§ EFFECT OF PARTICIPATION IN SPECIAL DRAWING ACCOUNT BY UNITED KINGDOM GOVERNMENT
§ Question proposed, That the Clause stand part of the Bill.
§ 12.40 p.m.
§ Mr. Terence L. Higgins (Worthing)
Like my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod), who said in his speech on the Budget in March that this was one the few Government Bills which he would welcome, and like my hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin), who, when speaking in the Second Reading debate on this Bill last week, also welcomed it, I should like very much to express my support for the Bill.
It is a Measure which introduces into our domestic field matters which are primarily of international concern. It was perhaps a little unfortunate that the Financial Secretary to the Treasury last week, in describing the Bill, in his perora- 1904 tion referred to it as a "giant step forward". His hyperbole raised some unfavourable reactions on this side of the House.
What it undoubtedly does—I think that this explains both the Financial Secretary's enthusiasm and the feeling of importance which I attach to the Measure —is to embody a fundamental change in principle. It is an innovation in our international monetary arrangements, and as such is of very great significance.
It is true to say that the question that we are dealing with was summarised in the heading of an article in The Times on 28th May by Professor Richard Cooper, of Yale University:Gold is on the way out as a monetary base. But is it going to go gracefully or disastrously? The S.D.R.s are the key and this week's Stockholm meeting is crucial.Happily, the outcome of that meeting was a success. As a result, we now have to go through the various procedural steps which will enable the S.D.R. system to come into operation.
It is a very difficult technical matter, but its significance was emphasised in the speech which Mr. Pierre-Paul Schweitzer, Managing Director of the I.M.F., made in Rio de Janeiro in 1967, when he said that he was dealing with a measure which, in his view, constituted the most significant development in international financial co-operation since Bretton Woods. However, enthusiasm for the Bill needs some qualification. The first is that the quantity of international liquidity which will be created if the scheme goes through in this House, as I hope it will, and if it is subsequently ratified and then implemented, is very small by comparison with the sums normally involved in international trade.
It is an experiment at this stage, and it may be some while before we can expand its scope, but there is a very great need to implement the scheme as quickly as possible. Therefore, we on this side felt that the right thing to do today is to make a few comments, as I shall do, in the "Clause stand part" debate rather than put down a Motion for a Third Reading debate. There are a number of points which need to be made in the"Clause stand part"debate and some questions which were not asked in the Second Reading debate last 1905 Friday which I hope the Minister of State will be able to answer today.
The fundamental point is that we are now in the international field in much the same position as we were in national finance a century or more ago following the change made in the 1844 Bank Act. That was a victory for what was known as the currency school as against the trade school. As a result, it became impossible for the currency to be expanded, as might otherwise have been thought desirable, to fit the needs of trade and commerce. As a result of that we had the development of the cheque system, which filled the gap for a long time, and, finally, we reached the stage where currency was created in the form of ordinary £1 and 10s notes which were not entirely backed by gold.
We are now in very much the same position internationally as we were nationally in the latter part of the 19th century. We had for a long period in international commerce a gold exchange system, and the development of, so to speak, cheques in the form of bills of exchange, and, finally, we have reached the stage which is equivalent to that major breakthrough in the last century currency notes. We only have to contemplate what would have happened to our domestic trade if we had had to rely entirely on a pure gold based currency to realise how significant this Bill and the precedent which it creates is likely to be, though there are dangers to which I shall refer in a few moments.
It is important to distinguish between two separate problems. There is a danger that they may become confused. One is the difficulties which arise from individual currencies and countries' balance of payments surpluses and deficits, the disequilibrium problem which requires them either to inflate or deflate to restore balance of payments equilibrium or to devalue. The other problem is that sufficient money should be available in an international sense to finance an increased volume of trade. It is important to distinguish those problems, although they are, of course, related both economically and politically.
This Bill is fundamentally concerned with the quantity problem rather than the equilibrium problem, though some 1906 may feel that there is a danger that the measure will reduce the sanctions imposed on countries to maintain or achieve an equilibrium in their balance of payments. I was glad that the Financial Secretary stressed last week that the purpose of the Measure is not to enable Governments to avoid putting their own domestic affairs and their balance of payments in order.
It is, of course, true that the disequilibrium problem itself imposes a strain on the international monetary mechanism. I believe that if this Measure can be passed through the House rapidly we can set an example to other countries which are also concerned with the scheme, and encourage them to set it up and get it working quickly. If this is done, I believe that from a psychological point of view it will have a good effect on the whole international atmosphere, and this is vitally important, particularly for the United Kingdom, which, after all, has more to lose from any monetary crisis in the international sphere, which could shrink world trade, on which we depend for our whole standard of living.
There are two alternatives to this S.D.R. scheme, but I should like to stress that they are second and third best to the system which is embodied in this Clause and Bill. The first alternative is the one which has served the international community since the Bretton Woods arrangement. An increase in international liquidity has been created by the United States and the United Kingdom, the two key currencies countries, running large deficits on their balance of payments, thereby adding to international liquidity.
But this has resulted in considerable antagonism from other countries, mainly France. Given the steps which our country and the United States are taking to put their balance of payments in equilibrium, it is clear that we cannot rely on this process to increase international liquidity in the future. In this case there is a danger that commerce will be inhibited by a failure of international liquidity to expand in line with the increase in trade. I do not think that we should have to rely on continuing United States/United Kingdom deficits to increase liquidity in the future. In any case, it is far too arbitrary for it to provide a really sound basis for the expansion of international trade.
1907 The second alternative is to increase the gold price. This was debated at considerable length last week, and I do not propose to go into that in any detail. It is clear that for a long time gold will provide an important and fundamental basis of international finance, but at the same time measures of the kind embodied in the Bill will enable us to reduce our dependence on gold and arbitrary fluctuations in the production of gold.
This is bound to produce some political reactions, notably, as was said last week, from the producer countries such as Russia and South Africa, and from France who has adopted a dogmatic attitude on gold. Clearly, if the gold price were increased, France would tend to gain because of the large stocks which she has recently accumulated, whether she would gain as much this week as last week is perhaps another matter.
I do not follow the argument that an increase in the price of gold is the best solution to our international liquidity problems. There is an extraordinary schizophrenia developing amongst those who advocate an increase in the price of gold. If one concertinas their argument, they say that the important thing about gold is that it has an intrinsic value, and therefore it is necessary to double it. When one expresses the argument in that occluded fashion its absurdity becomes apparent. Gold, like other commodities, has an intrinsic value provided it is scarce and people want it, but to a large extent the value of gold depends on the value which national Governments are prepared to put on it and the precise figure at which they are prepared to buy and sell it. Its value is, therefore, like other things, something which is determined by supply and demand. General de Gaulle's famous phrase that gold is immutable, universal, and impartial seems to me absurd, because it clearly is none of those things, and his own interests in the matter are fairly easy to discern. I do not think that the best answer to our problems is an increase in gold price, and it would be unfortunate if we had to rely for ever more on the supply of a particular commodity which does not necessarily bear any direct relationship to the needs of international trade.
1908 I propose, now, to refer to the question of the special drawing rights, and to raise one or two difficult points which arise on them. One of the main reasons why many of my hon. Friends, and indeed hon. Gentlemen opposite, have expressed concern is that they are worried about the extent to which new liquidity may be created, and that a world wide inflation may result. I believe that we can rely on the mechanism which has been suggested for the control of liquidity. Perhaps I might quote briefly from an excellent article in the American Journal of International Law, by Mr. Joseph Gold, General Counsel and Director of the Legal Department ofthe I.M.F. He said:The major feature—of the special drawing rights system—is that it provides for the deliberate control, whether by creation or cancellation, of international liquidity. Hitherto, the volume of international liquidity has depended on such moral as fortuitous factors as the amount of new gold production and the pattern of its absorption, the deficits of the reserve currency countries, and the predilections of countries with respect to the composition of their reserves ….The great advance for which thespecial drawing rights system will be responsible when it is translated into law is that the creation and contraction of international liquidity will no longer be determined solely by aleatory influences, but to an important extent will now be the subject of rational and deliberate international control.That raises some difficult questions even at this experimental stage.
Personally, I am sorry that progress could not be made on the original Stamp plan for increasing international liquidity which would have related the amount of liquidity created to the amount of aid which was given to developing countries. Professor Stamp suggested that the I.M.F. should add to liquidity by a fixed amount each year and invest in developing countries either directly or through their capital markets. They could then use the I.M.F. certificates when they bought goods from advanced countries and these certificates would go into the international liquidity pool.
It is unfortunate that what Professor Paul Streeton described as the link between aid and international liquidity has been broken and we have not been able to secure agreement on a scheme as ambitious as that. It is correspondingly 1909 important in welcoming this Bill to pay extra attention to the Bill next on the Order Paper, namely, the Overseas Aid Bill. Given that we do not have an automatic restraint imposed on the amount of liquidity created by a link with aid we shall have to rely on the international monetary authorities exercising a degree of discretion. But I am satis-lied that adequate control on liquidity creation will be exercised.
That brings me to the other point about which hon. Members are right to express concern; that is that there is a danger that individual Governments might use their special drawing rights to finance domestic projects and delay putting their balance of payments in order. During the earlier part of this year we were engaged in debates on the National Loans Fund Bill. This was concerned with the whole system of Government accounting and in particular the relationship of the National Loans Fund and the exchange equalisation account.
In Committee, at c. 126, my hon. Friend the Member for Barkston Ash (Mr. Alison) made a speech which, I think, might usefully be used as a text for economic students. He spoke about the way in which the Exhange Equalisation Account is used. We were concerned on that occasion with knowing exactly how the account works and how movements in and out of it could be identified.
Because of the fears which many of my hon. Friends have that the S.D.R.s may be used to finance domestic policies of which they do not approve it is vital that the figures for the special drawing rights held in the Exchange Equalisation Account should be made readily available to the House. I do not think that it can be denied, because of the provision made for it to designate currencies and to exercise control, that the I.M.F. is bound to know what S.D.R.s are held by particular countries. If the I.M.F. is to know what the position is, it is important that the House should know. I therefore ask the Minister to say whether these figures will appear in the normal National Loans Fund accounts once a year and whether they will also be published at more frequent intervals.
1910 The Government surely ought to make it clear to the House that they are not using these special drawing rights to finance their policies but only as they are intended to be used, as an addition to reserves and as a new form of international liquidity which will oil the working of international trade.
In this connection, I ought to say, because there seemed some confusion about it during the debate last week, that the position is that once the scheme is brought into operation the special drawing rights will be created and they will then be allocated to member countries in accordance with their quotas. It is not the case, as some hon. Members seemed to imply last week, that individual countries will have to apply for an allocation if they are in balance of payments difficulties.
I wish to put two final questions to the Minister. First, we are told that members will be required to hold, over the initial five-year period, an average of 30 per cent. of their S.D.R.s. Would the Minister clarify this point? It is not clear from the Bill or the White Paper what the position is if a country has absolutely zero S.D.R.s in its reserves for four years and then 150 per cent. for the last year. Would this reasonably be considered by the I.M.F. and the operators of the scheme as fulfilling the 30 per cent. requirement? Over what period is this average to be calculated? Is it the five-year period or a shorter period?
Secondly, have the Government any information about the position of the French? We understand that it is not possible for the French to block the scheme. Indeed, they appear implicitly to have agreed to the scheme going forward, though this does not necessarily mean that they will participate. If the Minister has any information on this point, we shall be grateful to hear it. However, we shall understand if he is not able to give it this morning.
A significant precedent is being created by this Bill. The amounts involved at this stage are comparatively small in terms of international liquidity. But the innovation is important. This is a change in our international monetary affairs 1911 which, I believe, will have the support of the large majority of hon. Members and of the country.
§ Mr. Frank Hooley (Sheffield, Heeley)
It is an agreeable coincidence that today we are to discuss two Measures which will greatly improve international arrangements for monetary institutions and trade and aid, namely, this Bill and the Overseas Aid Bill, which is concerned with I.D.A. This demonstrates the value of institutions of the United Nations, particularly those concerned with the more technical matters of trade and monetary arrangements and aid generally. It emphasises the value of the I.M.F. in helping the world generally and this country in particular to deal with certain problems of exchange and currency.
I have been a little alarmed from time to time during the past six months about the suspicion and dislike of some of my colleagues concerning the I.M.F., as though it were an international big brother directing our own Chancellor of the Exchequer about what he should be doing. I hope that they recognise that in the Bill and this scheme we have something not only of great importance to the world system, but of special importance to Britain, which is landed with the problem of controlling and managing a reserve currency. The S.D.R. scheme will, to some extent, help this country to deal with the long-term problem of managing a reserve currency.
I agree with almost everything that the hon. Member for Worthing (Mr. Higgins) said. I am pleased to know that the Bill has, as I understand it, the full support of hon. Members opposite. I agree that it is quantitatively a small break-through, but it is an immense break-through in principle, because it creates a completely new international reserve unit which is not dependent in any way on gold. I hope that it is a step on the way to the demonetisation of gold altogether.
I share the regret of the hon. Member for Worthing that the scheme has not been linked with help to developing countries. This was perhaps too ambitious for the first stage. However, I hope that the possibility of using the creation of international liquidity for the purpose of helping poorer countries will 1912 not be lost sight of when further progress is made along this road, as it must be made.
It is, I think, appropriate to pay tribute to the work of the Home Secretary, who, when he was in a previous office, did so much to lay the foundations for the scheme. His work was of immense value, and will in future be recognised to have been of immense value, to the general financial management of this country.
I welcome the Bill and the fact that it appears to ave the unanimous support of hon. Members.
§ Mr. Michael Alison (Barkston Ash)
I wish to ask the Minister of State a couple of nuts and bolts questions about the currencies into which S.D.R.s may be converted in the exchange equalisation account. Can S.D.R.s be disposed of from the exchange equalisation account in exchange for sterling? I emphasise "sterling" because it has some bearing on the use to which this asset may be put.
Line 3, in paragraph 5, of the Explanatory and Financial Memorandum, states:The main transactions will be the exchange of Special Drawing Rights for other countries' currencies …This seems to imply that the use of S.D.R.s, once they have been allocated to the United Kingdom, will be limited to the acquisition of other currencies. Nevertheless, provision is made later in the same paragraph for the exchange of S.D.R.s for sterling or other currencies.
There seems to be the possibility of reconstituting an S.D.R. position by allowing sterling to flow out. If sterling can flow out of the Exchequer Equalisation Act in exchange for S.D.R.s, the implicacation seems to be that S.D.R.s can flow out from the account in exchange, not only for other currencies, but for sterling.
It is important that we should be clear about this matter. One of the intriguing possibilities which looms up if S.D.R.s can be used to acquire sterling is that the whole problem of Government internal finance can be diverted from the money market in the home country, where the Government have to raise sterling to finance their internal operations and, incidentally, pay a very substantial rate of interest and where, in certain circumstances, they are insulated from the 1913 United Kingdom rate of interest, from the credit-creating repercussions of borrowing in the market, and they will be able to acquire sterling in the international market in exchange for S.D.R.s at a very low rate of interest. As far as I can see, the rate of interest is 1½ per cent.
I should be interested to know whether the Minister of State visualises a situation arising in which the United Kingdom Government, anxious to finance their internal expenditure and to insulate the banking system and the money market from increasing their own liquid debt, can acquire the sterling which they wish for internal use from other countries prepared to exchange it for S.D.R.s. It is not clear from the scope of the Bill whether this operation could be undertaken. That is a technical question.
My second question is also technical and limited. Are we to understand that only those who are members of the I.M.F. will be participants in the S.D.R. scheme, or will it be possible for other countries which are not I.M.F. members to participate in it? This is of some importance, because if countries which are not members of the I.M.F. participate in the S.D.R. scheme they will not be inhibited by the I.M.F. limitations about devaluation. There might be severe embarrassment if we found ourselves holding, in exchange for S.D.R.s, a currency which was suddenly more heavily devalued than would normally be permitted under the I.M.F. regulations, and we had to use this currency to re-acquire our S.D.R.s when reconstitution came along. It seems to me that there is scope for non-I.M.F. members to participate in the S.D.R. scheme. Perhaps the hon. and learned Gentleman would clear up these two points.
§ The Minister of State, Treasury (Mr. Dick Taverne)
I shall do my best to answer some of the points in different ways. I agree with the hon. Member for Worthing (Mr. Higgins) and my hon. Friend the Member for Sheffield, Heeley (Mr. Hooley) that it was a pity that the plan finally adopted was not more closely in line with that of Professor Maxwell Stamp. It was quite clear that this was not negotiable. It was clear that it was more in the interests of developing countries for the amendment to be made to the I.M.F. than not at all, because their reserves are increased pro- 1914 portionately more than the actual reserves and they stand to benefit from the growth of world trade.
I have no information about any change of attitude on the part of the French. As the hon. Member for Worthing said, although it is regrettable it will not prevent the scheme coming into operation because the French will not have the right of veto under the scheme.
I was asked about the actual figures being made easily available. It is clear that the annual picture will be published. It will not be published through the National Loans Fund, but when the E.E.A. holdings are published in the balance of payments accounts. It will be made clear what has happened, on an annual basis, in terms of the S.D.R. scheme. I agree with the hon. Member's desire to see these figures made available for general knowledge more frequently than annually, but I am not sure that I can answer the question as clearly as the hon. Member would like.
It seems that, in any event, these figures will become available through the publication of the international financial statistics, and one would expect that in future there would be a new entry when the new scheme is in operation, showing the S.D.R. holdings of individual countries. There are publications on the part of the Government relating to the reserves position three months back. At the moment, I can see no objection to the exact S.D.R. position being shown. I shall have to look further into that question, however, although I cannot see any difficulty about the House being fully informed, at any time, what the S.D.R. holdings of this country are.
The hon. Member also asked about averaging. If the average were below 30 per cent. the country concerned would be obliged to reconstitute its holdings. The hon. Member asked what would happen if a country's holdings were zero for four years and then 150 per cent. in the fifth year, thus arriving at an average of 30 per cent. The way in which that average would be dealt with is one which will have to await the deliberations of the I.M.F. But I find it 1915 difficult to conceive that such a position would continue.
As the hon. Member will be aware, one class of country which may be designated to increase its holdings of S.D.R.s is that whose holdings are falling consistently below the 30 per cent. level, and it is inconceivable that a country would allow itself to get into a position in which it would be under the threat of a designation from the I.M.F. In those circumstances, I do not feel that there is much danger of a country being at a zero level for four years and then at a very high level for the fifth. However, it is not easy to say how this would work out in practice.
Some more technical and difficult questions were asked by the hon. Member for Barkston Ash (Mr. Alison). As I understand the position, S.D.R.s can be disposed of in exchange for sterling just as they can be acquired with sterling. The position which the hon. Member was concerned could not arise in practice because Article XXV, 3 (a) lays down thatexcept as otherwise provided … a participant will be expected to use its S.D.R.s only to meet balance of payments needsor its reserves need.
Although this will be a decision for the country itself in the first place the Fund may make representations and it may ultimately suspend the participant who fails to fulfil the expectation of Section 3(a). The danger that worried the hon. Member is, therefore, not likely to arise.
The hon. Member also asked about the participation of non-I.M.F. members holding S.D.R.s. There are certain circumstances in which non-I.M.F. members can participate in the S.D.R. scheme, and all I can do now is to refer the hon. Member to Article XXIII, and (3). There is a reference in paragraph 4 of the General Statement in the First Appendix to the White Paper to allocations of special drawing rights being made only to participants, and the holding of such rights not being restricted to participants, although it refers mainly to bodies like the Bank for International Settlements. If the hon. Member reads Article XXIII he will find a detailed explanation which I am not really in a position to expound more briefly now.
1916 As there is to be no Third Reading debate, I want to say something of a general nature following upon what was said by the hon. Member for Worthing. I will restrict my remarks, because the matter was fully dealt with in a debate of a very high standard. Despite reservations which some hon. Members then expressed, most people accept this as a major break-through in principle, as it has been described by my hon. Friend and others.
As M. Schweitzer has said, it is the biggest step forward since Bretton Woods. The point of biggest significance in the longer term is that we will no longer be dependent for the growth of world trade on the rate of accretion of gold to the monetary system or the increase in the balances of reserve currencies. Further, it is important because it illustrates a degree of international co-operation in this all-important sphere. It shows a determination to proceed in an orderly and rational fashion, and at a controlled rate.
I agree with what the hon. Member for Worthing said about the importance of speedy implementation. The separate question of activation is one for the Fund, but the completion of ratification and the acceptance of this amendment will increase international monetary stability, which is a factor of the greatest importance.
I echo the remarks made by my hon. Friend the Financial Secretary and my hon. Friend the Member for Heeley in paying tribute to the work of the Home Secretary and the right hon. Member for Barnet (Mr. Maudling). We should also mention three other names—Mr. Ossola, the Chairman of the Group of Ten Study Group on this question, which reported in 1965; Dr. Emminger, Chairman of the Group of Ten Deputies during the formative period when this scheme was discussed and, above all, M. Schweitzer, the Managing Director of the Fund, whose part in bringing this scheme to fruition has probably been greater than that of anyone else. I therefore echo the remarks of the hon. Member for Worthing.
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.1917
§ Clause 2 ordered to stand part of the Bill.
§ Preamble agreed to.
§ Bill reported, without Amendment.
§ Motion made, and Question, That the Bill be now read the Third time, put forthwith pursuant to Standing Order No. 55 (Third Reading) and agreed to.
§ Bill accordingly read the Third time and passed.