 23rd October 1967; Vol. 751, c. 1262.] There are, of course, grave risks if we do not take full advantage of those opportunities, and I want to mention what they are.

First, however, I would like to ask the Chancellor a question about the circumstances of devaluation. Yesterday, in reply to a question from me, the right hon. Gentleman went out of his way to proclaim the responsible way in which devaluation had been brought down. He said: As to the timing and nature of the operation, outside those who wish to take some party advantage, the rest of the world believes that the timing of the operation and the manner of its execution have been exceedingly well carried out. The degree of consultation that took place with all the major areas affected—[HON. MEMBERS: 'On Friday?'] Yes, on Friday. The degree of consultation which took place has undoubtedly resulted in our being able to take this step without incurring the hostility of those adversely affected by it"—[OFFICIAL REPORT, 20th November, 1967; Vol. 754, c. 942–3.] Yes, indeed. When did the banking world first know of the decision to devalue, and how much notice was given to those who then withdrew their sterling balances?

Eight days ago, a colleague of mine who is a professional man was in Basle. His work brought him in touch with a prominent banker. He was told on that occasion that a loan of £1,000 million would be provided for the United Kingdom and that the Government would devalue up to 15 per cent. He returned to Britain on the Friday. He had not read British newspapers and he concluded that in the light of this information that when he got back devaluation would already have taken place. [An HON. MEMBER: "What is his name?"] I will certainly give his name. I do not know whether I can remember his telephone number. He is Colonel Geoffrey Taylor. I am not at liberty to disclose the name of the banker, but I can certainly vouch that if my colleague was prepared to give that information he could hardly have been expected to have fabricated it.

I merely ask, was that information the result of second sight or of first-hand knowledge? Let us hope that it was second sight. But it seems to me to be an extraordinary coincidence, however, that both the figure which we now know to be the case and the accompanying action by the Government were accurately predicted. What has been the loss to the reserves in the period of uncertainty? I would put it at between £250 million and £450 million.

It seems, therefore, that even the timing—not taking into account whether it should have been done six months ago—has given advance warning and has caused a far greater drawing on our reserves than was necessary. I hope, therefore, that the Chancellor or whoever replies to the debate will be able to reassure us about this. If it is the fact that the action which the Government have now taken was general knowledge eight days before it occurred, that is a grave indictment of the way that the Government have handled devaluation.

Mr. R. T. Paget (Northampton)

Surely, one does not have to suspect a leak. Was it not a reasonable deduction from everything that was happening? I telephoned my co-trustee and told him that it was going to happen.

Mr. Thorpe

This is where I disagree with the hon. and learned Member. To many of us, it has been obvious that the £ was over-valued and that economic growth of 1 or 2 per cent. and an unemployment figure higher than for the past 27 years made the revaluation of sterling inevitable, but the only people to whom it was not an inevitability were Her Majesty's Government. The continuation of the policy of sacrificing everything for the sacred cow of sterling made many bankers feel that perhaps the Government were entirely firm and that they were genuinely not intending to revalue.

Now, what should we do? In 1958, France was the sick man of Europe. The French had virtually no exchange reserves and their debts were 3,000 million dollars. As a result of devaluation and the measures which accompanied it, their exports rose by 16 per cent. in the first year and by 21 per cent. in the year after. Shortly afterwards, their reserves grew to 4½ billion dollars and they paid off 2,400 million dollars of debts. If we can get the right policies to support devaluation, there is no reason why this country should not likewise have that rate of economic growth. This is why I found the speech of the President of the Board of Trade very disappointing. It was all very well to dig up what the Tories had done, but we did not hear very much about the package deal which would support devaluation.

I would like to make one or two suggestions, first in regard to tariffs. I believe that this is the moment for us to start cutting selectively certain tariffs. It is true that this would lose us some of the advantage of devaluation, but, at the same time, we will face price increases for many of the raw materials which we import for our manufacturing industry. I think particularly of wool and textile manufacturers.

It is true that New Zealand has indicated that she will follow suit in revaluing her exchanges. I was talking this morning, however, to a woollen manufacturer who takes the view that as a result of devaluation and the increased cost of the raw materials which we have to import he will have to increase his prices by between 5 and 10 per cent. I agree that it is too early to assess the final figures until we know which countries will follow suit, but there was never a time when it was more important to allow our manufacturers to buy their raw materials in the cheapest market and, at the same time, by cutting tariffs not to allow them to have a sense of false security.

I also believe that there could be cuts in things like chemicals and fertilisers, which we have to a certain extent to import. Therefore, the first thing which I urge upon the Government is, without waiting for the Kennedy Round, to cut tariffs selectively in order to stimulate competition and to reduce as far as possible the cost of our imported raw materials.

Sir Tatton Brinton (Kidderminster)

If the right hon. Gentleman's argument is to stand up, he will have to specify which raw materials are carrying tariffs, because wool does not carry a tariff.

Mr. Thorpe

With respect, it does, from non-Commonwealth sources, at 10 per cent., so there is one case with, wool which we import from non-Commonwealth sources, where there is a 10 per cent. tariff which could be cut down.

The next point is, obviously, that we want to make the maximum degree of import saving. I would say that one way in which this could be done is by boosting agricultural production. I see no reason why we should not be able to get very nearly £200 million more out of the agricultural community.

Mr. James Davidson (Aberdeenshire, West)

£300 million.

Mr. Thorpe

That is a matter for negotiation. As I see here one of my hon. Friends from Scotland, I should like to take account of his susceptibilities in view of recent events. For example, we could have a boost in beef production in this country. The Minister of Agriculture should at this moment be seeing whether the hill cow subsidy which was cut back in 1964 might not be reintroduced to help the small farmer to make his contribution.

There there is the question of Bank Rate. I hope that the Bank Rate of 8 per cent. will be only a very temporary measure, because it seems to me that it has two disadvantages. The first is that it is going to pull dollars out of the United States, because sterling at 8 per cent. is a very attractive investment, and this in turn might weaken the dollar, and that would be bad for sterling. Secondly, we need loan money and working capital for investment in exporting and import saving industries and if borrowers have to pay 9 per cent. or 10 per cent. it will be very dear indeed.

Then, on Government expenditure, we are told we are going to cut £100 million off the defence budget, which I welcome. They are at long last converted to the idea of reducing our commitments east of Suez. But is this going to be enough? The Defence Correspondent of The Times today says that our existing gross overseas expenditure as a result of devaluation will go up by £300 million. I do not know whether that figure is correct or not, but assuming for the moment that it is, it means that we shall have to make a saving of £400 million in order to have a £100 million net saving.

Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Gentleman has got the figures wrong. That is a total of £300 million of foreign exchange expenditure, as I understand it.

Mr. Thorpe

It will be increased money we shall have to find to pay for overseas expenditure, therefore—

Mr. Sheldon

Totally wrong.

Mr. Thorpe

—to get a £100 million reduction I hope that the Government will indicate what they have in mind. Is it chiefly on overseas expenditure, or, for example, by releasing engineering capacity for production in this country and thereby putting it into the export drive?

Again, what about tax incentives? I find it very difficult to see why the Government consider increased Corporation Tax is going to help the export boom. If there are increased profits the Government say these should be shared. I think that there is a rather old-fashioned Socialist idea behind this move, as though there were really something rather dirty about profits. This is something we should guard against. I would rather see the Government give definite fiscal encouragement to profit-sharing, so that the workers who help to produce the profits may also share in them.

But, if one thing has become clear, it is the complete anomaly in the present circumstances of the Selective Employment Tax. The whole thing has really now become a farce. What, I think, is one of the gravest charges against it is, that it does hit one of the largest individual dollar-earning industries in this country, tourism, and I cannot see how this is to assist in the balance of payments. Surely there is a case for Selective Employment Tax to go, and if the Government wish to reward those who go out into the export markets, here is a case for the introduction of an added profits tax.

With regard to wages and labour relations, since July 1966 the workers of this country have been under a wage freeze of differing degrees of coldness, and I wonder whether the Government are now intending to have a freeze upon a freeze, because if at the end of a long period of freeze they are then going to have a further freeze at a time when the cost of living is going up, then I think they have a very great political problem on their hands. It is going to be a very difficult problem indeed. I believe that across-the-board wage increases are obviously something which must be discouraged. We have got to try to get more local productivity bargains. I believe that, despite the fact that we know that spiral wage inflation will completely minimise the effect of devaluation, it is the responsibility of the Government to look at some of the lower-paid workers who are getting £9 or £10 a week and who are going to be severely hit. This is something the Government have got to plan.

There is one other matter with regard to labour relations. There is no good asking people to pay more for their food, encouraging people to export more, if we cannot get those goods through the docks. I must say that I think the Government must press a little harder in using their agencies, their good offices, to bring about a settlement of that dispute, which is severely damaging to the economy. I am not one who, like the Prime Minister, blames it on the dock strike, who blames it on the seamen. I lay the blame for most of our difficulties on the priorities which the Government have clung to for the last three years and which they adopted from their Conservative predecessors, and to which they have faithfully and slavishly clung.

We must now make a real effort to get a new reserve currency in the world, whether it is a European currency, or whether it is through the I.M.F., but we must not again have sterling subjected to the vaguaries and pressures which we have seen through the last ten or fifteen years because of the fact that we have a reserve currency.

The Government may well have to take unpopular measures. If those measures are right, we will certainly support them. What I find disappointing about the Government speech today and about the statement of the Chancellor is that although he has devalued there is no guarantee that the supporting measures behind it will be sufficient to get the economy moving. That is what is profoundly disturbing, because if we do not take advantage of this opportunity then the last state of this house will be worse than the first.

If it means we as a nation are going to stop preaching and begging and borrowing and mortgaging to keep the £ afloat, if it means we are no longer to sacrifice growth in the economy, sacrifice full employment to the £, then this is at least a start in the right direction.

What frightens me about the Prime Minister in charge of the economy is not that the Prime Minister has not the courage to be unpopular. The Prime Minister has taken many measures which have courted unpopularity. The great danger with the Prime Minister is that he is always at his most brilliant at the eleventh hour and the fifty-fifth second when dealing with a situation, usually by severe measures, which need not have arisen in the first place if he had had sufficient foresight.

I believe that the decision to devalue was inevitable. At last the Government are beginning to get their priorities right. It is because I am not satisfied, I have not confidence in the adequacy of the package measures behind it to enable full advantage to be got out of it, that I and my hon. Friends will go into the Lobby tonight—[HON. MEMBERS: "Tomorrow night."]—tomorrow night—I wonder if we could get in twice?—because we do not feel the Government have as yet given to this House any adequate indications of how we are to maximise this opportunity. If we have those policies which will enable us to take full advantage of the opportunity this country will respond, and, if we can take advantage of this, the whole wretched business of balance of payments crises and recurring squeezes will go, and once again this country will have a healthy economy and all the influence and power which that implies in the world.

5.30 p.m.

Mr. Brian Walden (Birmingham, All Saints)

For me the decision that the Government took on Saturday brought to an end a long period of personal and political unhappiness, because the Labour Party won the election in 1964 and again in 1966 on what I regarded as a clear alternative policy to that which had been followed before. The Labour Party promised growth; it promised expansion. It did not say that there would not be sacrifices or difficulties.

It certainly did not suggest in the first of those two elections—and only in a muted way, if at all, in the second—that it somehow regarded the current exchange rate of the £ as inviolate and would give it priority over growth, expansion and full employment. It was therefore difficult for me, believing as I did and still do believe that the Government we then had was the only radical alternative that the country could ever have, to see it go through a period which I can best categorise as agony, during which my Front Bench carried out a policy which, in essence, was the policy of the Front Bench opposite. It was the remedies of the party opposite that were being applied and not our own.

I shall not recriminate. I want principally to talk about devaluation. I feel the greatest sympathy for the Chancellor. I do not regard him as being in any way the devil in the machine. I think that he was too easily persuaded, as many people in this country are, that the people who know best about our economy are the financiers, and not the industrialists or the economists. That is a nonsensical conception. Between the wars there was a great intellectual argument, with two great protagonists taking part—one the Governor of the Bank of England, representative of the City opinion, Mr. Montagu Norman, and the other an academic economist, Maynard Keynes. Who was right? Keynes was right.

I want to refer to some of the remarks of the right hon. Member for Enfield, West (Mr. Iain Macleod). Nobody could have listened to his speech without feeling an inner compulsion to respond. One wise man in this country said that Britain was the only major industrial country in the world where finance dominated industry, and I believe that that is true. I want to give one illustration of that obsession. There is a lot of talk about what we may have lost last Friday, in terms of reserves. Was it, as some hon. Members have asked, £250 million? Was it £450 million? How often is the same concern expressed about the value of production lost by deflation? That is vastly a larger figure, but it worries hon. Members opposite a good deal less.

This is a nation which, for some strange reason for which I cannot provide an explanation—it may be something to do with the fetish of the London money market, which I agree is technically superb—allows financial considerations to predominate over industrial considerations. I think that we over-estimate the value of the City to this country. One value of the change that has been made is that we will now switch from a preoccupation with financial concern to a pre-occupation with industrial concern. Not that the Government have not done a great deal of that already. My hon. Friend the Member for Ebbw Vale (Mr. Michael Foot) said a good deal about regional policies, and I could add to what he has said. The work done by the Ministry of Technology and the work of the Ministry of Labour in retraining has been excellent.

The difficulty is that that policy was essentially long term, for a restructuring of industry, and by holding on to the old exchange rate we were fighting a monthly battle against a possible run on the £. What we needed was more margin. We could not carry out an industrial restructuring on the kind of margin on which we were operating.

Mr. John Smith (Cities of London and Westminster)

The hon. Member for Birmingham, All Saints (Mr. Walden) has said that he does not consider that the City of London contributes very much towards a solution of these problems. Does he know how much of our export earnings are earned by the City?

Mr. Walden

I never said anything of the sort. What I said—and I will repeat it for the hon. Member—was that we have a technically superb market in the City—the only significant money market in Europe. But one of the problems in life is that we tend to raise up what is good to the status of something that is infallible. I say this again to the hon. Member; finance should be totally subservient to the requirements of industry; it should not be the master of industry. That is the difference between us.

Too many people have a feeling that somehow industrial development is less significant than the earnings which we achieve from City brokerage operations—and I agree that we do earn a good deal from them. The City is not the producer of wealth in the way that the motor car industry is. The City, by its expertise, provides us with money which, in the balance, is just as good as money earned in the export of motor cars, but we must remember where the real wealth lies. We must remember that City expertise is wholly useless if we are going to apply the kind of deflationary policies which destroy the morale of the people who have to work in the factories and cripple the initiative of the industrialists.

I want now to talk about devaluation because, palpably, hon. Members opposite believe, or say that they believe—I think that there are more secret devaluationists on the benches opposite than will be apparent in the Lobby—that the old exchange rate should have been maintained and that the Government have gone in for what some of them have called a gamble, others have called a disastrous policy, and still others have discussed in largely moral terms.

I will not say anything about the policy of devaluing by 30 per cent. because my right hon. Friend the President of the Board of Trade disposed of that point. Undoubtedly it would have caused reciprocal devaluation. There are those who think—and this is a week for unorthodox thoughts—that to pull other countries into a devaluation with us would, from some long-term points of view, have been a very good thing for the world monetary structure, because it would have taught many countries a valuable lesson about the need for establishing an artificial currency which the world could use to support its trade.

I do not share that view. I believe that the consequences would have been so incalculable that we could not have contemplated that step. The real argument lies between a devaluation of 14.3 per cent. and a big loan—in other words, adopting the policy which hon. Members opposite presumably support. Let it not be thought that taking a loan would not have involved a gamble. In my view it would have involved a vastly greater gamble than devaluation.

Let us remember all the things upon which we would have been gambling. We would have taken the loan with strings—and I shall not go too deeply into what that means. Certainly it would have cut out completely the opportunity to devalue. There would have been no question of a devaluation. We could not have negotiated a loan of that size if we had been contemplating devaluation.

Almost certainly it would have meant that a very close scrutiny would be kept on the employment rate in this country, the amount of unused capacity, and certainly a very careful watch would have been kept on Government expenditure. It would have meant that we would have been expected, whilst maintaining the old exchange rate, to get ourselves into balance of payments surplus and take whatever measures were needed, no matter what they did to the level of employment and the prospect of growth in order to achieve that aim.

Some may say that that would have been the right course, but it would have been a blind gamble nonetheless. Even if it had worked, it would have done us great harm.

But think of all the things that have to go right for the policy to have worked. There would have had to be a revival of trade in the United States of America and Germany. Not only that, but we would have had to be assured of getting more than our fair share of the export increase involved. We would have had to gamble that the growing wave of protectionism, very apparent at the moment in the United States Congress and over which we have no control, would not in fact shut us out from the opportunity of exploiting those markets. That would have been the first gamble.

The second gamble would have been that the inflation in this country which is building up, and is consumer-led, could have been contained by some mechanism with the use of the regulator—possibly or by sharply increased taxation. I wonder how much hon. Members opposite will advocate that in public—the damping-down of inflation by sharply increased taxation to stop it sucking in more imports. If we had gone ahead and allowed inflation to grow and suck in more imports and inevitably in the long run increase export costs, we would have been operating against ourselves on both sides of the account. Moreover, as has been apparent in all recent crises, we would be gambling on there being no major industrial dispute that would, in the now oft-used phrase, blow us off course.

For instance, no rail strike in February. I am not for a moment predicting one, and I assure my colleagues in the N.U.R. and A.S.L.E.F. that I am suggesting nothing of the kind. But we are men, not gods. We cannot predict exactly what will happen. There might be a rail strike. If that had happened it would have sunk us out of hand. That would mean that we had taken the loan to no purpose. That would have been another gamble, another option that we thought we had, but in fact gambling on something wholly beyond our powers to control. That is what the loan would have meant.

I agree with my hon. Friend the Member for Ebbw Vale that we would have had the bankers on our backs. They are not such terrible people. I concede to hon. Members opposite that they are men of great expertise who have helped this country in crises in recent years. The worst that I can say about them is that they have conceptions about our economy and, for that matter, the world's economy, which I do not share. Between the financiers and the economists, I will take the economists every time. There is a peculiarly restricted series of obsessions which financiers have. Not only would they have been on our backs, not only would they have been able to exert influence against a policy that we wanted to carry out, but the policy itself would have depended upon sheer blind chance.

We could have sat and prayed that trade revived and that the inflation was not too sharp or that we could control it or would not have great labour disputes. When I am told that the option that the Government have taken represents a gamble, I am forced to ask what are the alternatives. Is what we have done really a bigger gamble than that? What the Government have done in fact is, at great cost—and I want to say something about that in a moment—to give themselves margin. It may be called buying time, and I will say something about that in a moment, too, but nonetheless they have given themselves margin. They now have the power to effect a whole range of policies.

My hon. Friend the Member for Ebbw Vale mentioned some of the things that he is interested in. I could—I will not now—give a list of some of the things that I am interested in and would like to see the Government act upon. However, they now have the chance to act. [HON. MEMBERS: "Only for a time."] Hon. Members opposite say, "Only for a time." But of course. As between the alternative of buying some time and simply relying upon luck to pull us through, I have not the slightest doubt as to which is the more sensible policy.

What is the price of devaluation? It is, first, that countries abroad who have held money with us—indeed, anybody abroad who has held money with us have had its value reduced. That is a point of which hon. Members opposite make much. I wonder whether they are prepared to make as much of this point. How on earth is it supposed that we held a lot of that money in the first place? By having interest rates over the last decade which have been nearly 2 per cent. above the New York rate. [An HON. MEMBER: "What are they now?"]

That is how we held the money in. What does it mean? It means that if we are to continue discussing these issues in these absurd moral terms, a lot of the cost of devaluation has been discounted in advance by the fact that they have been taking it out in interest payments already.

The Chancellor and the right hon. Gentleman the Member for Barnet (Mr. Maudling)—who is not here; he will be soon; he is coming back shocked and anguished from New Zealand to condemn this unprecedented step—both these gentlemen have said the same thing. They have said that people do not put money with us because they like us; learn the facts of life, boys; they put money with us because they are getting something out of it. Exactly. As far as I am concerned, the motto is caveat emptor: they put it with us because they thought they could get something out of it. They have made a commercial judgment. That commercial judgment, like all commercial judgments in life, is subject to problems and difficulties and loss and they have now sustained some loss.

Sir Frederic Bennett (Torquay) rose—

Mr. John Tilney (Liverpool, Wavertree) rose—

Mr. Walden

I will not give way at this point. That is the first cost of devaluation.

The second cost of devaluation is the cost in the domestic price level. Prices will rise—and I have something to say to the Government on this point—and my own guess is that they will rise about 3 per cent. I notice that figures have been quoted varying between 21½ and 31½ per cent. for the rise. It is foolish to think—I hope the Government will not think it and will not say too often—that we can, by exhortation—I trust no other methods are being considered—hold costs, including labour costs. We cannot. They will rise. Prices will rise and wages will follow. That is an automatic consequence of devaluation. I do not think that any hon. Member can tell me of a devaluation, other than the French one of 1958 where decree was used, where this has not happened.

Devaluation releases economic forces which tend to force up costs to cancel out the effect. The issue is one of time. Everything that we can do to inhibit the rise is something well done. Every month that we can stall off a further spiral in costs is a month longer for us to take advantage of devaluation. There are varying estimates about the time we can win and the time we need. I think that we can certainly get three years out of this. We shall be gradually blunting the edge all the time. The competitive advantage that we now have in world markets will start moving against us from next month onwards. We are not the only industrial country which will face inflation in the next few months, and that has to be taken into account, too. Some of the others will also inflate, and necessarily one has to take account of that. We shall slowly lose the edge. What we have to do is to make sure that while we have it we cash in on it.

I do not go along with the argument that the main gain, at least in the short run, will be on exports. That certainly was not so in 1949. There was some gain in exports, but by far the greatest gain was in terms of imports. Admittedly in those days it was a question of dollar imports. I do not see any reason on the figures, especially on our import figures and when we look at the content of our imports, to suppose that the greatest saving in the short term will not be made that way this time as well. The greatest chance for industry will not be in exports, but in terms of imports substitution. I do not mean by that there are not great export opportunities now— there are. I do not mean that industrialists should not switch towards exports, but the immediate gains are likely to be on the import side of the trading account.

What matters desperately to my hon. Friends, and indeed to the whole House, is unemployment. We are bound as a result of some of the measures taken complementary to the devaluation to destroy some jobs. I do not see how we can effectively prevent the destruction of jobs by the natural running-down of older industries. Some more men will come out by that process, but on the other side I do not see how it is possible to have a situation where there will not be a sufficient demand for import substitution which will more than suck up the amount we shall lose on the other side.

I agree with my right hon. Friend the Prime Minister that we shall see a sharp drop in unemployment, certainly after the second quarter of next year. This is a policy markedly different from the policy we have had to date. It involves sacrifice, but it at least carries the benefit of using the spare resources of labour which in broadly human terms makes no sense to create in the first place. We shall now be able to use all our productive capacity both in men and resources.

This Government are not the only Government since the 2 dollar 80 cent rate was fixed which has looked at the prospect of devaluation. I think the Government should have devalued in April, but I know that the position must have been very difficult, as indeed it was in 1964. Although the arguments were clearer, the economy was over-heated at that time. In 1966 it was massively over-heated.

This is not the first Government that has looked at devaluation, although from the way in which hon. Members opposite talk one would never guess that the Conservative Government of 1951–55 very seriously considered it. The Conservative Cabinet—I am open to correction on this—discussed the possibility of putting the rate down to 2 dollars 40 cents, oddly enough, the rate which has now been selected. This matters when we consider the way in which hon. Members opposite have chosen to talk about this action. It is not so appallingly immoral that one cannot talk about it, and not such a breach of patriotism that a Tory Cabinet could not discuss it. Let us have less humbug about this.

We have now taken the decision and it is irrevocable. I know and hon. Members opposite know—this is why they adopt the, stance they do adopt—that this measure is absolutely crucial to my party, not simply in terms of the next Election, but for a generation. It is crucial for the radical forces in this country. The argument which hon. Members opposite enjoy using most and resort to most frequently is that radicals do not know how to run the economy. Of course to them this seems a magnificent justification for all that they have ever said.

But to me the policy that has been discarded was a policy of sacrifice without hope. This is a policy which involves sacrifice and a heavy price, but which gives us margin, which gives us hope, which uses our spare resources, which gives us an economic and financial strategy that is in line with the other Departments of the Government and in harmony with the long-term activities of the Government. It is in harmony with the ideological convictions of my colleagues and myself. I do not have the slightest doubt that it is a policy which will work and deserves to work.

5.55 p.m.

Mr. Selwyn Lloyd (Wirral)

I agree with the hon. Member for Birmingham, All Saints (Mr. Walden) that it is quite wrong to talk about these matters in emotional terms. I am not quite certain how emotional he himself was towards the end of his speech. I do not talk about this as a moral issue. The reason why it is unwise for a Government to talk about these things is that if it is known they are doing so it weakens sterling.

Having dealt with the speech of the hon. Member and emotion, I come to the Chancellor's decision. He is not present now, but to me this is a sad occasion, and I express personal sympathy with the Chancellor. I know something of the strain involved in a situation like this. The Chancellor is in a very lonely position and cannot talk much, even to his colleagues. His is a very exacting job. In the nature of things, he cannot talk to anyone much about a matter of this sort. I am very sorry indeed that his fight to preserve the 2.80 rate ended as it has.

I believe that the £ was not overvalued and the Government were right to make every endeavour to save the 2.80 rate. This is a defeat, not only for the Chancellor and for the Government, but for the country. Even now in this debate the choice has not been put in realistic terms. The choice was not either to support the 2.80 rate with more deflation and disagreeable things for all of us, or devaluation which would avoid that deflation and those disagreable consequences. We have got the devaluation, but if it is to be successful it means worse deflation and more disagreeable consequences. We still have a situation in which we have to make our living in the world.

I return to the Chancellor's speech of 24th July. I think he was absolutely sincere when he made it. That is why he must have a heavy heart today. He began by saying that devaluation is no way out, and said: It is a flight from reality He said: we reject the notion that our economic strategy should include a change in the exchange rate of the £. He went on to say: The fundamental fact about devaluation as a deliberate act is that it consists in making the product of the labour of our people cheaper while making the product of foreign labour dearer. For every hour's working at home we command less of world resources. He also said: Let there be no dodging about this. Those who advocate devaluation are calling for a reduction in the wage levels and the real wage standards of every member of the working class of this country. They are doing this, and the economists know it. And later he said: If there were devaluation in this country, any effort on the part of the organised workers to counteract it by securing higher wages should be ruthlessly resisted. He also said: This is a nostrum among economists who are quite clear-sighted and cold-hearted about its purpose. Unfortunately it has been picked up by a number of people who clamour for devaluation because they believe that it is a way of avoiding other harsh measures. They are deluding themselves. The logical purpose of devaluation is a reduction in the standard of life at home. He went on to talk about breaking faith with Governments and private citizens overseas. He used some wise closing words with which I almost wholly agree; and then ended Devaluation is not a way out of Britain's difficulties. I believe that to be absolutely true. These passages in the Chancellor's speech should be read again and again. It contains the reasons why some of us have fought so hard against devaluation. It has not been through sympathy with the speculators or out of respect for the bankers in Zurich. It is because we knew the consequences it could have for the people of this country. In such a situation it is the poorest and the weakest who suffer most.

So much for the Chancellor's approach to these matters. What about the Prime Minister's? I thought that his approach on Sunday night was very different. He mentioned several times the deficit of 1964, three years ago. He did not mention that in 1964 our overseas investment went up by £350 million. He did not mention that our imports of industrial raw materials in the year increased by £385 million. He did not mention the fact that stocks in this country were in that year £590 million, £370 million more than the year before. He did not say that the value of our dollar portfolio investments between 1962 and 1964 rose by no less than £600 million. The Conservatives' failure to check expansion in 1964, whether it was right or wrong, was in accordance with the advice and lectures persistently given us by the Prime Minister and other occupants of the then Labour Opposition Front Bench.

The Prime Minister spoke in his broadcast about speculation against sterling—those bogey men the speculators. A businessman covering his forward commitments is not a speculator. That is prudence. I wonder how much speculators, in the true sense of the word, came into it, at any rate before that very odd performance on Thursday afternoon.

The Prime Minister went on to say this in his broadcast: The decision to devalue attacks our problem at the root. If so, why was it not done before? The truth is that, if accompanied by measures of appropriate severity, it will not be disastrous. If it is not accompanied by measures of appropriate severity, it is as likely to tackle our problem at the roots as paying Danegelt was an economical defence policy.

The Prime Minister went on to say: It does not mean that the pound in your pocket or purse or in your bank has been devalued. It is very difficult to think of a more misleading way of putting it. The Chancellor of the Exchequer, in the speech to which I have referred, said, The logical purpose of devaluation is a reduction in the standard of life at home."—[OFFICIAL REPORT, 24th July, 1967; Vol. 750, c. 99–101.] Then came the soft sell in the Prime Minister's speech, to the effect that it will mean more jobs. Then there was some political dirt about council house rents, although it is the Government's policy, to quote the circular they issued to local authorities on 30th June, that subsidies should not be used wholly or even mainly to keep general rent levels low. Nevertheless the Prime Minister had to bring that in as a piece of dirt. Then he said this: We are out on our own now. Again, that is an utterly false picture to paint, because we have to sell £6,000 million worth of exports to the world in order to be solvent. We have to repay our debts.

Then there was all that talk about making it so easy to export. Here I rather agree with the hon. Member for Birmingham, All Saints. Those in the export business are in the position of having their imported raw materials 14 per cent. up; Bank Rate is at 8 per cent., even if they do get the credit; the 2½ per cent. export rebate has gone; the S.E.T. premium has been withdrawn if they are not in a development area; and there has been an increase in Profits Tax. After all that, they have to sell 14 per cent. more to stay where they are—in other words, between £800 million and £900 million worth of additional exports to stay where they are. Therefore, we must all have profound misgivings about the future.

Entering a little into what the hon. Member for All Saints hinted at, one thing which is becoming obvious even to supporters of the Government in the country is that a Labour Government are incapable of running Britain's economy. Between 1945 and 1951, an average of £400 million of loans and gifts were received each year. They left a deficit of £400 million behind them when they left office in 1951. Now we wonder what the figures will be for 1964 onwards.

The Prime Minister always used to accuse us of manipulating the economy with our eyes on the General Election. He said that he makes a close study of these matters. I bet he does. His behaviour between 1964 and March, 1966 showed a determination to win that Election whatever happened to the economy. So we can expect some manipulation and the attempt to create a little boom before he makes a dive for the country. Then there will be the propaganda.

The hon. Member for Ebbw Vale (Mr. Michael Foot) said this at the Labour Party Conference at Scarborough: When we get out of recession, the Prime Minister will hail it as the greatest economic miracle since the loaves and fishes. We shall hear more of that—purposive, meaningful, technological revolutions, structural changes—almost all of them for the worse, incidentally.

The only structural difference the Prime Minister seemed once to understand comes from the swimming pool, that passage quoted in the Sunday Mirror, I think. The only thing he got right in his comments about what happened in July, 1961 was when he said that devaluation, to quote his words, was not a springboard but a slide. That, I think, is the whole problem. When the speech of the hon. Member for Birmingham, All Saints is analysed, it is quite clear that that is what he thinks may be the problem in three years' time. It may be sooner.

I was disappointed in the speech made by the President of the Board of Trade. In the debate on the Loyal Address, I asked the right hon. Gentleman some questions with regard to the position in the North-West. One of the misfortunes about this debate is that we have had to give up our debate on the problems of the North-West which was to have taken place tomorrow. I asked the right hon. Gentleman certain questions. The Leader of the House, in winding up, said that he would answer them if he had time. However, he did not answer them.

I put it to the President of the Board of Trade that this is yet another way in which those parts of the North-West which are not in development areas will be threatened. I think that many hon. Members opposite feel exactly the same. The whole problem is that there is much too wide a differential between the areas in Lancashire which are in development areas and the areas which are not. These measures will increase that differential. The S.E.T. premium is withdrawn from industries which are not in a development area. The President of the Board of Trade is reported to have said in Burnley on Friday that we are moving into a period of rapid expansion. That was how he gave some hope to the people in the north-east of Lancashire. It will be very interesting to hear how he proposes to get those areas moving again and to get new industry to go there with the present distinctions between them and development areas.

Mr. Joel Barnett (Heywood and Royton)

Is the right hon. and learned Gentleman suggesting that it is the policy of his right hon. and hon. Friends that areas like the grey areas should all be treated like development areas? Would he care to say what the effect of this would be on the country as a whole?

Mr. Selwyn Lloyd

I said in the debate on the Address that I hoped that the Hunt Committee would report soon. I said, speaking for myself, that I thought that the Government should take the immediate step of withdrawing the regional employment premium from some people who do not need it and using some of that money to help special areas like north-east Lancashire. The Vauxhall works in my constituency will get £¾ million a year out of the regional employment premium. Vauxhalls have done nothing, in my view, to merit this. They had inducements to go there. It is a waste of public money. I am quite willing to sacrifice that money and see it used to help areas like north-east Lancashire out of their present difficulties.

Having disposed of that, the question is: how do we break out of this situation? I think it is clear that hon. Members on both sides believe that there is not a short-term answer. In the longer term, I think that what we have got to do is to recreate the confidence of the wealth producers—the men and women who work overtime, the people who save either small sums or large sums, the people who try to build a small family business into a big business. Any fool can destroy wealth. It is comparatively easy to distribute it. We have death duties, Surtax, penal rates of taxation, and so on. The job is to create it.

I should like the Chancellor, even in this situation, to look again at the levels of direct taxation, not just at the top, but all along the line. I would like him to consider—this was referred to at Question Time today—the tax position of small family businesses and the close company rules. The Capital Gains Tax as it is framed at present—I am not arguing about the merits of the tax—is an encouragement to a man to run down his business or farm before transferring it either by sale or by gift. I do not think that the present system of encouragements to investment is right. I was always suspicious about it when I was told that it would cost the Treasury £100 million a year less. The old test of profitability, although I admit that there were some technical flaws in it, was much better than the present system of grants.

With regard to overseas investments, the restrictions in this situation should be looked at. The Chancellor of the Exchequer was good enough to come to open the London headquarters of Rank Xerox, a company with which I am connected, as he knows, and he described it as the most fantastically successful enterprise of this decade. I thank the right hon. Gentleman very much for saying that. But under the present rules the original investment by the Rank Organisation which led to all this success would not have been allowed—the investment which has brought to this country one way or another tens of millions of pounds. We are being deprived of opportunities of sharing in the great wealth of Canada, Australia and, to a lesser extent, New Zealand. I hope that he will see that the expansion of our British companies overseas, on which we rely quite largely for our exports, is not hampered by these tax rules.

I was talking to a Manchester ship-owner a few days ago and he said that in a certain period the ships of his line had carried shipments to Canada, 25 per cent. of which were for British companies in Canada. I do not think it is realised how the export trade is buttressed by what we have got overseas by way of companies and subsidiary companies.

Finally, I come to the question of productivity, a difficult matter. The Government will have a hard time indeed on the salaries and wages front. They must concentrate upon productivity deals. They may seem to mean unequal treatment, but unless this approach is adopted there will be another reduction in the standard of living like this one. It is in the interests of all that we should get a move on on the productivity front.

Devaluation has been described as similar to the process whereby a man seeks to recruit his flagging energies by two large Martini cocktails. There is a temporary exhilaration. One saw it on the benches opposite yesterday and today. But it will wear off and they will feel worse. This is defeat, and it will need a strength of purpose which I do not think the Government possess to prevent it being a disaster.

6.12 p.m.

Mr. Desmond Donnelly (Pembroke)

The right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) said that this was a defeat. I absolutely agree with what he said on that point and, indeed, with some of the other points that he made earlier and on which I hope to comment.

In the year 1708 Mr. Secretary St. John, by a calculated Ministerial indiscretion, disclosed to this House that Britain had lost the battle of Almansa because there were only 8,000 British troops in Spain when this House had voted to ensure that there should be 29,000 there. When the Government, a month later, confirmed this news, the House was so shocked that it adjourned and sat in silence for half an hour, no Member caring to rise or comment on the situation. The defeat that we have suffered in this respect in our economic policy is infinitely worse than that minor engagement in Spain.

Mr. Eric S. Heffer (Liverpool, Walton)

I suggest my hon. Friend the Member for Pembroke (Mr. Donnelly) sits silent for half an hour.

Mr. Donnelly

There is a great sense of unreality amongst some of my hon. Friends in assessing this situation.

It was Sir Winston Churchill who said that the value of recrimination about the past was that it enabled one to ensure effective action in the future. I want to say only a word about the past. It is that when the Prime Minister took the decision in October, 1964, not to devalue, a fateful decision was made. It was a brave one, if not necessarily a very wise one, as was subsequently proved. But by taking that decision we inevitably pegged our economic growth rate, and when we pegged our economic growth rate at that point it became inevitable that the social programmes on which we had been elected to this House in the 1964 election were not capable of being financed out of the then rate of expansion of the economy. It was at that point that the battle for the £ was lost.

If we had halted the simultaneous programme of expansion in the social services there would have been a very different situation. If we had taken a different course about sterling, there could have been a very different situation. But it was at that point that we began the chain of events that inevitably led to the happenings of this weekend.

The importance of that assessment of the situation is to ask ourselves whether we have yet learned that lesson, as my hon. Friend the Member for Birmingham, All Saints (Mr. Walden) said earlier. What is the situation with which we are confronted today? We have not been paying our way in the world. We are having to divert a large proportion of our resources from home consumption to export sales. In this situation our exports must come from either home consumption, or from Government spending, or from investment. There is no other way. It must come from one of those three things.

The grave danger is that the easiest course is to take our exports out of investment. It is easy to do that, in the same way as it is to eat the seed corn. Yet it is the most dangerous and damaging of all. It is possible in certain circumstances, if action is not taken, if there is not a governmental resolution to ensure that there is a curtailment of home demand, to have in a very short time a considerable expansion in the economic growth rate of this country. We can do it out of surplus capacity in the first instance. But the moment we have an extensive expansion—up to even 8 per cent., as we could have in a year, instead of the 3 per cent. or 4 per cent. in conditions of normal stability—we immediately find ourselves in a situation where wages and prices begin to take off once more and we are back again in this present situation.

What should we do? Let me begin by making observations about things that we should not do. Reference has been made by the right hon. Member for Devon, North (Mr. Thorpe), by the right hon. and learned Member for Wirral and others about the 42½ per cent. Corporation Tax, the S.E.T. rebate and the doing away with the export rebates. I know the reason for some of these, but the Corporation Tax seems to me to be the most indefensible of all. It is to take a swipe at industry in order to take a swipe at the workers. It is sadly irrelevant to the problem at hand.

Then we need much more confidence to encourage our industrial management. The changes in S.E.T. and in the export rebates, as has been pointed out, show how difficult it is for any responsible management in this country to continue to take its decisions with the fluctuating changes of Government policy.

Then there are the various items that we read in the newspapers from time to time about the proposed expansion of public ownership. I sadly recall saying in this House on other occasions that one of the surest ways to devaluation of the £ was to spend £582 million on the nationalisation of the steel industry. We did not spend all that in the end, but we had to print more money and that had an inflationary effect on the economy. It was totally irrelevant to the whole situation. It is even more so now. We are on the same wretched road again, pursuing policies such as planning for the National Hydrocarbon Corporation to take over North Sea gas or pursuing the policies of my right hon. Friend the Minister of Technology and nationalising the atomic energy industry.

There are various other things that we should not do. One of these—and the most important—is that we should not create extra charges for industry. This national bandwagon will be pushed out of the mire only by giving the opportunity to the industrialists of the country to do it. The industrialists include the workers, because these charges are charges upon the workers as well, and upon their capacity to compete. The specific charge I have in mind is the proposal to increase the charges on road transport. This has very grave implications. If we pursue that sort of thing, we shall be back once more on the same road.

What should we do? First, in my judgment, we must develop a totally new pattern of labour relations. There are about 650 trade unions in Britain. We could do with about 16. If we put half the trade union officials in Britain in villas in the Caribbean for the rest of their lives, it would be cheap at the price. There is a subtle and difficult human problem in considering how to amalgamate the unions. We must be generous and reasonable, but it must be done. It is no good waiting for the recommendations of the Royal Commission on the Trade Unions and Employers' Associations. I have a poor opinion of that Royal Commission, anyway. We cannot wait. We shall be ruined.

We must have a totally new system governing labour relations so that both management and workers have confidence in the machinery for the redress of grievances, without resort to unofficial strikes.

Mr. Raphael Tuck (Watford)

Does my hon. Friend envisage a return to the Trade Disputes Act of 1927?

Mr. Donnelly

No. Let my hon. Friend go abroad and study the achievements of the Socialist Governments of Scandinavia. The pattern is all there.

Mr. Paget

Is my hon. Friend aware that the Socialist trade unions in Scandinavia have more than three times our numbers per head of officials?

Mr. Donnelly

I am not at all sure about that. They are certainly far more efficient. There are situations which should never be possible in this country.

To illustrate what I mean, I remember the occasion of a strike at the Ford factory, at Halewood. One of the delivery drivers was dismissed because of a motoring offence of which he had been convicted. He was dismissed pending an appeal in the courts. It should have been impossible for the Ford management to dismiss him pending the appeal. Equally, it should have been impossible for the workers to go on strike without proper recourse to the industrial courts to settle their dispute. Unless we are prepared to face the need to create machinery in which both sides have confidence for the redress of grievances which are there, again, the country will be ruined.

It is no good dodging the issue and saying that we must wait for the Royal Commission. We cannot wait. Only in this way shall be apply the order of the boot to the likes of Mr. Jack Dash and make them redundant. If ever there was a devaluation which could well be named after one man, this is Mr. Dash's devaluation.

There are other measures which we must undertake. We must look again at the whole tax structure. We must cease to penalise the front runners in industry. We should accept that there ought to be a maximum of a man's income payable in tax and that, beyond a certain point, he has the right to retain what he earns. For example, in Western Germany the maximum tax that any man pays on his income is 56 per cent.

There are other forms of taxation. The right hon. Gentleman the Member for 'Devon, North spoke about the added value tax. The sooner we get back to a situation in which people have their money, having the right to spend it or to save it, and in which we take money from the spending side of the arrangement, the sooner we shall get back to some form of reality and incentive in our industrial society.

We must have a far clearer look at the whole question of Government spending. Our national Welfare State bill at present runs at something over £6,500 million a year. At the present rate of progress, and at current prices, it will be about £8,000 million in the early 1980s. It is not possible to sustain this out of further taxation. How are the problems to be met? In certain sections, the Welfare State is extremely bad. There is only one practical way, and that is by resort to a method of selectivity—from each according to his ability and to each according to his needs. That was not a bad Socialist principle.

Mrs. Lena Jeger (Holborn and St. Pancras, South)

My hon. Friend is now contradicting himself. A few moments ago, he seemed to disapprove of a system of Income Tax which does relate contributions to means.

Mr. Donnelly

I was not saying that at all. What I said earlier was that I disapproved of a system of Income Tax which, at the top end of the scale, destroyed all initiative. That is quite different.

We must get back to the principle of selectivity, because this is the only way by which we shall provide the social services needed by the poorer people. [HON. MEMBERS: "Oh."] If some of my hon. Friends are not prepared to see the inevitability of the truth that one cannot get more resources from taxation under the present system, they must appreciate that the consequence of what they say is that they will never be able to provide better social services.

The plans are already there. They are in the Cabinet files, prepared by my right hon. Friend the Member for Sowerby (Mr. Houghton) before he found himself in the street. Many of the plans are for the sort of thing which was supported by my right hon. Friend the Member for Lanarkshire, North (Miss Herbison), the previous Minister of Social Security. Only if we are prepared to break the cycle of the mounting costs of the Welfare State and provide the means to meet the needs of the poorer sections of the community by a method of selectivity shall we ever be able to get out of our difficulty.

I began by saying that I sensed that there was an air of unreality in some of the remarks made by my hon. Friends. In my view, there is a wide gulf between their hopes, their aspirations and their prejudices and the realities of the situation. If this democratic institution is to survive, if the House of Commons is to express the views of the working class, and if this party is to express its views, it is essential t hat there be a much closer rela- tionship between my hon. Friend's views and theirs. If they doubt what I am saying, let them look at the by-election results. [HON. MEMBERS: "Hear, hear."] Many of my hon. Friends do not represent anyone at all. It is all a charade.

Mr. J. J. Mendelson (Penistone)

Go and sit over there.

Mr. Donnelly

I am not making my speech from over there—

Mr. Speaker

Order. It will help if the hon. Gentleman addresses the Chair.

Mr. Donnelly

I am not making my speech from those benches, because I was a member of this party a long time before my hon. Friend, the Member for Penistone (Mr. Mendelson) and I shall be a member of it after him.

Mr. Mendelson

Will my hon. Friend give way? [HON. MEMBERS: "Hear, hear."] What has it got to do with you Tories?

Mr. Speaker

Order. We are getting a little too familiar.

Mr. Mendelson

I was not addressing you, Mr. Speaker, and I apologise at once. I made my interjection because, after the cheers coming from the Tories, I thought that my hon. Friend might be more comfortable to have the cheers around him, particularly if he wishes to urge selectivity in the social services, pushing that idea on us. What my hon. Friend says is no different from what the Leader of the Opposition put to the Tory conference a few weeks ago.

Mr. Donnelly

I wrote it long ago. There is no copyright in good ideas.

I conclude in this way. I believe that this country can be pushed out of the morass in which it now is, and that it will be pushed out of it provided that we have leadership which is associated with those two old-fashioned characteristics, courage and integrity.

6.30 p.m.

Mr. Sandys (Streatham)

We have listened to a very courageous speech by the hon. Member for Pembroke (Mr. Donnelly). I very much hope that the good sense he has spoken will make some impression on his hon. Friends.

The devaluation of the £ is a grim and humiliating event. Nobody will criticise the Government for the decision they took last Saturday. Having allowed the ship to drift on to the rocks, they had no option but to take to the boats. What is so objectionable is the way in which they are now congratulating themselves on what they have done.

In his highly disingenuous broadcast, the Prime Minister told us that we are a proud nation. If we are, it is certainly not thanks to him. Does he expect us to be proud that our Government have betrayed the trust of those who relied on his assurances and kept their reserves in sterling? Who is the right hon. Gentleman to talk about pride? The only pride he knows is false pride. He is too proud ever to admit that he could be wrong. He told us, as my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) pointed out, that everyone was to blame except himself—the previous Tory Government, the Arabs and the Jews in the Middle East, the dockers, and, of course, the bankers. He has looked around for every scapegoat he could find.

It is noticeable that the right hon. Gentleman has made no attempt to take upon himself any of the criticism which has been unfairly concentrated on the Chancellor of the Exchequer. This is not the failure of one Minister. It is the failure of the whole Government, for which the Prime Minister, above all others, must accept responsibility.

In making his difficult decision, the Chancellor of the Exchequer will, I am sure, be guided by what is in the best interests of the country. There are rumours that he might be replaced by the Foreign Secretary. That is certainly a sobering thought.

Mr. Mendelson

Who are the people who give the right hon. Gentleman these rumours?

Mr. Sandys

When the Prime Minister spoke with emotion about the great break-through and the dazzling new opportunities, one would have thought that he was announcing a glorious victory and not an ignominious defeat, that he was proclaiming the achievement of a noble objective for which the Government had been striving, instead of the total collapse of their whole economic policy. The Prime Minister talked about escaping from a straitjacket. He can speak as an expert. There is no promise, however solemn, no pledge, however categorical, from which he fails to extricate himself. Houdini would have had nothing to teach him. The right hon. Gentleman is the greatest political escapologist of all time.

Not only did the Prime Minister repeatedly promise to uphold the strength of the £, but he told us that devaluation would do nothing but harm and provide no solution to our economic problems. Now that the Government have been compelled to adopt the policy they so recently condemned, they tell us that it will be the answer to all our prayers.

Devaluation by itself will only win us a breathing space. We must use it to do something more than just breathing. In his broadcast, the Prime Minister said that the Government would now be able to attack the root of the problem. They should, of course, have been doing that all along. It remains to be seen whether now at last they will face up to the needs of the situation.

One of the main causes of our trouble is overspending by the Government, which diverts an undue proportion of our resources away from the productive industries. The cuts proposed are not nearly big enough. They should certainly have included the introduction of what is called "selectivity" in the financing of the social services and, in particular, the reintroduction of prescription charges.

There is also the question of economic growth. People must be given much more positive encouragement to put all they have into the job of increasing output; and that means removing the disincentives of over-taxation. Immediate action must also be taken to prevent the country being held to ransom by a small minority of industrial saboteurs. Legislation is urgently needed to restore authority and responsibility to the trade unions, and to put a stop to the legalised intimidation of those who want to work.

But that is not all. There is one other essential requirement about which little has been said. If the Government are to achieve the economic upsurge which they expect, they will have to secure the whole-hearted co-operation of the British people in rebuilding our shattered economy. We need a united national effort and a new sense of national purpose. In times of crisis our people have always responded to leadership—the leadership of men whom they respect. Our present Prime Minister must recognise that he can never again hope to lead and inspire this nation. Discredited and distrusted at home and abroad, he no longer possesses the moral authority to call on others for sacrifice.

For three years the British people have been asked to endure the wage freeze, increased taxation, credit restrictions and unemployment, with the specific objective of avoiding devaluation. Now they are told that all this has been for nothing; and they are asked to accept further hardships in order to make a success of the very thing which their former sacrifices were intended to prevent.

The man who misled them before cannot make the same appeal again. By an endless succession of dishonoured promises and the total reversal of almost every major policy on which his party was elected, the right hon. Gentleman has lost the confidence of the nation. He has forfeited his mandate to govern. If he has any regard for democratic principles and constitutional propriety, he will hold an immediate General Election so that the people may choose a new Government whom they can trust.

6.39 p.m.

Mr. Austen Albu (Edmonton)

I am sure that my right hon. Friend the Prime Minister will be quite capable of defending himself against the accusations of the right hon. Member for Streatham (Mr. Sandys). I cannot say that the right hon. Gentleman added very much to our knowledge of Conservative Party policy on the matter which we are debating. He demanded cuts in Government expenditure, which comes strangely from the right hon. Gentleman, who would have had us go on pouring out our money in Aden and other parts of the Middle East. Perhaps on another occasion he will assist the House by telling us where he thinks the cuts in Government expenditure should be made, particularly to counter-balance the expenditure he would maintain overseas.

Mr. Sandys

If our arrangements had gone on, we should have been making British aeroplanes, instead of spending a vast number of dollars on American aircraft of questionable quality.

Mr. Albu

The right hon. Gentleman knows perfectly well that the cost of the British aircraft was rocketing. They would have cost the economy a completely unknown sum. But we are buying aircraft at, at any rate, fixed prices. The right hon. Gentleman referred to our "shattered" economy. That is typical of much of the economic discussions in this country, particularly at a time when the value of the £ is under discussion.

I have had grave doubts about the way the economy has been going since the end of the war and, at least, for the last 18 months I have been in favour of the policy of devaluation. But we must not start to discuss these matters as matters of great drama. One cannot describe as "shattered" an economy which is doing about £14,000 million of trade a year, taking both sides of the account. It is nonsense. We have always been, and we remain, one of the largest trading nations of the world. What we have been struggling to do since the war is to transfer a miserable few hundred million pounds from one side of the account to the other. The Conservative Party failed to do it. It is true that so far we have also failed to do it.

The manner of the discussion which takes place about the exchange rate is the most frightful nonsense. One might think that we were fighting a gallant battle in defence of a maiden's honour and that we had now lost it. But in fact it is a simple act of economic policy. I remember that in November, 1964, and in 1965 many Conservative Members of Parliament asked, "Why did you not devalue at once and blame it all on us?"

Mr. Iain Macleod

Name them.

Mr. Albu

The right hon. Gentleman knows who they were. I am certain that if the Conservative Party came into power tomorrow they would have devalued at once and blamed it on us.

I would point out that the right hon. Member for Barnet (Mr. Maudling) has on more than one occasion referred to the fact that his mind was moving in the direction of a floating rate. So there should be no more of this melodramatic form of discussion.

No one can put his hand on his heart and say that this decision or any other decision of economic policy will solve all our problems. The science of economics has not yet reached that state of perfection.

One can have doubts about the level to which the rate of exchange has been lowered. Nevertheless, I think that probably when every account has been taken of all the other changes there will be an advantage in our export prices of between 5 and 9 per cent. As for imports, the change will be very much more effective. This should lead to a very substantial improvement in the import-export balance.

None of us who have advocated devaluation has ever pretended that it was a soft option. But the argument used in this House—and, I am afraid, used by the Chancellor in his speech on 24th July—that only devaluation must lead to a reduction in the standard of living, is nonsense. If the country has been spending more than it has been earning any policy would have to reduce the standard of living or have its effect on employment. The policy of deflation, of more deflation without a reflation through exports, which this policy is intended to achieve, would have led to very much more and severer unemployment.

For those who say that the policy of devaluation is a policy of buying time, I would say that of all the policies which could be adopted it is the least true of this one. The policy of the right hon. Member for Barnet of trying to burst through while borrowing vast sums abroad did not work because the changes in the import-export balance did not improve sufficiently to eradicate the deficit. That was a policy of buying time. The policy that some of my hon. Friends have advocated, that of compulsorily acquiring our overseas investments, would have the same effect. It is, in effect, the same policy, although instead of borrowing abroad one pinches the overseas investments. It is a "borrowing time" policy. I believe that it is the same with import controls, which, as the President of the Board of Trade, in his admirable speech, said would not stick, could not be held for ever and would make British industry less competitive.

The real question is whether we can or cannot keep our level of inflation down to that of our competitors. That is what matters. If we can keep it in line with that of our competitors—not keep it down completely, which is impossible in any industrial country today—the costs of our competitors are rising also—devaluation will stick. It is then once for all and the advantage is permanent. So the argument that devaluation is only a way of buying time is completely untrue. There is no reason why over the years ahead this advantage should be whittled away unless our costs rise faster than those of our competitors. The Government's problem is to ensure that they do not.

Some people believe—I know that the Chancellor believes it very strongly—that the problem would be solved if we could in some way increase world liquidity—find a new reserve system. I do not doubt that this is an extremely important problem and that there are serious dangers of holding back the growth of world trade because of inadequate liquidity. But, however important the problem is for world trade as a whole, it will not solve the problem of basic imbalance between the rates of exchange of one country and of another—in this case our rate of exchange compared with the rates of exchange of our competitors.

Looking at what has been happening during recent years, we see that our share of world trade has been falling, which must indicate that there has been an imbalance. It has been going on for a long time, since before the war. This makes it clear that there was an over-pricing of our exports and an under-pricing of our imports. If, among the international arrangements, many of which are so admirable for supporting nations' currencies, there was an international agreement to help correct imbalances in the rates of exchange between countries in order to help the deficit countries, the problem would be different.

If countries with very large annual surpluses and large liquid reserves had the responsibility to inflate, and possibly revalue their currencies, countries in deficit would not be forced to take action on their own. For instance, if Germany, which is in this position and has been over the last few years, were to do it, and other countries as well, perhaps we should not have required to devalue our currency. But as there is no such responsibility on other countries, and there are no international arrangements for adjusting rates of exchange, countries like Britain, with chronic deficits, must take their own steps.

I believe that the Chancellor made the task of holding inflation rather harder by his speech in July, when I think he exaggerated the effects on prices and on working-class standards. The effect on prices should be moderate, and the full effect will take several months to come into being. It is important that this should be understood. I entirely agree that a rapid rise in wages or prices, perhaps anticipating a comparable rise in the prices of foodstuffs and domestic materials and so on, would be extremely harmful

Mr. W. R. Rees-Davies (Isle of Thanet)

The hon. Gentleman says that the effect of prices will be moderate. Does he recollect that when devaluation worked through the economy in 1950 and 1951 we had a rise in prices in one year, 1951, of 3s. in the £? That was certainly not wholly the effect of the Korean War. It was due largely to devaluation.

Mr. Albu

The hon. Gentleman is wrong. What happened was a most violent change in the terms of trade so that the cost of our imports went up enormously, almost entirely due to the boom created by the Korean War. Thank goodness, we are not in that situation today. This is a completely different situation. There is no reason why there should be more than a moderate rise in prices over a very long period.

As several hon. Members have said, on this side at least—it is extraordinary how reluctant hon. Members opposite are to admit the fact—the operation has been carried out remarkably successfully if one considers what has not happened to other exchange rates and the acceptance of the situation by the central bankers throughout the world. So far, there has been no chain reaction and there is not likely to be. No doubt this is because the devaluation has been moderate. Nevertheless, it must also owe a great deal to the collaboration between the central banks and the care taken by the Government and the Bank of England in mounting the operation.

But industry at home is still doubtful. I hope that it will seize the opportunity it now has in the export markets or in import substitution. But the Government have to regain the confidence of industry, which has undoubtedly been lost over the last few years. I believe that to increase Corporation Tax by 2½ per cent. is a mistake. It will have no effect on the current attitude of the unions and will only irritate industry. I do not believe that vast profits will be made, except by a very small number of firms, out of devaluation. Some firms will make some profits where they were making very little. Other firms will be able to reduce their prices, and if they are able to operate at higher capacity in order to sell more overseas, their profits will still increase. Over the last year or so these profits have not been very high, anyway. There is no great advantage in increasing Corporation Tax by 2½ per cent. It takes away some of the incentive to invest and advocates of devaluation have always hoped that an export-led boom would follow which would also lead to investment because of the demand created.

I think, also, that Ministers should stop making naive speeches about what they are going to do by intervening in industry. I personally am an interventionist, but I believe in intervening for concrete and useful purposes. I believe that vague statements of general intention supported by no concrete proposals raise the expectations of the Left wing of our party and anxieties in industry, neither of which are justified. This is not the smack of firm government, but a sort of industrial slap and tickle which excites and irritates but satisfies no one.

However, I believe that the change in policy the Government have now made, and which so many of us hoped for for so long, provides hope where little existed before and can, therefore, provide confidence for both sides of industry who can now see a future which, before, they could not. Provided that the Government use the new policy to regain the confidence of both sides of industry, the change will enable us at last to get that economic growth on which, in the end, everything else depends.

6.53 p.m.

Mr. Hugh Fraser (Stafford and Stone)

Many of us will find ourselves in some accord with some of the more academic aspects of the speech of the hon. Member for Edmonton (Mr. Albu). I remember that only last July the hon. and learned Member for Northampton (Mr. Paget) and I raised the then forbidden word "devaluation" in the House. It is nice to see that the Government have been converted, but I must say that today they look not so much like converts but escaped convicts. Undoubtedly, they suddenly changed their minds on the issue.

To the hon. Member for Edmonton, I would say that the academic aspects of the devaluation debate are now water under the bridge. The main problem, rightly set out in a leader in The Times the other day, is the political problem which ensues from devaluation. I am sure that hon. Members, whether they have been of the hon. Gentleman's view or whether they are new converts to the glories of devaluation, must realise that the key matter before the Government, this House and the country is to see that the new exchange rate is maintained. Frankly, I think that this will not be an easy task, and the fact should be faced. There is a danger, in my view, that the rate of devaluation may well prove too low.

First, devaluation to the new rate does not imprison those who have money here—and I am talking here of ruthless fact. There is always the danger of a "better 'ole" where the develauation has only been 13 or 14 per cent.

Secondly, there is the danger that the new advantage for exports has already been diminished to a large extent, as the hon. Gentleman pointed out, by the S.E.T. disadvantage now imposed, by the extremely high rates of interest and by the disappearance of the export rebate. Thus, to the exporter, the true advantage he gains is not 14.3 per cent. but much nearer 9 per cent. overall. Various countries are not devaluing, contrary to what they did in 1949 and 1931. This means, for example, in the wool trade, that the cost to exporters of woollen goods will rise. They will pay for their raw materials an increase of 14.3 per cent., while losing the export rebate and the S.E.T. advantage.

Mr. Crosland

I want to take up this point of the effect of the withdrawal of the export rebate and the S.E.T. pre- mium in some cases. Our calculations do not suggest that this will reduce the price advantages of devaluation by anything like the amount the right hon. Gentleman suggests—namely, from 14.3 per cent. to 9 per cent. I will, if it is convenient to the House, try and get for the Government's reply tonight a more precise figure. The true figure is much nearer a reduction of 2 to 3 per cent. than the 5 per cent. the right hon. Gentleman suggests.

Mr. Fraser

It would be useful if we did know precisely when the rebate is to end. We would certainly welcome a full statement tonight. We also have to take into consideration the increase in Corporation Tax in this context. I still stick to my belief that the actual advantage to exporters is nearer 10 per cent. than 14 per cent.

In considering the timing of this exercise, the problem now is to try to swing a consumer-directed boom into an export-led boom. To think that this will be easy is the height of folly. To use one of the Chancellor's nautical expressions, the ship is being told to go fast astern and hard-a-starboard, which will lead to much creaking in the engine room and to the shaking of the passengers amidships. The timing of this exercise therefore undoubtedly creates dangerous inflationary pressures.

If this step had been taken in April, or when we last discussed this subject, we would have been in a much easier position for what have been called the complicated negotiations with other countries. It is quite clear that there was not a loan and, because there was not a loan, there were no strings; but what is also clear now is that the bankers, especially the United States and the countries of other vital international currencies, were not prepared to accept rate of devaluation higher than 14.3 per cent. If the Government had acted with more perspicacity when they determined on this course, they could have moved in a more powerful direction. What is more, they would have had the chance of having a floating rate for the £, for which there was an overwhelming argument, rather than the fixed rate which we are now to have.

I have said enough about the difficulties which the country will face in maintaining the rate at 2.40 dollars, and there are many more, but the key problem, as I have said, is not the economic niceties of the matter, but the political will to force this exercise through and to keep it up. It is here that I have grave doubts about the Government Front Bench. I have grave doubts about their technical ability. I shall not belabour the Chancellor of the Exchequer again about why from Thursday onwards he allowed the central bank in this country to support sterling forward. That is technically a total mystery, but it must have cost the country literally scores, if not hundreds, of millions of pounds which cannot be recovered—we shall be buying back pounds at 23s. and one can not make money out of that.

But I am concerned not with the Government's technical skill, but with the attitude of easy optimism and lack of judgment which the Prime Minister has displayed over the last three years. That is what alarms me. If the Government continue as before, always saying that all will be well and headed by a Prime Minister who, on television, can say that the Government will stop prices from rising, then devaluation cannot possibly work. The only way in which devaluation can be effective is to make full and free use of the market mechanism. This is a market solution and we have to face it, and if the market is interfered with, if there is this slap and tickle with industry to which the hon. Member for Edmonton referred, directions to industry and bossing about with industry and an attempt to stop prices rising, then I am certain that this exercise will fail.

It is in the interests not just of the Government but of the whole country that the exercise should succeed. Devaluation rates cannot be changed and once a standard has been fixed, we have to stick to it for the next 20 or 30 years. This means that the Government must seriously consider the whole of their programme and make changes in it. That is hard enough for any Government to do. They will not just have to make the cuts of the "Healey hundreds", but a real cut in Government expenditure, not only abroad, but at home.

One parameter of the problem is that over the last year we have lost a vast sum of money in the foreign exchanges. It will now be sucked back by high in- terest rates, but it will be hot money and we do not want hot money to swell municipal expenditure and other things which we cannot afford. Another parameter is the fact that the forward position of the balance of payments had these new steps not been taken would have been running next year at a deficit of about £300 million. I hope that the Foreign Secretary will confirm that figure this evening.

I therefore say to the Government, without much respect but with absolute certainty, that unless there is a change in policy, unless the Government do some of the things suggested by the hon. Member for Pembroke (Mr. Donnelly) and some of the things which we have suggested, unless, over the next year or 18 months, there is a cut of Government expenditure at home of more than £1,000 million, then this exercise will fail.

This is a matter of erosion. Having decided on devaluation, the time factor is not on our side. It is not on our side because of this small devaluation factor, because it will take a long time to get exports moving and because these effects could be destroyed in a short time by inflation.

We have no faith in the man who leads the present Government. I hope that the Chancellor, for whom I have respect, will tell him of the story which comes from South America—and the Chancellor has only just returned from Rio: "When you have a Government which is in financial troubles—es major an ladron que en boofo"—it is better to have a thief in charge than a buffoon.

7.7 p.m.

Mr. Eric S. Heffer (Liverpool, Walton)

I am sure that I shall not be expected to comment too much on what the right hon. Member for Stafford and Stone (Mr. Hugh Fraser) has been saying. He said that he supported devaluation and spoke of my right hon. Friends as a bunch of convicts who had apparently just been converted to the idea. His own efforts of conversion of his own Front Bench have not been particularly successful, to judge by the fury which his right hon. Friends have shown this afternoon in their opposition to the Government's decision to devalue the £. If, for some time, we have been marching towards a precipice and the enemy has been cheering us on, there must have been something basically wrong with the policy which we have been pursuing.

During the last 18 months, despite the voices from these benches and elsewhere, my party has been marching steadily towards the precipice. At the last hour, thank heavens, it has stopped short. We are now about to reverse from the precipice and carry through the policies upon which we were elected. Of course, there will be exceedingly great difficulties, as everyone understands. We know that in the immediate future there will be a slight rise in unemployment. I am not happy about that and over the last 15 months I have spoken strongly and vigorously against any increase in unemployment. But if the choice was between accepting a loan with all sorts of conditions which would have meant a continuation of, and perhaps extra, savage deflationary measures and devaluation, then I am in favour of devaluation. This was the choice presented to us.

We know that when loans are discussed the international bankers do not come forward with a series of strings attached to them, but suggestions are made that perhaps we should hold back on our social services, that perhaps we should not build quite as many houses as we did in the last period, and so on. We in the Labour Party are not prepared to accept that position. I fully support the Government in their action. It was a bold and courageous action, and if I have any criticism of it at all it is that it ought to have come a bit earlier than it did. That is the only criticism that I would make.

Mr. Peter Emerys (Honiton)

While he is propounding his arguments about the alternative between devaluation and a loan, may I remind the hon. Member that the Minister stated at the Dispatch Box this afternoon that no alternative loan was offered and, therefore, the question of an alternative does not arise?

Mr. Heffer

I listened very carefully to what my right hon. Friend said, and it was quite clear that we were faced with certain alternatives. The Government refused to accept one of those, and they were right to refuse to accept a loan which could have had unacceptable strings.

The other reason why I am delighted with the decision to devalue is this. When I first entered the House of Commons I went to a meeting of my Parliamentary Economic Committee. We were discussing the economic problems at that time. I was rather naive, and I said, "Why don't we devalue?" It was like speaking in church. There was a deathly, horrible, silence and I walked out of that meeting feeling a bit of a criminal for actually raising the matter, because I was told, "One does not talk about such things."

Of course, I did not know then that everything said in private meetings here gets into the Press the next day. I understand now, but I did not then. We have now reached the position where the £ is no longer a sacred cow. The interests of our people are being placed before the sacred cow of maintaining the £. If devaluing the £ will mean no increase in unemployment in Liverpool, Merseyside and other areas, then I am with the Government all the way.

I accept that one of the difficult problems is the point made by my right hon. Friend on the Front Bench, about the danger of the advantages of devaluation being frittered away by prices and wage increases. I am delighted that my right hon. Friends have made it clear that no further wage restraint legislation will be introduced.

I have five points that I want to put to my right hon. Friend, which could deal with the prices and wages problem. I am quite certain that they will not commend themselves to hon. Gentlemen opposite, so I ask them not to interrupt while I am giving them. We cannot do what was done in France when the Government, by decree, were able to freeze all prices. There has to be a certain amount of price increase; one understands this.

First, I suggest that we introduce, throughout the country, price control officers, attached to every local authority in the same way as rent officers are attached to local authorities, so that if retailers are tempted to put an additional 1d. on to the increased price which the manufacturer is legitimately charging, the local housewife can refer the matter to him. [Interruption.] I do not expect hon. Gentlemen opposite to accept or to understand this, but if we are to make a success of this devaluation, and obtain the support of the trade unions, then the workers in industry have to see that this is operating fairly and that there is a move being made by my party to make certain that there are no unnecessary and unjustified price increases.

I also believe that every manufacturer who wishes to put forward a price increase must justify that increase before the Prices and Incomes Board before it can be made. My third point is that there should be no percentage increases in dividends, unless it can be proved that there has been a genuine investment in new machinery and modernisation.

Fourthly, there should be a minimum wage to meet the needs of those workers who are receiving well below what is necessary for them and their families to live. If we do this, we will find that the trade unions and the workers will be much more prepared to accept the voluntary wage vetting system which the T.U.C. is now operating. It is important that my hon. Friends should not ignore this and say that it is nothing but another gimmick and cannot work. The success of our policy is very much dependent upon the workers being absolutely convinced that the operation of this will be fair to all sections of the community.

Mr. J. Bruce-Gardyne (South Angus) rose—

Mr. Heffer

For some reason or other, whenever I speak in the House hon. Members want to get up and ask me questions about the points that I am making. I appeal to them, on this occasion, to let me finish my speech very quickly, so that other hon. Members may speak, too.

I am an interventionist in industry. I do not mean that we should interfere with the capitalist employers. I would prefer the Government to set up their own industries. My hon. Friend the Member for Pembroke (Mr. Donnelly) referred to the whole House sitting down for half an hour in silence. If he had done the same at that particular moment the House would have been delighted—this side of the House, anyway, but not the other side. Hon. Members opposite were delighted with his points.

We should see an extension of new forms—I emphasise "new form"—of publicly-owned industries, particularly in the under-developed areas. I cannot see any reason why the Government should not channel new industries into Merseyside, Scotland, Wales and all the other areas in which there is the problem of a sustained level of unemployment much higher than is necessary and healthy for the economy. Having taken the first step in a bit of revolutionary thinking on economic matters, the second step would be a little easier and the third step would be easier than that.

This is a road on which I am delighted we have begun to travel. I shall ensure that my voice, together with that of most of my hon. Friends, is constantly raised so that we keep on moving along this road. If we pursue this policy, not only will we win the next General Election, because the people will understand that we are implementing the policies on which we were elected, but we shall ensure that the country is transformed, and we shall build a Socialist society and Britain will be economically and politically strong for all time to come.

7.21 p.m.

Sir Henry d'Avigdor-Goldsmid (Walsall, South)

I hope that the hon. Member for Liverpool, Walton (Mr. Heffer) will acquit me of discourtesy if I do not take up all the stimulating points which he made and with nearly all of which I totally disagree. I bear in mind your suggestion, Mr. Speaker, about the number of hon. Members who wish to speak. Therefore, I intend to be very brief.

Earlier, I intervened in the argument between my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) and the Government Front Bench about the events of last Friday. I do not want to say more about that regrettable day other than that tragedies are not well organised; and it was a day of tragedy. I was, however, upset by the Chancellor of the Exchequer delighting in the tribute to his skill expressed in the views of gentlemen abroad whose institutions have undoubtedly profited by that day of tragedy. This is not an unsolicited testimonial.

Yesterday, the hon. Member for Willesden, West (Mr. Pavitt) referred to the ill-gotten gains of British speculators who have been gambling on the £ in the last few months."—[OFFICIAL REPORT, 20th November, 1967; Vol. 754, c. 949.] Last Friday morning, the discount market, as is its duty, tendered for and was allotted no less than £180 million worth of Treasury bills on the basis of a Bank Rate of 6½ per cent. At the time they were allotted, the monetary authorities knew very well that Bank Rate would be 8 per cent. by the time they came to pay for them. Therefore, as the President of the Board of Trade will appreciate, they suffered a loss of 1½ per cent. on £180 million for three months, which is roughly £1 million. I wish to make that point so that what I may call the ill-informed remarks of the hon. Member for Willesden, West do not go entirely unchallenged.

During the debate, I have been a little shocked by the gusto with which this decision, which was forced on the Government—it was not voluntary, and nothing will persuade me that it was—has been received. The best analogy which I can give is this. If one's friend has the misfortune to fall into a muddy pond, he naturally deserves one's sympathy. If he says, "I will be dry in a minute", one admires his optimism. But if he says, "It is a perfectly clean pond", then I think that his sense of cleanliness is a little deficient. This is the impression which I have had during the debate—that those who welcome this enforced devaluation are, in moral and financial terms, a little deficient in their sense of cleanliness.

Devaluation has solved certain problems. The first problem which it has solved completely is that of the reserve currency. This is something which need no longer worry right hon. Members on the Treasury Bench, because sterling is no longer a reserve currency. People who deposited sterling here and who have suffered as a result of devaluation will seek to get it away as soon as they conveniently can.

Sterling lost its status as a reserve currency two or three years ago, when we started making restrictions on the investment of British funds in sterling area countries, particularly Australia. When restrictions were placed on investment in Australia, the Australians had to look for other sources of supply, which they found in the United States. The weaker members of the sterling club have stayed in it, but the stronger members from whom we benefited have left. The fact that they have not followed us by de- valuing is a clear example of how independent of us they are, particularly South Africa, which, as a gold-producing country, would have every reason to devalue or would be under pressure to devalue but has not done so. All this suggests to me that sterling is no longer a reserve currency and that we need not have that worry any more.

One cannot help but be affected by one's upbringing. I spent some of the formative years of my life between the wars in the City at a time of continuous currency devaluation. I saw it happen in this country. I saw it happen to the United State's dollar. I saw it happen particularly to the French franc. These are experiences which I have lived with at close quarters and which I cannot dissociate from my mind.

The French devaluations were a series. Originally the franc was defended with great vigour. Then they got the habit of devaluation. Some of the considerations which prompted the remarks of the hon. Member for Walton were uppermost in the minds of French politicians at the time. They found devaluation a very easy way out of their immediate troubles, and they resorted to it year after year. The net result was that, whereas in 1931, 1,000 francs cost £14, by last week 1,000 francs, or 10 new francs, were worth 14s. There was a 95 per cent. devaluation in terms of sterling which is not a strong currency.

This is very much the danger which we are in at the moment. My right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) made a valid point when he said that we should forget about the past and that the question is whether we can defend the current rate. As I am in the happy position of not having any responsibility whatsoever for policy, I propose to make a few suggestions about how it can be defended. It can be defended primarily by a change of thinking on the Government Front Bench. I shall give them a few hints about a change of feeling.

The first thing which I put to them is that they should defer the raising of the school-leaving age. [HON. MEMBERS: "Shame."] That meets with cries of "Shame", but it is something which I am willing to advocate. Everyone knows of the cost involved in that great education programme. I have no responsibility for it, but I suggest that at this moment a deferment of the raising of the school-leaving age would be one of the best ways of meeting some of the expense to which devaluation has put us.

I do not set out to be an agricultural expert—

Mr. Mendelson

Nor educational.

Sir H. d'Avigdor-Goldsmid

We can argue about that later—but I see no sign whatever around the Ministry of Agriculture that it has any ideas about the import saving that could be done by increased food production.

I am told on every side, for example, that there is likely to be a surplus of barley in 1968. A surplus of barley in this country is of no help to us. As most of it has not yet been sown, it would be very simple to increase the guaranteed price of wheat so that farmers were induced instead to sow wheat, which would be consumed in this country. I have no doubt that such a suggestion could be shot down, but it is something which should be considered. We have heard of nothing like this in the debate, although we are told that we are to have a £200 million saving of imports as a result of increased food production.

My next suggestion will not be very popular. In present conditions, when we are fighting for our lives industrially, what good is our great regional policy? My constituency in the West Midlands is an active producer, but if any of my constituents or their neighbours wish to increase their productive power they are ordered not to do so; they are not granted an industrial development certificate. Instead, they are invited, at considerable expense to the taxpayer, to transfer their activities elsewhere, to somewhat less convenient, less economic and more expensive. Not only that, but they probably have to transfer their activity to a place where they do not have access to all the accessories which they require. That is a policy which needs to be looked at again.

I suggest to the President of the Board of Trade that next time his enthusiastic office turns down an application for an industrial development certificate, he should carefully examine the reasons for doing so. At a time when an increase in useful production for export or in import saving is so valuable, slightly more consideration should be given to manufacturers who want to do these things by expanding their own works instead of being sent miles away.

There is another point on which I should like to speak to the President of the Board of Trade. I think that there should be an overhaul of the credit arrangements for our exports. All the people living abroad who have bought our goods on deferred payment terms are now enjoying an uncovenanted 15 per cent. benefit. Unless they have much more confidence in the new parity of the £ sterling than they ever had in the last one, they will be in a hurry to seek to enjoy the same benefits in the case of a future devaluation, which would certainly be on the books if the policy advocated by the hon. Member for Walton were adopted by the Government.

People abroad will be seeking to increase their purchases from this country, but not for cash. I believe that we should consider to what extent the people who will be queueing up for our goods because they will be cheap are prepared to pay cash for them and that if they are not prepared to pay cash we should be extremely discriminatory in the people to whom we grant credit. I offer that thought to the Government Front Bench. We have got to the position that, like the Red Queen in Alice in Wonderland, we have to move very fast indeed to stand still. It is not beyond our power to do this, but I am quite sure that we cannot do it unless there is some new thinking.

Hon. Members opposite scoffed at the suggestion by my right hon. Friend that devaluations only take place under Socialist Prime Ministers. The reason we have not had more frequent devaluations is that devaluation has usually been followed by a Conservative Government. I believe that if a Conservative Government do not shortly follow this latest devaluation will be one of a series, in which the hon. Member for Walton may be satisfied but no one else in the country will be.

7.37 p.m.

Mr. Jack Ashley (Stoke-on-Trent, South)

I have listened with great interest to the debate and to many of the suggestions which have been put forward from the benches opposite. I rather regret, however, that instead of concentrating upon attacking the policy of the Government many hon. Members opposite have tended to attack individuals such as my right hon. Friends the Prime Minister and the Chancellor of the Exchequer. I regret that very much. I was particularly sorry to hear the right hon. Member for Enfield, West (Mr. Iain Macleod) call for the resignation of my right hon. Friend the Chancellor of the Exchequer. That dramatic gesture was not at all in keeping with the kind of standards we have come to expect from the right hon. Gentleman. I can only say that we regard that as a kind of political gimmick, which caused some resentment on this side of the House.

We on this side are tempted to reply in kind, because if anyone knows anything about resignations it is hon. Members opposite. When Mr. Harold Macmillan was Prime Minister and was having a difficult time hon. Members opposite were demanding his resignation. When the right hon. Member for Kinross and West Perthshire (Sir Alec Douglas-Home) was Prime Minister they demanded his resignation, and recently there has been a demand from right hon. and hon. Gentleman opposite for the resignation of the Leader of the Opposition. It is, therefore, hon. Members opposite who, continually demand resignations by men who are having a difficult time. I do not regard this as one of the better displays by hon. Members opposite.

We on this side appreciate that the Chancellor has had a difficult time and calls for his resignation such as we have had from the right hon. Member for Enfield, West serve only to strengthen our determination to urge him not to resign. If the right hon. Member for Enfield, West, who in my view is one of the few hon. Members on the Opposition Front Bench with real talent and is a man whom I admire, continues in that vein he will only devalue himself.

Sir F. Bennett rose—

Mr. Ashley

I have heard hon. Members opposite criticise the Government and, at the same time I have heard great praise of the French economy, the strength of which has been related to the weakness of our economy. In doing so what they have failed to recognise is that one of the reasons for the strength of the French economy was that as the right time and in the right manner they devalued.

So I can only assume that this opposition to devaluation by hon. Gentlemen opposite is not an active principle. They do not object to devaluation in principle, but, by many of the speeches I have heard this afternoon and by the television performance I saw from the Leader of the Opposition last night, the impression has been conveyed, wittingly or unwittingly, that hon. and right hon. Gentlemen opposite are objecting in principle to devaluation. The fact of their praise for France, with the fact already mentioned on this side of the House in the debate that devaluation was at least considered by hon. and right hon. Gentleman opposite some time ago, seem to indicate that it is devaluation carried out by the Labour Government rather than devaluation itself which is of concern to hon. and right hon. Members opposite, and so their outraged protests are rather unconvincing.

What interests me very much is this ploy by the party opposite that the debts upon the economy today are due to Socialist profligates. I want to remind hon. and right hon. Members opposite that they had been slipping in and out of international pawnshops long before we did. I do not blame them for this. All I say is that when they were in office they were incurring debts and borrowing massive sums of money, and that it ill becomes them now to condemn this Government for incurring debts. The only point I want to make is that hon. and right hon. Members opposite should not condemn this Government on principle for the kind of thing which they themselves were responsible for when they were in office.

Now we have made a clear departure—and thank goodness we have—from borrowing in that way, and I am only too delighted that we have, because I regard this as a major step forward, and it gives hope for the economy.

The Opposition tend too easily to brush aside some of the reasons which have been advanced for the difficulties we have encountered in trying to carry out the policy which we have undertaken for the last three years. It is all too easy to brush aside the cost of Suez, to brush aside the cost of the dock strike, to brush aside the difficulties of the international recession, to brush aside the rise in interest rates. These have all been major factors, and for hon. and right hon. Members opposite to attack the Government for mismanagement and to take no account of those difficulties, though it may sound fairly clever and though it may convince some sections of the public, is not the right kind of attack and is an unfair criticism of the Government. If it is the tactic they propose to pursue throughout this debate, all I can say is that I do not regard it as at all convincing.

It has been suggested by the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) that something should be done about the docks. I do not think anyone regards the Government as responsible for the trouble between the Israelis and the Arabs, or for the world recession, but there are murmurings today about the responsibility of the Government for the trouble in the docks, and there are suggestions flying around, not put quite clearly on the Floor of the House, though I am sure they are in the minds of hon. and right hon. Members opposite, that the Government should take a firm line with the men in the docks, that the Government should stand no nonsense and should get tough. The Government are right to be cautious, because the dockers are causing this country a great deal of hardship at the moment, but they are doing what they regard as right; in other words, in terms which hon. and right hon. Members understand, they are pursuing private profit. The suggestion that action should be taken against the dockers by sending in troops, for example, or by legal sanctions, is not made because they are pursuing private profit but because hon. and right hon. Members opposite regard this as against the national interest. That is their point of view, but I disagree.

From now on, since devaluation, it is the manufacturers of this nation who, if they do not take advantage of export markets, are failing the nation by failing to export. I would like to know where hon. Members opposite stand when these manufacturers do fail the nation. What sort of sanctions will they suggest for the manufacturers, equivalent with the sanctions against the dockers, because a flip behind the ear for the goose is a kick up the backside for the gander. They cannot attack one side and not the other.

Mr. Ian Lloyd (Portsmouth, Langstone)

Is the hon. Member seriously suggesting that the creation of profit as a result of the creation of wealth is in the same category as "profit"—which has not been created—as a result of the destruction of wealth, which is what is taking place in the docks?

Mr. Ashley

I thought hon. Members opposite would confuse this issue and I am afraid that the hon. Member has fallen into that trap. He did not listen to what I was saying. I did not say that. What I was saying—and I am sorry if I did not make myself clear—was that the dockers are pursuing their private profit and the employers are pursuing their private profit, and I do not condemn that, but if dockers are to be condemned for failing the national interest, then hon. Members opposite ought in fairness to suggest sanctions against employers for failing the national interest as well. I suggest that in all fairness.

Sir Tatton Brinton (Kidderminster)

Would the hon. Member please specify what manufacturers he is at present attacking for failing the nation? He has made a lot of vague accusations. As a manufacturer, I personally resent them.

Mr. Ashley

I am not making any vague accusations at all. [HON. MEMBERS: "The hon. Member is."] What I specifically said was that if since devaluation manufacturers fail to increase their exports, which the nation needs, then they would be letting down the country, and if they do so I think it is the responsibility of hon. and right hon. Members opposite to do something about it; if they are going to attack the dockers, let them equally attack employers. That was all I was suggesting.

The Opposition have made great play with the fact that we did not devalue before. They say, if we can devalue now, if that is a good policy now, why was it not a good policy before? I did not publicly advocate devaluation. I told my Governmental colleagues my own opinion, and they knew my opinion, and, rightly or wrongly, I did not join my hon. Friends in a public demand for it. This was a question of personal judgment. They may have been right, I may have been right; I just do not know. As it happens, we have now devalued. The reason why the Government did not do it before, and, in my view, very rightly did not do it before, was that if they had devalued before 1966 the situation would have been entirely different, because there were not spare resources to go into the export industries, and we would simply have made the economic difficulties the greater in an over-heated economy. So we move with the times. There is a time when devaluation is a wrong thing to do, and there is a time when it is a right thing to do. I suggest that they have devalued at the right time. It might have been a little earlier, but most certainly not a lot earlier.

As for the Chancellor's denying that there was to be a devaluation, I honestly do not believe that hon. Members opposite would expect the Chancellor to tell the House that we were going to devalue in a week's time. This was obviously not in the minds of hon. Members opposite, so they ought not to be hypocritical about it. The Chancellor had to face the classical dilemma of any Chancellor. It is a fair political game if one is going to play it on that level, but I am sorry that the Opposition chose to do so.

If this new strategy or policy is to succeed, two things are of crucial importance. First, the Government must press on with their policy of regional regeneration. If they do not they will not have much hope of solving the basic economic problem which confronts us. I hope that my right hon. Friend the President of the Board of Trade, in whom I have the greatest confidence, will go much further in the regional policy that he has been pursuing recently and will carry much further the regional proposals which have already been enunciated by the Government.

Welcome as was the appointment of the Chancellor of the Duchy of Lancaster as Minister for the North of England, I suggest that my right hon. Friend should appoint a full-time Minister with responsibility for the regions. This issue cannot be dealt with on a part-time basis by a Minister with other responsibilities. I hope that my right hon. Friends will consider my suggestion that a full-time senior Minister should be appointed to ensure that advance factories are built and occupied, and that a really dynamic approach is made to industrialists to fill the factories. We must induce them to go to these factories.

Secondly, an effective prices and incomes policy is now more vital than ever. Given the increase in the cost of imports, there will inevitably be pressure for higher wages. Already in the pipeline there is a claim by 3 million engineers, and we have a claim by 1½ million building trade workers which involves even more people. Millions of other workers have claims averaging 14 per cent. in the pipeline. These claims must be kept in line with productivity.

I agree with the voluntary prices and incomes policy now endorsed by the Government, because I am confident that the T.U.C. vetting system will be effective. Much energy is being put into making a success of this policy. The responsibility today lies clearly on the backs of the T.U.C. and the individual unions to play their part, on their side of the bargain, in restraining demand in line with productivity. On the other side of the bargain, responsibility lies plainly on the backs of the employers to see that productivity is increased and also to ensure that prices are not raised unjustifiably. We know that some prices must rise, and it is very difficulty—as every economist and shopkeeper knows—to disentangle legitimate price rises from those which are unjustified.

I warmly endorse the suggestion of my hon. Friend the Member for Liverpool, Walton (Mr. Heffer) that people throughout the country should be authorised to examine price increases which may be unjustified. I go no further. In my view, this is a good idea and is well worth examining. I agree with it because we have somehow to prevent unjustifiable price increases in the next 12 months or two years.

Given these conditions, with incomes and prices kept in line with increased productivity, I believe that we shall see a revival of the British economy, which will move forward within the next year or two to an enormous success.

7.55 p.m.

Sir Arthur Vere Harvey (Macclesfield)

The last part of the speech of the hon. Member for Stoke-on-Trent, South (Mr. Ashley) was the most valid part. Unfortunately, he also tried to defend the Chancellor's action in denying that there would be devaluation. Those of us who heard Lord Chalfont's statement in the middle of last week, in Paris, when he aid there would be no devaluation, made up their minds that it was bound to happen. Whenever Lord Chalfont is involved one can take the opposite view from that which he expresses. One does not have to be very clever to reason it out.

The hon. Member for Stoke-on-Trent, South seemed to resent criticism from the Opposition. All I can say is that before he came into the House his right hon. Friend the Prime Minister used to sit on the Opposition Front Bench, regardless of the situation, haranguing the Government. He must get used to criticism, because there will be much more to come in the months ahead. What I do not understand about the whole business is that the Prime Minister and many of his right hon. and hon. Friends are turning what is a national disaster into an achievement. It is a most extraordinary situation.

We have had endless quotations from what the Chancellor has said and what the Prime Minister has said. To listen to the Prime Minister broadcasting on Sunday night was nauseating. It was a contemptible performance. Here was the man who has always said that he would be frank, who has always said that victory was round the corner. We have heard it so often. The Prime Minister has built up an image of himself from the word go as a man of action. We had the first 100 days. We had him flitting about the world in his aircraft, wearing his Gannex. I heard of one shopkeeper who had a Gannex in his shop for six weeks and could not sell it.

Nearly three years ago the Government put on an import surcharge of 15 per cent. and brought down upon themselves the wrath of their E.F.T.A. partners. They showed some courage in doing this, although they carried out the operation in a very clumsy fashion. I could see some reason for reducing it to 10 per cent. but in April of last year the Government told their E.F.T.A. partners that they would take the 10 per cent. off at the end of the year. Of all the crazy things to do—to give eight months' notice! Having put on the surcharge, the Government should have kept it on.

Some of my friends on the Continent said, at the end of the summer, that one of the biggest mistakes the Government made was to give eight months' notice of the fact that they were taking off the surcharge. It would have made a vast difference to our import situation if we had retained the surcharge. I can appreciate that pressures were put on the Government to give way and to relax the surcharge, but it was the wrong thing to do.

The Prime Minister must accept responsibility for the present situation. Recently, he said that he was now in charge of our economy. Having built up an image of himself, the Prime Minister must now live with it. We have never got the facts from him. He dodges and wriggles about everything that is put to him. Every Tuesday and Thursday he is asked Questions to which he never gives direct answers. The country is in the same position. To tell the poor, wretched pensioners on Sunday night that the £ in their pockets was still worth 20s. takes some beating.

I will quote one thing that the Prime Minister said in October, 1964: I do not believe we are facing any danger to sterling, any run on the pound because the loan facilities available to us have been increased. The Government maintain the bogey of the £800 million. Although we were told at the last election by the Prime Minister and other members of the government that there were now no alibis left, they are trotting it out every day in almost every speech. In that £800 million there were vast investments overseas and if the election had not been put off until October, 1964, most firms would not have built up their stocks of raw materials at vast cost which was a bonus to the Government when they took over. I should like to know what is the present position of stocks in this country. My own suspicion is that they have been run down a great deal. There is very little fat on which to live.

I am sorry that the hon. Member for Ashton-under-Lyne (Mr. Sheldon) has left the Chamber. He was quite within his rights last Thursday in asking a Private Notice Question of the Chancellor about the exchange rate of the £. It was equally tempting to my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) to put a similar Private Notice Question. But he did not, and quite rightly so, because to put a Private Notice Question to the Chancellor when he was in the middle of negotiations about the exchange rate could have shaken the £, and that is what happened when the hon. Member for Ashton-under-Lyne put his Question.

The Chancellor answered the question in a hamfisted way. It was a great embarrassment to him and the Government and it really speeded up the run on the £. The Question put by the hon. Member for Ashton-under-Lyne last Thursday is probably the most expensive Question in the history of this Parliament.

Mr. David Marquand (Ashfield)

Has the hon. Gentleman given notice to my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) that he was to make this unpleasant attack upon him?

Sir A. V. Harvey

The hon. Gentleman has to take the rough and tumble of debate. I have sat here through the whole debate and I have said nothing unpleasant or unfair. He was perfectly justified in putting his Question. I am merely expressing a view on the cost of that Question and I am prepared to base it on that.

We are always being asked by the Government to pull up our socks and show the Dunkirk spirit. That is the one thing that I fear in the present situation. One can make one or two appeals to the people, but the Prime Minister and his colleagues have made so many appeals and that is the real risk that we run.

Having gone with devaluation, it can work if a number of other things are done with it. If one does not do those things devaluation is bound to fail. The main thing is that prices, salaries and wages have to be paid. It is essential somehow or another. However, having had 18 months of restraint and freeze, are the people today in the mood to follow the Prime Minister's lead? I hope that they will for the sake of our country and our economy, but I have grave doubts whether they will do so—very grave doubts indeed.

There is nothing wrong with the people, who work hard. We have small elements which bring about some of the strikes, but in the main the people are working pretty well. What they are suffering from is constant interference from Government administrators. Who would have thought that in the middle of the negotiations to fix the exchange rate of the £, the right hon. Lady the Minister of Transport would be wrecking the road haulage system? I know that she does not think so, but that is what she is doing, and it can only lead to increased cost of transport of exports and home goods. It is inevitable.

The Government relaxed hire-purchase rates in August and the banks were instructed to be more lenient with customers in granting overdrafts. Yet within three months this policy is reversed. How do people know where they stand in running their businesses or private affairs? It is an impossible situation. We have had a small consumer's boom in the home market in the last three months. That has to change, or we have to try and change it.

I believe that the seriousness of the situation has not yet been brought home to the people. The Prime Minister certainly failed on Sunday night. One cannot hoodwink the people. They are very politically minded. If the Prime Minister had gone on television on Sunday and said, "We are in a desperate situation economically. I myself am prepared to halve the expenses that I get as Prime Minister and I am asking every Member of Parliament to take a 10 per cent. cut in salary"—there will be some groans, yes, from all of us, but a modest gesture at this level would have a tremendous effect on the country.

However, one has to go much further than that. I think that a fine comb should be applied through every department in the Civil Service and local government. Why is it that industry is always being asked to be more efficient, to bring in consultants, McKinseys and others, but we never hear of the Government doing it? All we know is that there have been 45,000 additional civil servants in the last three years, with 6 million square feet of extra office space, costing about £10 million a year. The Government have to get to the root of the problem. They have not begun to do it and that is why I am fearful for the future.

Are the Government trying to tackle the problem of bringing about cuts in Government expenditure? We are told that there is to be £100 million saved on defence. The hon. Member for Woolwich, East (Mr. Mayhew) said that he was told in March this year by the Minister of Defence that not one penny more could be cut. But, suddenly, they have been able to cut £100 million. However, they have not told us how much extra we shall have to pay for the F111A and the Phantom aircraft being ordered. It certainly makes the TSR2 proposition look very cheap today using British labour and materials, and a great number of the men involved on that project would still be in Britain today instead of North America.

Why is it, in tackling the whole issue, that the Government have to have a set at industry, the one body which can save the situation? The hon. Member for Stoke-on-Trent, South talked about exports. Exporting is no fun today. In the olden days merchantmen would get on a ship and go off to Australia for five weeks, or a week on one of the "Queens" to America, and that was all right. But that has all changed. Firms do not allow that now. One has to get into a jet, get there in six hours, and get stuck into the job of selling. I do not know how many hon. Members opposite have tried to sell British goods abroad. I would say very few. I have spent many years trying to sell British aircraft in foreign countries. It is a difficult task and not very enjoyable—[Interruption.] I sold 100 in the Far East long before the hon. Member for Smethwick (Mr. Faulds) was a Member of the House.

Why make a set at industry by raising Corporation Tax another 2½ per cent.? I should like to see the Government abolish the Selective Employment Tax and not withdraw it except in development areas. It will cost I.C.I. and Courtaulds £1 million each on the withdrawal of the S.E.T. premium, and B.M.H. £1.8 million All this money should have been for new plant and machinery to produce more efficiently. It is one thing to lose the export rebates and for the Bank Rate to go up to 8 per cent., which I hope will be for a temporary period. We have to give incentives to people in industry and the people working in industry. That is not what we have had from this Government. They hit with the hammer every time they make an announcement.

We have been told that agriculture needs to produce more. I would have thought that in recent weeks the Minister of Agriculture and the economists in the Government would have been working on this problem. We have been told that 150 million or 200 million tons of additional food is to be grown on this island. However, the Government only think of agriculture during a General Election, or during a crisis, when they trot out the word "agriculture". The matter has not been thought out. I should like to know before the debate finishes—if I may have the attention of the right hon. Gentleman the Secretary of State for Economic Affairs—the figures for the increase in agricultural production. The agricultural industry in Britain has had a rough time over the last three or four years. The outbreak of foot and mouth disease in the North-West recently has had disastrous effects for many farms and has limited output. That must be taken into consideration in settling the affairs of the agricultural industry for the future.

I have never been a great pro-South African; in fact, I have been rather critical of South Africa, but I have detected recently a rather more enlightened policy on the part of the new Prime Minister of South Africa. He has not gone all the way, but he has gone some way in this respect and I have found that quite encouraging. South Africa is our second best customer. We have a favourable balance with South Africa of £70 or £80 million. Every British ship going to the Far East has to go round the Cape and it may call at a South African port on the way. Yet we are not prepared to provide even elementary armaments to South Africa.

This is a monstrous situation. The Government are prepared to operate sanctions against Rhodesia, but not against South Africa, because they know that we cannot afford that. It is an extraordinary situation that British ships calling at Durban and Capetown are supplied there with Rhodesian foodstuffs. When I hear of other countries trading with Rhodesia from all over the world, and trading very well, I am amazed that we should go on trying to keep our so-called pride. This situation will deteriorate more, and we cannot afford it.

What a situation it is when we have to devalue and Mr. Ian Smith keeps his currency at par! I ask the Government to look at the whole matter objectively. The people I feel really sorry for are those in the poorer countries within the Commonwealth. There are very poor countries, in the West Indies and elsewhere, which have trusted this country for over 100 years and have kept funds in Great Britain which they will now find are worth 14.3 per cent. less than they were. They believed the Prime Minister, the Chancellor and the Government, but what is to happen in future? Will they believe a Labour Government? That would be very surprising.

The Government are incapable of leading the people. They have made too many mistakes in the last three years. Of course they have had bad luck over Suez and the docks strike, but they have had good luck as well. The terms of trade have been in their favour, and they had more good will than any Government has ever had before when they came into power. They frittered the whole of it away.

The one man I feel especially sorry for is the Labour candidate in Derbyshire, South-West, who has not even got the Foreign Secretary up there to support him. We shall see the result of that by-election on Thursday or Friday. If the Government are to tackle these problems, I ask them to take the matter more seriously, to stop nationalisation, to consolidate what they have done so far, to make a success of steel but to stop there. They should give the facts to the people. They are entitled to know them.

8.14 p.m.

Mr. David Marquand (Ashfield)

There was one point in his speech on which I agreed with the hon. Member for Macclesfield (Sir A. V. Harvey), so perhaps I may offer him one small olive branch to compensate for our exchange across the Floor. I thought he had a point when he spoke of the need for greater efficiency in the Civil Service, but that was the one element of truth in his otherwise nonsensical farago.

One hon. Member opposite compared my hon. and right hon. Friends with con- victs who had recently escaped from prison. I feel like one who had been sitting in a condemned cell and who has now been reprieved. In the last nine months at least, and in a way in the last 15 months, I have had to support a policy which seemed to be sinking deeper and deeper into the sands. At last we have managed to escape from a policy which by the end was bankrupt, and I am very glad that we have done so.

My hon. Friend the Member for Stoke-on-Trent, South (Mr. Ashley) complained about the unfairness of attacks from Members on the Opposition benches. I am very glad that hon. Members opposite are attacking the Government so furiously and to frenetically because it indicates that at last we have made a clean break from the kind of policies which hon. Members opposite support. I am delighted and thankful that that has happened.

We have had a number of criticisms from the party opposite about devaluation. Some of the critics have spoken in the neanderthal terms of pre-Keynesian economics as if any change in the exchange rate was immoral, but most of the criticisms have concentrated largely on the timing of the operation. If that is the essence of their criticism and if they think the timing was wrong, I ask members of the Conservative Party when it would have been the right time to devalue? What would have been a better time? The Leader of the Opposition said on television last night that this was the wrong time; when would he have done it? Presumably he would not have done it in the past but he thinks that the right time would be in the future. If so, we have to examine clearly the alternatives to devaluation.

We are discussing economic policy and choices. It is not sensible simply to rule out one choice without saying what alternative choice hon. Members opposite would have taken. If a country finds itself in balance of payments problems, it is of course arguable and may on occasion be true that those balance of payments problems are caused by over-heating in the economy. It is possible, it could arise. The measures of July 1966 were taken on the assumption that the balance of payments difficulty in which we found ourselves then was due to over-heating and over-heating in the economy alone. That was the logic of the July, 1966 measures.

At that time I thought that on balance this was right. Since then, however, it has become abundantly clear that that assumption was false and that it was not solely over-heating which was responsible for balance of payments problems. It became clear before the closure of the Suez Canal that the July, 1966, measures had not shifted resources sufficiently into exports and had not damped down imports sufficiently. It was quite clear from the trade returns then that those policies had not worked and, therefore, it could not have been simply over-heating in the economy which had caused the balance of payments problems which led to those measures.

If that were so, there could be only one other explanation. The other explanation could only be that this country's balance of payments was in a state of fundamental disequilibrium. I came to that conclusion last April. My right hon. Friend the Chancellor had come to it apparently 10 days ago. I do not think there is any point in arguing now whether or not he should have come to that conclusion before. The point is that this conclusion has been staring us in the face more and more over the past few months. This conclusion is not simply held by members of this party but it is held by every responsible foreign observer who has looked at the British economy.

What does the party opposite say about the Report of the E.E.C. on Britain's application for entry to the Common Market? If ever there were a call for devaluation of a country's currency, that can be read between the lines, and sometimes actually in the lines of that document. Do hon. Members opposite think that those people after a hardheaded examination of this country's position, came to that conclusion that the economy was in a state of disequilibrium because they are Socialist fanatics? They came to that conclusion because they are hard-hearted economists and politicians who could plainly see the logic of the facts.

For a country which is in a state of fundamental disequilibrium devaluation is the only reasonable course. The idea that it is somehow buying time, that it is somehow an escape, is nonsense. The alternatives are buying time. The alter- natives are an escape. To impose import controls in a situation of fundamental disequilibrium could by definition only make the disease worse than it was before, because inefficient industry would be protected and Britain would be announcing to the world that it could not stand on the existing exchange rate and had to adopt an artificial crutch.

Would a loan be any better in a state of fundamental disequilibrium? A loan would simply have ensured that when it ran out the state of disequilibrium would be even worse than it was before. Obviously the only reasonable, realistic course, the only course which is accepted as being responsible and realistic by the International Monetary Fund, is that which my right hon. and hon. Friends have had the courage and the wisdom to take.

It is often said that devaluation is not a panacea. It is often said that it is a risky course. Of course it is not a panacea. Of course it is a risky option to take. But the alternative of a loan with the deflationary strings which would necessarily have been attached to it would have been a far greater risk. What would a continued deflationary policy in this situation have meant? It would have meant, first, that the regional policy of my right hon. Friends would have been destroyed. We cannot hope to get regeneration of the less prosperous parts of this country in conditions of general deflation. We cannot hope to encourage manufacturers to go to development areas when they know full well that there is not adequate demand for their goods. The one and only time when we can hope that the sort of regional policies my right hon. Friends have been pursuing for the past three years can work effectively is when they are applied in conditions of full employment and when the economy is working at full capacity.

The same applies to the structural reforms of industry for which my right hon. Friend the Secretary of State for Economic Affairs is particularly responsible. These structural reforms work only if those in industry are prepared to take risks. People cannot be asked to take risks in a stagnant economy, facing high unemployment and low demand.

A continued deflationary policy would have meant, thirdly, that the incomes policy would have been a total failure. Working people cannot be asked to accept an incomes policy in conditions of unemployment, in a situation where social programmes and social expenditure cannot be properly expanded. In contrast to some of my hon. Friends, I have supported the incomes policy as one of the Government's most important long-term measures and as one of the most valuable things the Government have done, but I have been bitterly distressed to see how the policy has gradually been whittled away over the last nine months because it has had to be operated in a deflationary situation.

Above all, the deflationary alternative would have meant that there would have been no hope of the Government's being able to carry out the social programmes which they were elected to carry out and which everyone on these benches believes to be necessary and right. We could argue—some of us have argued—that, even in conditions of very low growth, even in conditions of unemployment, even in conditions of unnecessary spare capacity, it was still necessary to fight the battle against poverty and to shift more resources to social expenditure than we had done up to now. Obviously, it will be far easier to do these things if we can have an expanding economy. I believe that we can now look forward to that.

I do not believe that because we have devalued we have turned the key to Utopia. Of course we have not. There will be a price to pay. There must be a price to pay. No one in the Labour Party will do the Government, the party, the country, or the long-term aims of democratic Socialism, a service if he attempts to pretend that there is no price to be paid. If we make that pretence, we shall only ensure that the benefits of devaluation are eroded away and that we find ourselves in a similar situation in a few years' time.

It is necessary, therefore, to point out that some measures of disinflation have to be carried out by the Government. Before this step was taken—this is one of the reasons why a few weeks ago I felt so depressed about the whole situation—it was clear that next year the economy would go ahead too rapidly for the balance of payments to stand it at the existing exchange rate. There was in the economy already too much steam for the balance of payments to hold unless we changed the exchange rate. By devaluing we have given an extra stimulus to the economy of tremendous proportions. We have added an extra element of reflation vastly greater than we added before, because of the new incentive which has been given to the export industries.

If this devaluation works, we shall have even more steam in the economy. It is therefore common sense that the Government must take out some of the steam out and accompany devaluation with measures of disinflation. I do not think that there can be any denying this. There is no point in pretending otherwise. Those who complain about the mixture of deflation and devaluation are simply burying their heads in the sands. They are not doing themselves, the Party or the policy any service.

I agree with my hon. Friend the Member for Stoke-on-Trent, South (Mr. Ashley) and disagree with the otherwise superb speech of my hon. Friend the Member for Birmingham, All Saints (Mr. Walden) in that in this situation an incomes policy will be even more necessary than it was before. Clearly there will be price rises. There have got to be price rises. There can be no dispute about that. I agree with what my hon. Friend the Member for All Saints said, that wages will follow suit, but we have got to make sure that there is no explosion of income increases in the months to come, or once again we shall have torpedoed the ship on which we have now set sail.

I believe that an incomes policy will be vitally necessary. I do not think that we can go back to the statutory policy of nine months ago. In a way I wish we could. From a purely economic point of view I wish we could, but from a psychological and political point of view I recognise that we cannot. This is a battle which my side has lost. I admit this. My hon. Friend the Member for Liverpool, Walton (Mr. Heffer) has won, and may he enjoy his victory. I think that some of the other policies that he supports would be more likely to work if he had not had that victory—

Mr. Michael Shaw

Does the hon. Gentleman not recall that, having received an assurance from his leader in 1966 that statutory enforcement would not come upon us for a wages policy, within 10 days or so it came upon us? Does he not find it an ominous sign now that he has been given this reassurance?

Mr. Marquand

I am sorry the hon. Gentleman has not understood my point. I have just said that I accept that we cannot have a statutory policy. I accept that the political situation in the Labour movement is such that we cannot do this. This is a pity in a way, but I accept facts.

Even if we cannot go back to a statutory policy, we have got to be very firm about the need for an effective voluntary policy. Because of all the battles over the statutory policy, because of the struggles that went on during the last year and a half, I think there is far greater hope now for an effective voluntary policy that acre ever was in the history of this country before. But I accept that this is one of the big question marks which we have got to face if we support this policy honestly and with clear sight.

This means that we have got to ask for sacrifices from our own people if the policy is going to work. It is dishonest and stupid to attempt to deny it. The difference is that we are now asking for sacrifices with some light at the end of the acme], whereas two weeks ago the Government were asking for sacrifices in conditions of total darkness. This is why I support this decision wholeheartedly and why I shall be able to vote for the Government in the Division Lobbies tomorrow with more enthusiasm and more confidence than I have felt for some few months past.

8.32 p.m.

Sir Tatton Brinton (Kidderminster)

I have listened with great interest to many of the speeches from the benches opposite, including that of the hon. Member for Birmingham, All Saints (Mr. Walden), whom I wish to quote and who I see is now leaving the Chamber. The point which I find is common to all of those speeches is, on the one hand, that they seem to be suggesting that what has happened to us, which in anybody's book must he a major disaster, is in some way a good thing—this has been the tenor of nearly every speech I have heard, and I have heard all except one—or, alterna- tively, that if it is not absolutely a good thing in itself, devaluation is a good thing because it has become the inevitable course to take in this country.

I do not accept either of those propositions. It may be that this is now the only thing that the Government could have done, but that does not make it a good thing; nor is it a credit to the Administration who have produced this dire result in the short time of three years.

There has been a great deal of reference to speeches by my right hon. and hon. Friends. It is suggested that we have in some way made this into a moral issue. I do not attempt to make it into a moral issue, or an immoral one, but I am a little shocked at the attitude of certain hon. Members opposite. For instance, I should like to quote the hon. Member for All Saints, although I have not given him notice that I had intended to do so and he has now left the Chamber. He said—I am paraphrasing him—that we did not really owe any moral obligation to those who have deposited their money with us if, as a result of our action, that money becomes devalued, because—and this certainly is true—the investor takes risks. He takes risks in the hope of profit, and sometimes he gets caught. I believe in the capitalist system, with the risks inherent in it, and, as an investor, I accept that there is always a risk in any investment which may ultimately turn out to be profitable. But, if I were a banker, I should feel ashamed to be the cause of loss to the people who had invested with me, and to suggest otherwise is, in my view, to burke what is certainly a moral issue.

It may be inevitable that, at times, one has to let one's friends down. I suppose that all of us have had regrettable moments in our lives when, perhaps, in some minor way, we have let down those who have trusted in us or have relied upon us. It can happen to anyone, and sometimes it is inevitable. But let us never suggest in anything we say—I have heard it suggested quite frequently today—that it is morally excusable or almost a good and virtuous thing to do. Let us be ashamed that it has happened. Let us be ashamed before those whom we have let down that this country has been so ill-administered and ill run that this has happened to people who had faith in us.

Mr. Tilney

Have we not also acted as trustee for certain colonial territories which have funds in this country, and have we not been a dishonest trustee?

Sir T. Brinton

Yes, I entirely agree. The hon. Gentleman the Member for Ashfield (Mr. Marquand), in a speech of considerable frankness, for which I give him due honour, told us openly that he has for a long time been supporting a policy which he considered to be bankrupt, and he is now relieved no longer to have to support that policy. For the first time for some period now, he tells us, he will go into the Lobby to support a policy in which he believes instead of one in which he does not believe. It is a rank confession of the bankruptcy of the whipping system if hon. Members can admit that they thought that their Government were wrecking the country by their previous policy but they did nothing to demonstrate that view.

I give the hon. Gentleman credit for one thing. He is the only hon. Member I have heard to manage to torpedo his own ship. I believe that it can be done—I was not in the Navy myself—the occasion being when the torpedo one has fired oneself is "blown off course".

Mr. Robert Maclennan (Caithness and Sutherland)

Perhaps the hon. Gentleman does not follow the speeches of my hon. Friend the Member for Ashfield (Mr. Marquand) with the close attention which we on this side give to them. Otherwise, he would have recognised that my hon. Friend has been advocating the present policy for many months and has made his opinions quite clear. There is no question of a change of mind on his part.

Sir T. Brinton

It used to be the custom in the House that the vote followed the voice. [Laughter.] I know that it is not now, and more is the pity.

Mr. Maxwell

Physician, heal thyself.

Sir T. Brinton

I trust that we shall not have too many interruptions from the buoyant hon. Gentleman below the Gangway.

I was saying that it used to be an honourable tradition that the vote followed the voice, though it is not so now. Equally, apparently, Ministers who have let the country down and have to admit to it do not feel themselves bound to resign.

Mr. Marquand

I think it was Lord Butler who once said that this House is about power, about a struggle for power between two organised political parties. The alternative to supporting my right hon. and hon. Friends would be to support that bunch over there. That is why I did not turn against my Government in the Division Lobbies.

Sir T. Brinton

I think that we need go no further into the rather strange motives which seem to move hon. Members opposite.

We have heard some beautiful theoretical speeches from hon. Members opposite, many of them from hon. Members highly qualified in academic subjects and some of them extremely good and learned speeches. I am not a theoretician. I am one of the chaps a great deal of the talk is about. I am a director of a manufacturing company which exports a good deal. I shall, therefore, talk a little about the practical effects of what has happened.

I am prepared to accept that in the position at which we had arrived devaluation may well have been the only answer. I have already criticised what led to it, but let us accept the situation as it is. We have a Government of a sort, and they have devalued. What flows from that from the point of view of those who are being asked to do the job? It is generally agreed that the salvation of the country and the way by which we shall get out of our balance of payments difficulties must depend largely on our exporting efforts. A contrary opinion was suggested by the hon. Member for All Saints, who said that saving through the substitution of imports by domestically-produced goods would possibly be greater than earnings from exports.

Although there may be quite a lot in what the hon. Gentleman says, most Ministerial announcements, speeches and representations seem to assume that the main burden of solving the burden must fall on the exporter, who, it is suggested, now has a 14.3 per cent. advantage in selling his goods. But I want to follow up something said by my right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser), with which I entirely agree. I, too, have been doing my sums, both for the benefit of my speech and for the benefit of my business.

The withdrawal of the S.E.T. premium will mean a perceptible difference to every manufacturer in the country. Some of them are not necessarily exporters, but if one is an exporter one must reckon with this. The estimate for my own business is that it will cost us upwards of ½ per cent. on the sales value of our goods. The withdrawal of that and the effect of Corporation Tax on our present budgeted level of profit which we hope to make this year, although we have not yet made it, is equivalent to 10s. a week for each of our employees, male or female. That is not an enormous figure, but it is part of a cumulative effect.

The withdrawal of the 2 per cent. export rebate is another. In the carpet industry, in which I work, raw materials represent a substantial amount of the sales value of a square yard of carpet, and the best estimate we can now make—this must be "guesstimate"—is that the increased prices of foreign-bought raw materials for carpets—wool, cotton and jute—plus a certain element in the synthetics we use, are likely to amount to 2½ per cent. on the sales value of our goods. Altogether, that is 5 per cent., so that our 14.3 per cent. advantage is already reduced to little over 9 per cent.

I have made no estimate for various overheads, such as transport in particular, which is bound to go up, nor for the fact that if we succeed in increasing our ex ports, as we shall try to do, we shall probably have to incur extra bank finance at the not inconsiderable rate of about 9 per cent. The banks usually charge ¾ per cent. or 1 per cent. over the current Bank Rate.

All those costs must be covered. When exporters are asked to do this job, let us not assume that by this wonderful Government decision they have been given an immediate advantage of 14.3 per cent.

Mr. Maxwell rose—

Sir T. Brinton

I am sorry. I shall not give way.

Mr. Maxwell

May I ask the hon. Gentleman a very brief question?

Sir T. Brinton

I shall not give way to the hon. Gentleman, because I have seen him so often interrupt hon. Members in the middle of their speeches with purely flippant comments. I know that he is a very distinguished businessman who would have something to contribute if he cared to do so.

I should like to say a few words about Corporation Tax. When it was imposed in 1965 it was suggested that the rate, which was not fixed until 1966, would be 35 to 37½ per cent. At that time, being cynics and having had some knowledge of Socialism in action, we assumed that the rate would be 37½ per cent., not 35 per cent. But it was calculated, and admitted by Ministers, that the rate required to produce at that time the same revenue for the Exchequer as under the old system of Profits Tax and Income Tax on corporations would have been 36½ per cent. Now it is to be raised to 42½ per cent. This is 6 per cent. higher than would have produced in the same conditions the same revenue as the old system, remembering that the old system already included Income Tax at 8s. 3d. in the £ and not at 7s. 9d. This represents an enormously increased burden since 1965—not even two years—on corporations. About one-sixth extra is to be milked out of them in Corporation Tax.

The 40 per cent. was already an excessively high rate, and higher than was by implication suggested by the Chancellor of the Exchequer at the time of the imposition of the tax. With the increase from 40 per cent. to 42½ per cent., one gets what appears to be the following possible sum in the case of a manufacturing firm. Let us suppose that before Corporation Tax it was accustomed to paying out about one-third of its gross income in the form of dividends—a reasonable proportion, rather lower than in many industries—and let us suppose that today it intends to maintain its rate of dividend in relation to profit, and let us take the figure of 35 per cent. for simplicity. Let us say that the firm wants to pay this out of the profit. Under the new rate, the profit is subject to 40 per cent. Corporation Tax. So out of every £100 that the firm makes it first has to pay 40 per cent. Corporation Tax, and then it takes £35 out of the remaining £60 to pay the dividend, and it is left with £25 to plough back.

With the Corporation Tax going up by 2½ per cent., in order to maintain the dividends at the same level—dividends have been heavily penalised already by the imposition of Corporation Tax—the firm then has to take an extra 2½ per cent. out. What is it left with? It can plough back not 25 per cent. but 22½ per cent. I suggest that in practice corporations, which are finding difficulty in any case in maintaining dividends, will be forced to take the 2½ per cent. out of the sum ploughed back. In other words, it will be one-tenth of the possible amount to be ploughed back, and so that amount is being milked out of them by this addition to the Corporation Tax. It is a very serious matter.

The President of the Board of Trade said, among other things, that the Government were determined to get growth and that a rise in manufacturing investment was needed. I agree with him that this is required. It is the foundation of any future prosperity and the foundation of the solution to our long-term balance of payments difficulties. Of course we must have capital investment. But what happens? The first thing that is done immediately we are faced with balance of payments difficulties is to clobber the very people who can get the Government out of their trouble. I was going to say that it is absurd to kill the goose that lays the golden eggs, but I feel that this is such a hackneyed phrase that one must no longer use it.

Hon. Members

Give us the eggs.

Sir T. Brinton

I am interested to hear that interjection. Hon. Gentlemen opposite are always saying that industry makes far too high profits and must be controlled. We had some blood-curdling remarks from the hon. Member for Liverpool, Walton (Mr. Heffer) about ensuring that the profits and dividends of industry were held down. Yet hon. Gentlemen opposite are now implying that industry is not making the profits. Hon. Gentlement opposite must make up their minds what they mean. Let us assume that industry is capable of making profits provided that it is given any incentive to do so.

I want to deal with the sort of burdens which are being envisaged for the people the Government are asking to export more. Various vague statements have been made. The Prime Minister's speech on television was an unsavoury performance. [HON. MEMBERS: "Cheap."] Of course it was a cheap speech, because in the circumstances of a major national tragedy it was a cheap party political speech.

Among the things the speech did contain that it should not have contained was, of course, the usual bit of flummery that this was not going to hurt, that the Government would cushion the effect on the lower paid workers, protect people against council house rents being raised and be ruthless in the application of regional policies. Whether those objectives are desirable in themselves or not, the fact is that they will cost someone some money. Who? If we are to cushion the lower paid workers, then, of course, the burdens, which will fall on all of us anyway, will be doubled on some. If we are to protect council house tenants against rises in rents, who will pay the difference? Presumably, the ratepayers. If we are to be ruthless in the application of regional policies, what is meant by "ruthless"?

Does this mean, for example, intensification of the I.D.C. system? As my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) pointed out—and this is a genuine criticism in the West Midlands and elsewhere—the system is administered in such a way that it frequently tends to inhibit growth by existing companies, even where, quite often, it is growth of only a marginal nature.

It is a sad complaint in the prosperous areas that, because the North-West, Scotland and Wales and other areas are short of industry, industries in the prosperous areas are prevented from growing. I do not quarrel with the system in that if a new factory for separate operations is to be built it should be set up in a development area. But the working of the system in practice is far more intensive and detailed than that.

It can happen—and has happened in the West Midlands, but I shall not name the place—that a relatively small development in a sizeable, established firm, which would employ an extra handful of people, say 20 or 25, has been refused on the ground that the development should take place, for example, at Newcastle. I wish hon. Members opposite, before branching out into theories about what should be done for social reasons, would appreciate that in detail these things become nonsense. They discourage and agonise the wretched man on the ground trying to do a job.

For example, let us take the case of a large established firm in the West Midlands which wants to put up a shed which will employ an extra 30 people. This would not upset the balance of employment in the West Midlands, but it is told that it cannot go ahead unless the building is put up elsewhere. It may, therefore, have to carry out the operation in another place, with the result that highly paid and very important key personnel, both technical and managerial, are going to have to spend much time motoring to and fro to the branch factory, wasting their time, hardening their arteries and bringing on incipient coronary trouble. [Laughter.] It is all very well to laugh, but hon. Members opposite do not have to do it. They only get coronary trouble from running up and down here. I speak from experience. My own firm set up a factory before the war 110 miles away, and I know what I am talking about. Hon. Members opposite, who could not even run a whelk stall, should try to understand what they are asking us to do.

Mr. Maxwell rose—

Sir T. Brinton

The hon. Gentleman cannot walk into the Chamber at about a quarter to nine and expect to be allowed to interrupt. He is always doing it; I have watched him frequently.

Let us remember that the Prime Minister is very keen on military metaphors; one was quoted to-night—something about Waterloo. Let us give him another to take home to-night. He is throwing his troops into battle to redress the balance of payments, but by measures taken against industry he is denying his tanks ammunition, and his spearhead is led by the ambulances.

8.55 p.m.

Dr. M. S. Miller (Glasgow, Kelvingrove)

Although I am conscious of the seriousness of the decision to devalue, I am also aware for the first time for many months of an entirely different atmosphere in the House, an atmosphere in which the struggle for the views which many of us on this side of the House express, the Socialist ideology, comes slap up against the policies of the Tories.

I find the exchange of views refreshing. It does a lot to renew my faith. We might now be getting somewhere, and perhaps that is what is worrying the Leader of the Opposition. Unfortunately, most of the Tories stick to their old, out-dated views. That is one of the faults which I find with the Tory Party. The Tories do not believe that people can and often do respond to higher stimuli. It is difficult, but it is possible, and it is rewarding in terms of human benefit, and I advise hon. Members opposite sometimes to try it.

I should like to comment on what was said by my hon. Friend the Member for Pembroke (Mr. Donnelly). I might be more inclined to give credence to his views if our competitors, such as France and Germany, provided social services inferior to ours, but they do not. Nor do I believe that social services should be a fall-out, the crumbs from the rich men's table.

It is usually inadvisable to make a virtue out of expediency, but I do not regard devaluation as an expediency. It is a positive action which, when weighed against other possibilities, has the best chance of striking at the roots of what has been known as the English disease. In spite of contrary contentions, I believe that devaluation should have been carried out some time ago, perhaps as soon as the mess which was left by the Tories in 1964 had been fully assessed and evaluated.

However, that is looking at it with the benefit of hindsight and once the decision not to devalue had been taken, it was right to defend that decision and to try to solve our problems by other methods. Not to have succeeded completely in solving those problems is not a disgrace on the part of the Government. It is rather, perhaps, an indication of the deep-rooted and stubborn nature of our difficulties, and we shall probably not know for some considerable time how near we came to success, success of a kind, because, although the Government had shown a realisation of the nature of our sickness, their novel policies, such as the prices and incomes policy and the redeployment of labour, had not been given sufficient time to produce the desired effect. The effects were beginning to show, but, unfortunately, our margin was insufficient to withstand the consequences of several disasters which befell us. The Middle East crisis, the docks strike and, we must admit, our correct moral stand on Rhodesia affected the position.

It was churlish of the right hon. Gentleman the Leader of the Opposition to brush aside these matters in so cavalier a fashion in his broadcast. As everyone says, devaluation is not an end in itself. To quote from one newspaper: For the first time since Ministers took office, it now looks as though there is a framework of financial policy compatible with economic expansion. The internal position of sterling and that of our domestic economy, instead of pulling against each other, are now such that they can be reconciled with growth. Devaluation is perhaps in the nature of a rather crude anaesthetic—crude because the patients must feel some pain—which will permit the surgeon to get on with his curative work. I contend that it was the Tories who frittered away the benefits handed to them by the 1949 devaluation. If they had taken a leaf out of the German book, they would have used the breathing space to ensure that the business community pushed like mad into the export market instead of waxing fat on a home consumer boom. During a visit to Germany in 1954 it was quite obvious that the German boom had not then begun because the Germans, for at least 10 years after the war, were engaged in doing what hon. Gentlemen opposite should have been doing.

I regret that towards the end of the period of the second Labour Government after the war that Government also lost their nerve and began the removal of controls which, had they continued for another three or four years, might have made all the difference. What devaluation must do, and has an excellent chance of doing, is to produce an export-lead boom. It might be wonderful for our inward- looking business community to make money by dealing among themselves, but Britain must export and we must encourage our industrialists to get out and about. Trade weeks and commercial attaches are not sufficient.

We should employ experts who know all about the areas to which we wish to export, who know thoroughly where and how our products can be sold. I would like to make a plea that when an export-led boom begins, as I believe it will, the benefits should be channelled into the development areas, and that Scotland should not be left out. It will be a tragedy if recovery took place but left the previous wide discrepancies in the regions.

We could accelerate our recovery by import controls. Even the United States is not averse to this sort of action. In my opinion, we should be buying nothing from abroad that we cannot manufacture at home. I know that it is contended that import controls safeguard the weak, but we should buy nothing that we cannot manufacture in this country, except by a process of very hard bargaining.

I have been asked to conclude now because the two Front Bench speakers are ready to speak, so I will only add that devaluation by itself is not enough. We should have price control which really works. We should have an incomes policy which is not merely a wage freeze, but which takes into account profits and dividends. The Government would be well advised to make sure that the burden of difficulty is shared as equally as possible by everyone. Only then will the people respond.

9.5 p.m.

Sir Keith Joseph (Leeds, North-East)

Although we on this side of the House will listen with the greatest interest to the Secretary of State for Economic Affairs, there is a certain sadness on these benches that we have been deprived of the Foreign Secretary, whom we had hoped would wind up the first day's debate.

The debate has been notable. My right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) summed up the point of view of the Opposition when he said that the Government's main job was to revive confidence in wealth creators at all levels. We have heard a number of experienced speakers from this side of the House. We heard my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), whose knowledge of finance made his speech particularly worth listening to. The knowledge of business and exporting made the remarks of my hon. Friend the Member for Kidderminster (Sir T. Brinton) especially relevant. The shrewd comments of my right hon. Friend the Member for Stafford and Stone (Mr. Hugh Fraser) were very cogent indeed. I shall refer to a number of other speeches later.

It would be wrong, however, to ignore the outstanding contribution made to the debate by the brave, trenchant and realistic speech of the hon. Member for Pembroke (Mr. Donnelly). He has a firmer grip on the realities of life than all hon. Members opposite and probably than most members of the Civil Service who advise Governments, despite their sincere diligence.

We on this side want the balance of payments to be put right, but we have no confidence whatsoever that it will be achieved under the present Government and the present Prime Minister.

I should meet straight away the challenge inherent in the speeches of the hon. Members for Ashfield (Mr. Marquand) and Birmingham, All Saints (Mr. Walden). They stated that, in their "expert" view, the price structure of this country had been in fundamental disequilibrium and for that reason, they said, devaluation was the right course for the Government to take. We believe, not that there is any fundamental disequilibrium in our price structure, but that our price structure and costs have been loaded by excessive and wrong-headed taxes; that our business efficiency has been impeded by excessive Government expenditure, by an excessive and inefficient public sector, and by the obstruction of business energies by bad, naïve, centralising, subsidising, government.

We believe that if the Government had been prepared to control demand more sensitively—and I well recognise how difficult that is—and to stimulate industry by tax reform and competition and to cut public expenditure, devaluation would not have been necessary. Furthermore, we believe that if they do not do these things, devaluation will not work.

We condemn the policies and incompetence of the Government and the continuous crisis to which this incompetence and these policies have led and of which devaluation is the outcome.

My right hon. Friend the Leader of the Opposition warned the country clearly enough. In July, 1966, he said: 'Unless we take action to avert it, we are faced with the threat of national bankruptcy'."—[OFFICIAL REPORT, 26th July, 1967; Vol. 732, c. 1452.] The answer to that from the Prime Minister was, as usual, complacent, evasive and reassuring. The Government have now devalued against all the arguments of their own Front Bench spokesmen. The responsibility must be pinned firmly on the Chancellor but, above all, on the Prime Minister.

I am sorry that the Prime Minister is not present, since I shall concentrate for a few minutes on his own contribution. This is the first time in 300 years of the office of Prime Minister that the country has had a graduate economist in No. 10, Downing Street, yet that graduate economist has allowed his Government to be taken continuously by surprise by economic events. His Government, and he in charge of it, ignored the danger signals at the end of 1964. They ignored the danger signals in 1965. They ignored the danger signals in 1966, and again they ignored the danger signals just now in 1967. As a result, they have on each occasion had to act more severely than they would have had to act had they acted earlier.

All this comes from the Prime Minister, who is a graduate economist, who has been in charge of the Government throughout, who is First Lord of the Treasury and who has recently taken over as economic overlord. The economic failure of the Prime Minister and of his Government is absolutely complete. He has never seen or foreseen what would happen, he has never had a contingency plan, he has led the party of expansion into contraction and he has failed in the last three years, even now, to bring help to those who are most needy in our society.

We have had three years that the locusts have eaten, and the locust-in-chief is the Prime Minister. Let me add up the national resources that the locusts have consumed under the Prime Minister. First, £370 million has been switched from the dollar portfolio into our reserves. Then, £905 million—I take the new post-devaluation figures—of loans has been taken from foreign countries and bankers and used. The American loan, already increased in value by the first Socialist devaluation, has now been increased in value by the second Socialist devaluation so that despite 12 repayments of instalments by Tory Governments, it now stands at a higher figure than when it was originally borrowed after the war. [HON. MEMBERS: "Shame."]

I have not finished the catalogue yet. Today, the stocks of this country, built up as part of the 1964 expenditure, which has been so much criticised—because expenditure on stocks accounted for a great deal of the current account deficit in 1964—are £400 million less in value than when the Socialists took over—more consumption by the locusts. [An HON. MEMBER: "How much is the dollar portfolio worth now?"] I have mentioned the £370 million which has been put into the reserves. That the dollar portfolio has grown in value is no credit to the Government.

Now, I come to the most damning figure of all in the catalogue. It is that the Government have exploited the increasing impoverishment of the countries which supply us with raw materials, because the terms of trade have gone in favour of this country by no less in aggregate than £255 million in the last three years. The catalogue, therefore, of the resources which the locusts, under the locust-in-chief the Prime Minister, have consumed is a formidable indictment of Government policies.

The strategy of any Government, who are intent on improving the standard of living of the people, including the poorest, must surely be, as my right hon. and learned Friend the Member for Wirral said, to release productive energies. Yet the Prime Minister has led his Government to do precisely the opposite. He has excelled in consulting industry, no doubt, but he has paid small heed to the lessons of such consultation.

The Government, as my hon. Friends one by one have emphasised, have hammered industry at every turn, and even in this package there is a gratuitous addition of £80 million of tax burden to industry through increased Corporation Tax. The Government misunderstand the needs of private enterprise. They have distracted it by precipitate, confused tax changes; they have weakened it by spreading an inefficient public sector which has added astronomically to public expenditure. Despite the terrible les- sons which any Government should have learned from the disaster of the last weeks, we look like having the mixture as before. There seems to be no sense of humility, no idea of a change in strategy. All that has happened is they have devalued.

Now let us analyse tonight the package which goes whith that. The Prime Minister, as my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said earlier this afternoon, has become an expert in double-speak. He uses tough words to one audience and whispered assurances and reassurances to another audience. If he goes on like that, then the benefits of devaluation will quickly be lost.

The Government should, in our view, put the most powerful pressures on industry to be efficient. That is the Government's job. But let it be by enforcing competition, by enforcing disclosure by tax reform, and by trade union law reform. Once they have done these things, they should cease to obstruct industry, and should let industry get on with the job, and for this purpose they should cut public expenditure and cut interference and cut centralisation, which are all the enemies of efficient industry. Precisely the opposite seems to be occurring—precisely the opposite—as I have explained, because of increasing Government expenditure, taxes, centralisation and interference.

Now we ask ourselves in this debate, is this devaluation to be the start of remedy, or merely a respite? Is it to be, in the Prime Minister's 1961 words, a springboard or a slide? It depends entirely on the Government's performance. Let there be no mistake, the Government are fighting now not just to reverse the balance of payments but to recover the confidence on which business at home and this country's treatment abroad depend. It is not just the balance of payments which is at stake, vital though that is. Confidence is even more important.

Now on the benches opposite hon. Members, with one or two exceptions, are solid at the moment behind the Government. The hon. Members for All Saints and Ashfield have rejoiced that the agony of recent months, when they have had to support what they quite wrongly misdescribed as Tory policies, is over, but I would like to say to them that the agony has yet to come. My right hon. Friend the Member for Stafford and Stone was absolutely right when he said that the essence of the question we are debating is whether the Government will make devaluation stick. All may seem approving now, but, as usual, hon. Members opposite have not read the small print, or they have not understood it. If devaluation is to be effective, then it is bound to hurt. If it is not effective, then we shall not make the progress forecast by the Prime Minister.

Of course, the President of the Board of Trade, in his opening speech, made a good debating point. He said the Tories were simultaneously alleging on the one hand that the Government would squander the opportunity and, on the other hand, that they would lower the standard of living. But these things are not all black or white. It is a question of degree. No one on this side of the House imagines that the Government would totally squander the opportunity, nor are we saying that everyone is to suffer to the full limit. We on this side believe that some people, the vulnerable sections of the community, should be protected, so far as is compatible with gaining the benefits for the country from devaluation. But we want to have confidence that the Government are going to make the devaluation stick.

I want to ask the Secretary of State a number of questions of which I have given him prior notice. First, will he give us a firm date when the export rebate will come to an end? We regret that it is coming to an end, but we want to know the date. Secondly, although we rejoice in the diminution of the obnoxious Selective Employment Tax, we can have no pleasure in the partial removal of the manufacturers' rebate in this case, since that simply adds to manufacturers' costs. We want to know when the S.E.T. rebate will come to an end because businessmen need to know in order to quote at home and abroad.

We want to know a little more about Government expenditure cuts. The hon. Member for Ebbw Vale (Mr. Michael Foot) was very just in describing the alleged defence cut of £100 million as a constant refrain in all Chancellors' packages. When shall we be given more details of the defence cuts? Wh[...] hall we know more about nationalised industry investment cuts? Is that the limit of public expenditure cuts? My hon. Friend the Member for Macclesfield (Sir A. V. Harvey) was right to say that the Government cannot limit themselves to demanding efficiency from industry. Let them look at their own vast and growing empire. Will the right hon. Gentleman tell us whether the Government are expecting a rise in private investment next year and, if so, whether the calculations allow room for such a rise?

I now turn to the infrastructure. The Prime Minister has told the country that, whatever else happens, housing, hospitals and educational buildings will not be damaged. The right hon. Gentleman must explain this to us in a little more detail. I must state my interest in the subject. I am a builder. I am involved in building some of these objects. Are we to understand that if these buildings cost more—and they inevitably will because of their import content, apart from anything else—the entire building programme for hospitals, schools, technical colleges, universities and public housing will go ahead unaffected, or will the quantity of these programmes be cut in order to keep the financial expenditure as it is planned now? Will the Minister give us a firm reply?

As for social services, we agree with the Prime Minister that in this situation it is right that the most vulnerable sections of the community should be protected, but we want to know who these will be and how they will be protected. We presume that among them will be the poorest of the elderly; those who, for shorthand purposes, are termed as living in family poverty; the disabled; the chronic sick; widows; and fatherless families. Are all those people to be protected? If so, how? Will there be discriminating or indiscriminate expenditure to protect them? May we have some assurance this evening, or be told when we shall be given details?

I ask the right hon. Gentleman to accept that we on this side of the House recognise and deplore the fact that, despite the large increase in overall expenditure on the social services, financed by the increases in the weekly stamp, there are still, after three years of Socialist Government, deep pools of poverty which the Government have done nothing to reduce.

We want to know who is to pay for the help to be given to these vulnerable sectors. Is it to be the taxpayer? If so, it is easy to predict that the emigration queues will increase. Or are the Government, for the first time, contemplating taking money from wasteful uses within the social services? Let me give an example. Are they going to remedy the indiscriminate increase in both family allowances and housing subsidies? Are they going to try to switch some resources from where they are not needed to where they are needed?

I now turn to the important matter of costs. As hon. Members on both sides of the House have recognised, if costs rise the competitive edge of this devaluation is blunted. Costs are going to rise—for tax reasons, transport reasons, because of the increase in import prices, and because of the consequentials—in all manner of services and products. One of the main components of costs is earnings. A wage freeze is abhorrent to this side of the House. We for our part believe in a high earning low-cost economy brought about by competition, by lower public expenditure, and by tax reform, all leading in themselves and together to better management. We believe in a high earning low-cost economy, but the Government are getting dangerously near to standing for a low earnings high-cost economy because of their controls and taxes and because of the subsidies that keep men in ill-paid work.

The question I put to the right hon. Gentleman is: as export-led growth comes—and we hope it will—does he accept that the Government must be intensely careful not to let too much steam build up so that earnings drift gets dangerously high? Does the right hon. Gentlemen really think that the T.U.C. Vetting Committee and the Prices and Incomes Board would be able to have any control over earnings drift? These bodies have not been put to the test at all in the relative recession which this country has been going through in the last year—[Interruption.] I will tell those on the benches opposite what we want.

We believe that the main barrier to higher earnings unaccompanied by lower costs is the subjection of employers to really tough competition coupled with lower Government expenditure, trade union law reform and tax reform.—[Interruption.] We believe that is the barrier. [An HON. MEMBER: "Put a fresh record on."]

Mr. Maxwell

Will the right hon. Gentleman give way?

Sir K. Joseph

No, I will not. [HON. MEMBERS: "Give way."] The hon. Member for Glasgow, Kelvingrove (Dr. Miller), who was within his rights, took five minutes beyond nine o'clock, and I want to share the five minutes so lost with the right hon. Gentleman opposite if I can.

I want to know whether the Government's view is that dangerous earnings drift is likely and, if so, whether they are contemplating any return to a freeze by law. If they fail to keep costs low because they allow earnings drift to increase, much of the competitive value of devaluation will go. The Government have to set an example. I have here a long list of wage claims in the public sector which will shortly be before the Government. It will be idle for the Government to call upon private enterprise to stand up to wage demands which are not justified if they do not set their own example.

We also want to know what the attitude of the Government is to prices. In our view it is absolutely right to squeeze prices by competition, but if costs rise, including earnings as an important component in costs, and the extra import costs of raw materials, we want to know what the policy of the Government will be about prices.

We want to know how the Government propose to protect the outlying areas of this country where prices tend to be high, where earnings tend to be low, and where transport costs are heavy. In Scotland, Wales, South-Western England and in Northern Ireland there are extra export opportunities in the medium term, but in the short term there are difficulties facing them and we want the Government's reassurance about what they intend to do.

I hope that no one on the Government bench thinks that this devaluation will give a 14 per cent. benefit just like that to all our exporters. First, there is the withdrawal of the export rebate; secondly, many exporters will want to increase their profit margins and will not, therefore, be ready to reduce their prices; and, thirdly, any such view as I have expressed would be too static. Are we really to expect that the Germans, the Japanese and all our other formidable competitors, will sit by and do nothing about their costs and prices? Of course they will react, and quite rightly. Nor should we be sanguine about import reduction, because, after all, two-thirds of our imports are of food and raw materials. Indeed, these will have to increase if we are to have growth, rather than decrease. It is only in one-third of our imports that the extra price will be a factor.

I should have liked, if there were time, to develop what was said by my hon. Friend the Member for Macclesfield about the bitter damage which the whole Government package will inflict on the poorer countries. Those which have not devalued, including some African countries, will have lost on any deposits they have left here. We hope they will make up slightly for this—this is the only good part of the package—by earning a little more on their exports to us.

We should ask ourselves, where does the wealth of this country come from? Some would say that it comes from the workers, and they would be partly right. Some would say that it comes from the savers and investors, and they would be partly right. Some would say that it comes from managers, and they would be partly right. Some would say that it comes from the Government. The Government have a part to play, not least in getting out of the way of industry. I believe with my right hon. and learned Friend the Member for Wirral that the wealth of this country comes above all from entrepreneurs and from private enterprise. That is where the jobs come from, where the taxes come from. Those are the people who do the investing and who do the exporting.

I am not claiming that all private enterprise is perfectly efficient. That is why we on this side of the House believe in cutting Government expenditure, in tax reform, in disclosure and in trade union law reform, but if the Government fail to recognise this basic truth and if instead of freeing the forces of growth they move towards a siege economy, this country will go even more rapidly downhill than it has in the last three years.

The mistakes that have led to devaluation have not, so far as we can see, led the Government to any humility or to any change of strategy. They remain interventionists, they remain centralisers and subsidisers. The hon. Member for Edmonton (Mr. Albu) had some wise things to say about the damage of intervention. They are failing to stimulate industry by tax reform; they are failing to curb Government expenditure. They are expending the inefficient subsidised public sector and adding to industry's costs.

The Government, I say again, are fighting now not just to solve the balance of payments problem, vital and indispensable though that is—the Government are fighting for the country to recover confidence. This devaluation could be a springboard or it could be a slide, to use again the Prime Minister's graphic alternatives of 1961. It could be a springboard, but we on this side of the House fear that under this Government and under this Prime Minister it will not be a springboard.

9.33 p.m.

The Secretary of State for Economic Affairs (Mr. Peter Shore)

I have rather less than 30 minutes in which to reply to a number of questions that were put to me and they have come so fast and furious during the last 10 or 15 minutes that I would need an hour and a half to deal with them adequately. I have also to answer the quite important questions put by the right hon. Member for Devon, North (Mr. Thorpe), and, of course, the right hon. Member for Enfield, West (Mr. Iain Macleod).

I start with a number of quick replies before returning to the central theme of this debate. I was asked when the export rebate would be abolished. My right hon. Friend the Chancellor of the Exchequer has authorised me to say that he intends to abolish the rebate on 1st April, 1968. That is to say, it will be paid on exports which qualify on or before 31st March, but not thereafter. Claims for the first quarter of 1968 will be accepted and paid as usual, but after that the rebate will disappear.

My right hon. Friend will make his statement about the Selective Employment Premium as soon as he possibly can.

Mr. Tilney rose—

Mr. Shore

I will not be—

Mr. Speaker

Order. The right hon. Gentleman is not giving way.

Mr. Shore

I must get through these questions before turning to the debate.

I was also asked a questiton about public expenditure and about what part of the package announced by my right hon. Friend yesterday was to be set against the 3 per cent. public expenditure on average growth from 1968 onwards. It is the defence expenditure that comes under that particular definition of public expenditure. It is the defence expenditure cuts which were announced and also a certain part of the civil expenditure cuts, again more details of which the House will hear shortly.

On the question of the defence cuts, there will be a further statement tomorrow. Those are three of the more important questions which were put to me. [HON. MEMBERS: "Answer."] I would like to help the House as best I can. I understand the sort of mood that Members are in, but it is a great mistake to waste time by asking for further and further elucidations of minor points which can be dealt with, and which will be dealt with, either tomorrow or later, when I think that what the House really wants is to get on with the substance of the debate.

Mr. Iain Macleod rose—

Mr. Shore

Before—

Hon. Member

Give way.

Mr. Shore

In a moment, I will.

Before finishing this brief answer to questions, I would like to assure the right hon. Member for Devon, North, in a direct answer to his question, that we have no intentions of introducing a wage or price freeze.

Mr. Iain Macleod

Would the Secretary of State answer this question? It is not a question of mood. It is a question of fact. The Chancellor of the Exchequer has already—the difference between 7.8 and 3—promised reductions of £600 million. Are the £400 million extra or not?

Mr. Shore

Public expenditure definition is the main problem here. The nationalised industry expenditures, as I am sure the right hon. Gentleman knows, are not included in those figures which my right hon. Friend gave. Therefore, they cannot be set against that. As I have said, what is set against the public expenditure figures as defined by my right hon. Friend are the defence expenditure and a part of the civil expenditure, of which we shall have more details soon. That, I hope, is enough for that particular question.

I would now like to take up some of the points—[Interruption.]

Mr. Speaker

Order, order. We have listened to one Front Bench quietly. We might do the same now.

Mr. Shore

I would like now to turn to some of the points made in the speeches which we have heard from the Opposition Front Bench during the course of the day. The right hon. Member for Enfield, West is wrong on quite a number of things. I think that he is quite wrong on the facts, as he put it, of three Socialist devaluations. He knows perfectly well that the devaluation which took place in 1949 was a devaluation in this country by which, like virtually every other combatant country in the world which fought in the Second World War—we were forced to readjust our exchange rate in an entirely different situation. [HON. MEMBERS: "Oh."] If I was addressing people in a more sober frame of mind, the point would be well taken. It surely is unanswerable.

The second point I would make on this—it is, again, a very simple point—is that, as in so many things, we Socialists are merely pupils of the Tory Party, because the Tories devalued, as they know perfectly well, in 1931, when they were in charge of the National Government and they devalued again in 1940 on the outbreak of war. They devalued because they felt that in those circumstances—I am not quarrelling about the circumstances—it was the right thing to do.

I make this point to get straight away in view of what I consider to be an enormous amount of humbug about the moral issues involved in devaluation. There certainly are consequences from devaluation, and it is true that certain people who hold balances are likely to be affected. This is clearly something that we should have wished to avoid. It was among the factors that weighed with my right hon. Friends, and, in fact, they would have liked very much not to have inflicted what is admittedly a hardship upon such people. But I leave that point on the moral issue now, and I turn to what, in many ways, I think, is a rather more important point.

It was clear to me from the speeches I heard that, in the view of the right hon. Member for Enfield, West, this devaluation should have been avoided, ought not to have happened and could have been avoided. I am not sure whether hon. Members opposite would say "yes" to all three points. This, I think is very interesting, because the plain fact of the matter is that this year, and for the reasons that have already been given to the House, we were continuing to accumulate a deficit on the balance of payments of over £200 million and, as has already been explained, the outlook for next year was in no sense encouraging.

I think, therefore, that the question for policy was: what new act of policy ought to be introduced in this situation? [HON. MEMBERS: "Resign."] Hon. Members say "Resign". Well, I would like to be clear what they would have asked the Government to do and what they would have done, as a Government, to close that balance of payments deficit. After all, they know perfectly well that they began it. They handed on an enormous debt to us and this debt has continued. The question is: what would they have done to put this deficit right?

We heard a little about their policies during the debate—encouraging producers of wealth, removing taxation, cutting down on expenditure. I should like to read a very serious comment upon the policies of right hon. Members opposite, written by somebody whose comments they might take very seriously. The writer sums up the position by saying this: In spite of the pre-eminent place of economic affairs in the political debate the Conservative Party is without an economic policy. It is this which makes the Tories appear in the present political context little more than an irritating irrelevance. I suspect that hon. Members opposite will recognise the style. It is one of a series of articles written earlier this year by Mr. Nigel Lawson, the editor of the Spectator, and who, I think, at one time played quite a considerable part in advising their political leaders.

I should like to read one further extract, though I shall not labour the point. It is well worth reading. After quite a long piece, the writer states: The conclusion is inescapable, the Conservative Party at the present time has no answer, or at least no answer that it can call its own, to the really big economic problems with which economists and civil servants grapple and on which Governments spend so much of their time these days. I think that the policies that have been suggested—these broad generalities about dealing with restrictive practices and giving incentives—are really quite inadequate for dealing with the problems that all Governments—the present Government certainly—have had to face. I cannot help putting to myself, therefore, and, I hope, to them, the question which forms in my mind about what they would have done had they been in this situation now. What policy would they have pursued had the nation been so unwise as to elect them in 1964?

The answer is clear. Right hon. and hon. Gentlemen opposite would have chosen deflation. This is the whole point. This is what the debate is about. This is the real issue. After three years, trying many different policy approaches, we are forced to choose between a strategy of deflation and unemployment and a strategy of devaluation. That has been the issue, and we are certain, from what has been said today, that right hon. Gentlemen opposite stand for deflation. They will always choose unemployment, and that is their policy. I am sure that the right hon. Member for Enfield, West, before the year is out, will regret the attitude which he has taken in this matter.

Yesterday, the Leader of the Opposition argued that we would need to produce 15 per cent. more in exports even to keep in our present position. This, he said, was the real cost of devaluation. That is a remarkable calculation. It would be true only if there were no change in the prices of British exports. But it is an absurd argument. I have no doubt that the prices of British exporters will vary—I hope that they will be flexible about it and take advantage of different markets according to circumstances—but they will, I am sure, rise by a least 4 to 5 per cent., and to that extent they will detract from the volume of extra exports which, in his television broadcast, the right hon. Gentleman the Leader of the Opposition suggested would be needed. The other factor which the right hon. Gentleman left out of account was the effect of higher import prices on reducing the volume of imports. We are not, therefore, faced with the fantastic picture of an immediate need to increase exports by 15 per cent. in volume.

The same point applies to prices. In his broadcast last night, the Leader of the Opposition said that prices would go up about by 2s. 10d. or 2s. 11d. in the £. This figure has been used loosely and in a damaging way by a number of people who ought to know better.

Mr. Maxwell

And do know better.

Mr. Shore

Yes, and do know better. I thank my hon. Friend for that. This is to refer simply to the change in the exchange rate. Our calculations are quite clear. The increase in the cost of living due to devaluation will be about 2½ to 3 per cent., and that, far from being 2s. 10d. in the £, works out at about 7½d. in the £, which is very different.

I shall not deal now with the case for devaluation as such, because it was argued so cogently this afternoon by my right hon. Friend the President of the Board of Trade and there will be a further development of the case tomorrow. I shall turn to the accompanying measures and the implications for the prices and incomes policy, which, I am sure, will be of interest to the House. Now that we have devalued, whatever the arguments may be on that, we have an immense opportunity for a prolonged period of faster and steadier growth than we have had since the war, and combined with full employment. This will involve restraint over the next year if we are not to throw the opportunity away.

The balance of payments will remain difficult for some time. We still have the problem that the Suez Canal is closed, and devaluation may aggravate the deficit for a time, because the rise in import prices will not be immediately offset by an equivalent rise in export sales.

Therefore, we must maintain confidence in the difficult months ahead. We must avoid an upward spiral in incomes and prices, which could quickly fritter away the competitive advantage we have gained. We must see that there are plenty of resources available for extra exports and import-saving production.

This means, first, a package of measures to restrain home demand. It would be quite wrong to call this a deflationary package. It is not, because it is coupled with devaluation and will simply mean restraining the growth of demand at home to make room for the growing demand of exports and import-saving. That is our calculation, and that is our strategy in the package which we have produced. In other words, to achieve a genuine transfer of resources we expect that production in total will expand next year and that unemployment will fall.

Moreover, the increase in output will be concentrated directly on production for exports and import-saving, and on investment for export and import-saving. Here, I may reply to the right hon. Gentleman by saying, "Yes. We do expect investment in private industry to rise during next year."

I now turn directly to the prices and incomes policy. Clearly, we must restrain increases in costs. We must not undo the effects of devaluation by seeking to boost incomes without increasing production. Therefore, we cannot allow money incomes to increase simply to compensate for the rise in the cost of living. I have already explained that we expect this to be 2½ to 3 per cent. as a result of higher import prices.

Sir K. Joseph

The right hon. Gentleman said, "We cannot allow". Is he talking of a law or not?

Mr. Shore

This will become perfectly plain if I may continue my statement.

The rise in import prices does not mean that the standard of living of work-people as a whole will be reduced. There may be a very small temporary reduction for some of those in full-time work. But this will be accompanied by the increased standard of living of those now unemployed who will be drawn into employment in the course of next year by the reduction in short-time working and the increase in overtime working.

In addition, although this is not the occasion to reveal what is in Ministers' minds—[Laughter.] If I may finish—[Interruption.]

Mr. Speaker

Order.

Mr. Shore

I should have said "In Ministers' minds on this particular point."

Mr. Heath rose—

Mr. Shore

Will the right hon. Gentleman wait one moment? The Government are pledged to protect from hardship the most vulnerable sections of the community.

Mr. Heath

Could the right hon. Gentleman say whether he made that last statement on an unattributable basis?

Mr. Shore

Any small temporary reduction in the standard of living of those now employed is worth while if it enables many more to be employed, whereas with alternative policies we should have had many more out of work than at present. Now, therefore, more than ever we need an effective policy on productivity, prices and incomes. It requires intensification of the drive for more productivity and efficiency; determination to avoid inflationary income increases; restriction of price increases to the minimum justified by import price rises and other unavoidable cost increases; and the prevention of unfair exploitation of the situation by profits and dividends.

The Government, as I have already assured the right hon. Member for Devon, North, are not asking for a freeze. It would be nonsense on prices anyway, because, as I have already pointed out, there will be this increase in prices as a result of devaluation itself. It would create the strongest disincentive to productivity bargaining at a time when productivity is needed more and more and impose severe and unnecessary hardship on the lowest paid.

Nor should new statutory powers be required. Management and unions are not being asked to do something against their best interests. Management have a great deal to gain from the new export and import-saving opportunities. I do not accept the calculations that some hon. Members opposite have made about the net effect of the loss of the rebates and the premium against the gain of devaluation itself. So managements have much to gain here. Unions have a great deal to gain from the increased employment and earnings opportunities as production expands.

I have asked the C.B.I. and T.U.C. for their co-operation in maintaining and strengthening the policy set out in the White Paper on Prices and Incomes Policy of 30th June, 1967, under which there is no entitlement to a "norm" or standard increase in income and increases in incomes and prices have to be justified against strict criteria, including of course the lower paid, of the national interest which are equally relevant to the new situation. The firm application of these criteria in a situation in which devaluation will be directly affecting the cost of living will call for a major effort from the two sides of industry. But it is essential that only unavoidable price increases are made; and that these do not lead to consequential wage increases.

I well understand that this is to expect a great deal from management and unions. They made great efforts in the standstill and in the severe restraint period to put the national interest first. In this new situation they are still being asked to sacrifice immediate personal benefit in the interests of the whole community. But the difference now is that we start out with a competitive advantage, whereas previously we were struggling to secure one. The task now is to maintain that position and take full advantage of it. This is a task that should not be beyond a voluntary prices and incomes policy.

I must now sum up. The time has been eroded by my efforts to answer the questions that were put to me. I return to the basic problem that we have faced from 1964 onwards. Our aim has been to get the economy out of the red. In July last year we were forced into a "stop" phase. We did many things in that "stop" phase to try to make it a much more creative one in very many different ways than we experienced in the 1961–62 and 1957–58 periods. Although in a number of important fields we enjoyed considerable success, it was becoming clear in the autumn of this year that these measures would not prove sufficient and that the controlled reflation which we then initiated would be endangered by further balance of payments difficulties.

So this was the choice: we could either deflate once again—with all that that means to the plans and hopes of tens of thousands of our fellow-citizens and in the waste of economic and human resources, or we could devalue.

I am certain that we have made the right choice. For years the British economy has been imprisoned by the balance of payments restraint. We have broken out, and if we now have the will and the self-discipline to make the best use of our new freedom we can transform our economic prospects and regain our national self-confidence and look forward to a better future for our people. That is the policy which the Government are pursuing and on which we shall be voting tomorrow night.

It being Ten o'clock, the debate stood adjourned.

Debate to be resumed Tomorrow.